In Rev. Proc. 2008-50, the IRS has updated and expanded the Employee Plans Compliance Resolution System (EPCRS). The new correction procedure is effective January 1, 2009, but plans may elect to utilize the new procedure as early as September 2, 2008. The new procedure continues the same programs available in the previous procedure: self correction program (SCP), voluntary correction program (VCP) and the closing agreement program for errors discovered on audit (Audit CAP).

The more significant changes are as follows:

Elective deferral correction. The IRS has expanded the correction method for improperly excluding an eligible employee from making elective deferrals or after-tax employee contributions to include a situation in which an employer fails to implement properly a deferral (or after-tax) election of a participant. In correcting such a failure, the employer corrects by contributing a qualified nonelective contribution (QNEC) equal to 50% of the amount elected by the participant, plus 100% of the match the participant would have received. The employer also would need to make a contribution for lost earnings. (Appendix A .05 and Appendix B, 2.02). Note: Prior to the issuance of the updated procedure, many practitioners (and IRS agents) felt that the correction method for improper exclusion of an eligible employee was inappropriate for a situation where the employer failed to implement an election.

Example. Jill earns $4,000/month and made an election to defer 5% of her salary. The employer (X) failed to implement the election for two months. X would need to make a QNEC to Jill’s account in the amount of $400 [50% x (5% of $8,000)] plus an earnings factor.

Example. X plan defines compensation for elective deferrals as W-2 compensation grossed up for deferrals. The plan provides a 100% match. Jack made a deferral election of 5% of his total compensation. X failed to apply the election to his $5,000 bonus. X would need to make a QNEC to Jack’s account equal to $125 [50% x (5% of $5,000)] to replace the lost deferral plus $250 to replace the lost match, plus earnings.

Catch-up contributions. The IRS also expanded the correction method for improper exclusion of an eligible employee to include catch-up contributions and Roth deferrals. With respect to catch-up contributions, the employer will not need to correct the error unless: (1) the employee was catch-up eligible; (2) it prevented an employee from making a catch-up contribution under the plan; and (3) the employee had deferred up to a statutory (402(g) or 415) or plan limit. Under the new correction method the missed deferral amount is half of the catch-up limit. The employer then contributes 50% of the missed deferral. (Appendix A .05 and Appendix B, 2.02) If the employee would have received a matching contribution with respect to the catch-up, the QNEC must include the lost match with regard to the missed deferral (half of the catch-up limit).

Example. For 2008, Ed (age 50) deferred $15,500 and wanted to make additional deferrals. The plan permitted catch-up contributions but the employer (X) informed Ed that he could not defer any more. Later X discovered its error. X will need to make a QNEC equal to $1,250 [50% x (50% x $5,000)] plus earnings.

Roth deferrals. The correction method for a plan which includes a Roth feature and improperly excludes an eligible employee from making deferrals is the same as it is for a plan that only permits pre-tax deferrals. The corrective contribution will be a QNEC and the plan may not designate the corrective contribution as a Roth contribution. (Appendix A .05 and Appendix B, 2.02)

Loans. A plan may correct participant loan violations irrespective of whether the plan document contains Code §72(p)(2) limits (amount limits, time period limits and level amortization requirements). Furthermore, the new procedure indicates that if a plan wants (1) relief from reporting the loan as a deemed distribution, or (2) to report a loan as a deemed distribution in the year of correction rather than the year of failure, the plan must specifically request the relief. If a plan submits a loan failure under VCP, the loan failure is the only error and it does not affect more than 25% of the participants, the IRS will reduce the compliance fee by 50%. (Sections 4.01 and 6.07). Note: The procedure continues to require a plan to obtain relief under VCP. The IRS has provided a “streamlined” VCP procedure which should provide faster IRS response and lower attorney’s fees. Given the cost of filing and the required sanction payment, the loan correction recommended in the procedure may be too expensive for most small employers. Despite its inclusion in EPCRS, most practitioners continue to view loan problems as a tax rather than a qualification issue.

Distributions. The IRS has increased the de minimis distribution rule from $50 to $75. Under this rule, a plan will not need to make a corrective distribution if the corrective amount does not exceed $75. (Section 6.02(5)(b))

Example. The plan made a total distribution to Ann (a terminated participant). Later, the plan determines it miscalculated the distribution and determined that the distribution was $65 short. Rather than make an additional distribution, the plan will not need to make the distribution to Ann because the amount is within the de minimis rule.

Example.. A plan made an allocation error which resulted in an under-allocation for the following participants: Ben - $60 and Betty $70. When the plan discovered the error, Ben had already terminated participation in the plan and had received a cash-out distribution while Betty remains an active participant. The plan will need to make the corrective contribution for Betty but it will not need to make a corrective contribution and distribution to Ben because the amount is less than the de minimis amount.

Earnings. In the prior version of EPCRS, a plan needed to determine earnings for corrective contributions, distributions and allocations based on (1) actual plan investment returns, (2) reasonable estimates of investment returns, or (3) if not reasonable to make reasonable estimate, a reasonable interest rate. The new procedure continues the same rules regarding earnings calculations but also indicates that the DOL’s online calculator utilized under the Voluntary Fiduciary Correction Program is deemed reasonable. (Section 6.02(5)(a)). Note: Many practitioners were hoping to be able to use the online calculator in any circumstance but the IRS did not allow unrestricted use of the online calculator.

415. The new procedure incorporates correction methods for excess amounts which are similar to those contained in the pre-2007 415 regulations. The correction methods are as follows: (1) reallocation of excess amounts to the other participants; (2) place the excess amount in a separate account and use it to reduce employer contributions in subsequent years; (3) distribute elective deferrals and after-tax employee contributions, commencing first with unmatched elective deferrals and after-tax employee contributions and then apportioning the excess amount between the deferrals and matching contributions (forfeiting the matching contributions). This procedure applies not only to 415 excess allocations, but also to deferrals which exceed a plan limit (other than 402(g) or the ADP test) and employer contributions which would violate the 401(a)(17) compensation limit. (Sections 5.01(3) and 6.06; Appendix A .08.)

Other changes. Other changes made in the new procedure are as follows:

Intentional failures. The IRS will determine the compliance fee under VCP for intentional qualification failures under Section 12.06, which also applies to egregious failures, and may result in a higher compliance fee than under the normal fee schedule based only on the number of participants. (Section 12.06)

Loan failures discovered on examination. The IRS will apply Audit CAP if it discovers upon IRS examination of a qualified plan or a 403(b) plan that a plan did not comply with the participant loan requirements and did not self-correct the failure or correct it under VCP. (Sections 13.01 and 14.01)

Simplified VCP application. The IRS provides a simplified sample application form for a VCP filing. (Appendix D)

Earnings calculation. In calculating earnings for corrective distributions, the IRS clarifies that the employer must calculate earnings from the date of the qualification error without regard to any extension provided under the Code. (Section 6.02(4)(e))

Improper distributions. The IRS clarified that, in general, correction of improper distributions which are rolled over to an IRA will not be subject to the 6% excise tax of Code §4973 if the participant withdraws the improper distribution. (Section 6.09(5))

Other governmental correction procedures. The IRS has added other government (e.g., DOL) correction procedures as a factor in considering whether a correction method is reasonable and appropriate. For example, if an error occurs because of an employer ceasing to exist, the plan could use the DOL’s procedure for termination of an orphan plan. (Section 6.02(2)(e)(ii))

Determination letter requirement. The IRS has revised the requirements as to when an employer must submit a determination letter request when correcting certain qualification failures by plan amendment. For example, a plan will not need to obtain a determination letter as part of the correction process for the following situations: failure to adopt an interim amendment, correction of demographic or operational errors under VCP or Audit CAP, and errors corrected through the adoption of a model amendment. On the other hand, the procedure does require a plan to submit for a determination letter in the following situations: determination of whether the plan document is in compliance with Code §401(a) upon termination or the VCP or Audit CAP submission occurs during an on-cycle year or in a nonamender failure. In addition, a plan correcting an operational error through plan amendment must apply for a letter by the end of their next remedial amendment cycle. (Sections 6.05, 10.08 and 11.01)

Compliance statement scope. The IRS has clarified the scope of its compliance statement for failure to adopt plan amendments timely. The compliance statement will cover the timeliness of the adoption but it will not determine whether the amendment conforms to the qualification requirements or is consistent with other plan terms. (Section 10.08)

RMD excise tax waiver. The IRS has clarified the circumstances in which it will waive the 50% excise tax for a plan failing to making required minimum distributions. Under VCP, a plan must make a specific waiver request for an owner-employee or a 10% owner. Under Audit CAP, the plan must request a waiver for any participant. (Section 6.09(2))

Other tax waivers. The IRS expanded the income and excise taxes (e.g., Code §§72(t), 4973 and 4979) it has the discretion to waive under VCP. For example, if a participant removes an overpayment from an IRA and returns it to the plan, the IRS has the discretion to waive both the 6% excise tax for over-contribution to the IRA and the 10% penalty tax for a pre-59½ distribution. However, the plan must make a specific request for the waiver of the taxes and the IRS may impose an additional fee for the waiver. (Section 6.09(5) and (6))

Correcting certain failures. The IRS has provided a new and expanded streamlined application procedure for certain failures. To qualify for the streamlined application procedure the plan must use the application format and correction method provided in the schedule. The plan only may use the streamlined procedure for the following qualification errors: failure to adopt timely an interim amendment or the failure to implement an optional amendment timely, failure to adopt other required amendments, certain SEP, SARSEP and SIMPLE plan failures, failure to administer loans consistent with the requirements of Code §72(p)(2), ineligible employer sponsorship of a 403(b) or 401(k) plan, 402(g) failures, Code §401(a)(9) failures, failures involving compensation limit, lack of loan or hardship provisions, and improper inclusion of ineligible employees.

ERISA Workshop. SunGard will present a one-day ERISA Workshop in which one of the topics will be an explanation of the changes and expansions under the new correction procedure. The course materials will include a chart of all of the correction options.

Attendance bonuses. One of the more significant topics we will be covering at the ERISA Workshop is the new proposed regulations on participant disclosure of plan fees and expenses. The regulations will have a significant impact on plan administration and are scheduled to become effective January 1, 2009. In explaining the participant disclosure regulations in the program, we will review actual drafts of a sample annual disclosure statement and quarterly disclosure statement. As an added bonus for ERISA Workshop attendees, each attendee will have the opportunity to attend the SunGard webcast on the regulations when they are finalized for half price.

Webcast. In addition, SunGard will present a Web Seminar, "EPCRS 2008: A New Look", on Tuesday, September 23.