IRS Issues Interim Guidance on SECURE 2.0’s Expansion of Self-Correction Program under EPCRS

May 31, 2023

By: Melanie N. Aska

Section 305 of the SECURE 2.0 Act of 2022, enacted on December 29, 2022, significantly expands the availability of self-correction under the IRS’s Employee Plans Compliance Resolution System (EPCRS) and directs the IRS to update EPCRS, currently set forth in IRS Revenue Procedure 2021-30, no later than December 29, 2024, to take the provisions of Section 305 into account.

Section 305 permits plan sponsors to self-correct “eligible inadvertent failures” (including loan errors) at any time, without IRS involvement, provided certain conditions are satisfied. Section 305 also directs the IRS to expand EPCRS to allow IRA custodians to self-correct eligible inadvertent failures relating to IRAs.

Section 305 defines an “eligible inadvertent failure” as a failure that occurs despite the existence of practices and procedures (formal or informal) that are reasonably designed to promote and facilitate overall compliance, in form and operation, with applicable requirements of the Internal Revenue Code. Under Section 305, an eligible inadvertent failure does not include any failure that is egregious, relates to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction.

Section 305 allows a plan sponsor or an IRA custodian to self-correct an eligible inadvertent failure under EPCRS, except to the extent that:

• The failure was identified by the Secretary of the Treasury prior to any actions that demonstrate a specific commitment to implement self-correction of the failure; or
• The self-correction is not completed within a reasonable period after the identification of the failure.

IRS Notice 2023-43. On May 25, 2023, the IRS issued Notice 2023-43, which provides interim guidance, in advance of the IRS’s update of Revenue Procedure 2021-30, on Section 305’s expansion of self-correction under EPCRS.

The new Notice provides:

• That a plan sponsor may self-correct an eligible inadvertent failure, before the IRS updates Revenue Procedure 2021-30, if certain conditions are satisfied and certain exceptions do not apply;
• That an IRA custodian may not correct an eligible inadvertent failure under EPCRS before the IRS updates Revenue Procedure 2021-30; and
• Interim interpretive guidance with respect to corrections of eligible inadvertent failures.

The Notice does not address the other sections of SECURE 2.0 that deal with plan corrections, specifically, Section 301 (relating to the recovery of retirement plan overpayments) and Section 350 (relating to correcting automatic contribution errors). The Notice also does not address any elements of Section 305 over which the Department of Labor has authority.

Plan Sponsors May Self-Correct Certain Eligible Inadvertent Failures Before the IRS Updates Revenue Procedure 2021-30. A plan sponsor may self-correct eligible inadvertent failures (except those listed in Q&A-2 of Notice 2023-43, as explained in the next section below) before the IRS updates Revenue Procedure 2021-30, if the following conditions are satisfied:

• The IRS does not identify the failure prior to any actions demonstrating a specific commitment to implement a self-correction of that failure;
• The plan sponsor completes the self-correction within a reasonable period after the failure was identified;
• The failure is not egregious, does not directly or indirectly relate to an abusive tax avoidance transaction, and does not relate to the diversion or misuse of plan assets; and
• The self-correction satisfies all of the provisions applicable to self-correction set forth in Revenue Procedure 2021-30, including that:
  • The plan sponsor must have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements;
  • The plan sponsor must apply the correction principles and rules of general applicability set forth in Revenue Procedure 2021-30;
  • The plan sponsor may, but is not required to, self-correct using a safe harbor correction method set forth in Appendix A or Appendix B of Revenue Procedure 2021-30; and
  • The plan sponsor may not use a correction method that is prohibited under Revenue Procedure 2021-30. [Notice 2023-43, Section III, Q&A-1]

But Plan Sponsors May Not Self-Correct Certain Other Eligible Inadvertent Failures Before the IRS Updates Revenue Procedure 2021-30. Plan sponsors may not self-correct the following eligible inadvertent failures before the IRS updates Revenue Procedure 2021-30:

• A failure to initially adopt a written plan for a Code Section 401(a) qualified plan, 403(a) qualified annuity plan, 403(b) plan, 408(k) SEP or 408(p) SIMPLE IRA plan, including the failure to timely adopt a written 403(b) plan document to meet the requirements of the 2007 IRS final regulations under Section 403(b);
• A failure in an orphan plan;
• A significant failure in a terminated plan;
• A failure that involves excess contributions to a SEP or SIMPLE IRA plan and that is corrected by permitting the excess contributions to remain in an affected participant’s IRA;
• A demographic failure that is corrected using a method other than a method set forth in Treasury Regulations Section 1.401(a)(4)-11(g);
• An operational failure that is corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable for a participant or beneficiary than the original terms of the plan;
• A failure occurring in a SEP with a plan document that does not consist of either a valid Model Form 5305-SEP or 5305A-SEP or a prototype SEP;
• A failure occurring in a SIMPLE IRA plan with a plan document that does not consist of either a Model Form 5305-SIMPLE or 5304-SIMPLE or a prototype SIMPLE IRA plan; and
• A failure in an ESOP that involves Code Section 409 (qualification requirements for tax credit ESOPs) in which tax consequences other than plan disqualification are associated with the failure, for example, a failure under Code Section 409(p) (prohibited allocations of securities in an S corporation). [Notice 2023-43, Section III, Q&A-2]

Certain Provisions of Revenue Procedure 2021-30 Do Not Apply to Self-Correction of an Eligible Inadvertent Failure. Before the IRS updates Revenue Procedure 2021-30, the following provisions of Revenue Procedure 2021-30, relating to self-correction, do not apply to the self-correction of an eligible inadvertent failure:

• The requirement that a qualified plan (i.e., a Code Section 401(a) qualified plan or a Section 403(a) qualified annuity plan) or a Section 403(b) plan be the subject of a favorable letter from the IRS;
• The prohibition of self-correction of demographic failures and employer eligibility failures;
• The prohibition of self-correction of significant failures under SEPs and SIMPLE IRA plans;
• The prohibition of self-correction of certain loan failures;
• The provisions relating to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination by the IRS; and
• The requirement that the correction of a significant failure must be completed or substantially completed by the end of a specified correction period (in general, the last day of the third plan year following the plan year in which the failure occurred). [Notice 2023-43, Section III, Q&A-3]

Certain Eligible Inadvertent Failures May Not Be Self-Corrected After They Have Been Identified. Before the IRS updates Revenue Procedure 2021-30, certain eligible inadvertent failures will be treated as having been “identified” by the Secretary of the Treasury – and therefore, no longer eligible for self-correction – when the plan or plan sponsor comes “under examination”, by the IRS, as defined under Revenue Procedure 2021-30. Thus, before the IRS updates Revenue Procedure 2021-30, once the plan or plan sponsor comes under examination, the eligible inadvertent failure is no longer eligible for self-correction unless the plan sponsor has, before the plan or plan sponsor comes under examination, demonstrated a specific commitment to implement a self-correction of the eligible inadvertent failure. [IRS Notice 2023-43, Section III, Q&A-4]

The Notice further provides, however, that, before the IRS updates Revenue Procedure 2021-30, a plan sponsor may self-correct a failure (including an eligible inadvertent failure) that is “insignificant”, determined in accordance with the factors set forth in Revenue Procedure 2021-30, even if the plan or plan sponsor is under examination by the IRS and even if the IRS discovers the failure on examination. [IRS Notice 2023-43, Section III, Q&A-5]

Facts and Circumstances Tests. Before the IRS updates Revenue Procedure 2021-30, a determination as to whether actions taken by a plan sponsor demonstrate a specific commitment to implement the self-correction of an identified eligible inadvertent failure will be made based on all the facts and circumstances. The plan sponsor’s actions must generally demonstrate that the plan sponsor is actively pursuing correction of the specific identified failure, and that the mere completion of an annual compliance audit or adoption of a general statement of intent to correct failures when they are discovered are not actions demonstrating a specific commitment to implement the self-correction of an identified failure. [IRS Notice 2023-43, Section III, Q&A-6]

Similarly, before the IRS updates Revenue Procedure 2021-30, for purposes of ascertaining whether the self-correction of an eligible inadvertent failure has been completed within a reasonable period after it has been identified by the plan sponsor, a “reasonable period” is determined by considering all relevant facts and circumstances. Except with respect to an employer eligibility failure, a failure that has been corrected by the last day of the 18th month following the date the plan sponsor identifies the failure will be treated as having been completed within a reasonable period after it has been identified. A self-correction of an eligible inadvertent failure that is an employer eligibility failure will be treated as having been corrected within a reasonable period after it has been identified by the plan sponsor only if the plan sponsor ceases all contributions to the plan as soon as reasonably practicable after the failure is identified and, in no event, later than the last day of the 6th month following the date the failure is identified. [IRS Notice 2023-43, Section III, Q&A-7]

Transition Rule. Before the IRS updates Revenue Procedure 2021-30, a plan sponsor will not be prevented from self-correcting an eligible inadvertent failure on or after December 29, 2022 (SECURE 2.0’s enactment date) merely because that failure occurred before December 29, 2022. [IRS Notice 2023-43, Section III, Q&A-8]

No Waivers of Applicable Taxes. Before the IRS updates Revenue Procedure 2021-30, self-correction of an eligible inadvertent failure with respect to which an excise tax or additional tax applies does not automatically result in a waiver of the tax. However, a plan sponsor may file a Voluntary Correction Program (VCP) submission with the IRS under the VCP component of EPCRS to request that the IRS not pursue certain excise taxes or additional taxes that apply to the eligible inadvertent failure. In addition, for an income tax or excise tax issue that cannot be corrected under EPCRS, IRS Employee Plans would accept a request for a closing agreement through the Voluntary Closing Agreement Procedure under Revenue Procedure 2023-4. [IRS Notice 2023-43, Section III, Q&A-9]

VCP Is Available. A plan sponsor may submit a VCP application under Revenue Procedure 2021-30 to correct an eligible inadvertent failure (including an eligible inadvertent failure that is a loan failure). [IRS Notice 2023-43, Section III, Q&A-10]

No Additional Recordkeeping Requirements. Section 305 of SECURE 2.0 does not provide any new IRS recordkeeping requirements with respect to the self-correction of an eligible inadvertent failure. However, current IRS recordkeeping requirements continue to apply. Accordingly, if the IRS so requests upon an examination, a plan sponsor must be able to provide documentation substantiating the self-correction, such as documentation that:

• Identifies the failure, including the years of occurrence;
• Explains how the failure occurred and demonstrates that there were established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance that were in effect when the failure occurred;
• Identifies and substantiates the correction method and the date of the completion of the correction; and
• Identifies any changes made to those established practices and procedures to ensure that the same failure would not recur. [IRS Notice 2023-43, Section III, Q&A-11]

IRA Custodians. Before the IRS updates Revenue Procedure 2021-30, an IRA custodian may not correct an eligible inadvertent failure under EPCRS. [IRS Notice 2023-43, Section IV, Q&A-12]

Reliance. Plan sponsors may rely on Notice 2023-43 from the date the IRS issued it (May 25, 2023) until the date the IRS updates Revenue Procedure 2021-30 pursuant to Section 305 of SECURE 2.0. If a plan sponsor completed a self-correction on or after December 29, 2022 (SECURE 2.0’s enactment date) and before May 25, 2023 (the date the IRS issued Notice 2023-43), the plan sponsor may apply a good faith, reasonable interpretation of Section 305 of SECURE 2.0 in completing the self-correction. A plan sponsor that completed a self-correction during that period in a manner that accords with Notice 2023-43 will be treated as having applied a good faith, reasonable interpretation of Section 305 of SECURE 2.0. [IRS Notice 2023-43, Section V]

Request for Comments. Notice 2023-43 invites comments, which should be submitted on or before August 23, 2023, on the guidance provided in the Notice and on any other aspect of Section 305 of SECURE 2.0. In particular, the Treasury Department and the IRS are seeking comments relating to:

• Additional correction methods that are required to be used to correct eligible inadvertent failures, including general principles of correction if a specific method is not specified by the IRS; and
• A description of common IRA failures and suggested correction methods for those failures, and the possibility of expanding EPCRS to be available for both IRA custodians and IRA owners. [IRS Notice 2023-43, Section VI]

The Upshot. IRS Notice 2023-43 provides interim guidance upon which plan sponsors may rely, until the IRS updates Revenue Procedure 2021-30, to identify and self-correct eligible inadvertent failures relating to their Code Section 401(a) qualified plans, 403(a) qualified annuity plans and 403(b) plans. IRA custodians will have to wait until the IRS updates Revenue Procedure 2021-30 to begin self-correcting eligible inadvertent failures relating to their IRAs. Hopefully, the updated version of Revenue Procedure 2021-30 will provide comprehensive guidance, not only on self-correcting eligible inadvertent failures in accordance with Section 305 of SECURE 2.0, but also on recovering retirement plan overpayments in accordance with Section 301 of SECURE 2.0, and correcting automatic contribution errors in accordance with Section 350 of SECURE 2.0.

If you have any questions about the provisions discussed in this news alert, please contact Melanie N. Aska at maska@murthalaw.com or 617.457.4131.

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