Retirement plans FAQs regarding governmental plans and EPCRS


1. Should we have a governmental plan correction program?

Governmental employers whose IRC 401(a) and IRC 403(b) retirement plans are governmental plans under IRC 414(d) are currently eligible for EPCRS and may use its correction programs to fix most failures to follow plan terms or applicable tax law when operating the plan and failures to timely update the written plan. For eligible deferred compensation plans under IRC 457(b), where appropriate, governmental employers may seek to enter into an agreement with the IRS in order to resolve problems. Reasonable modifications to procedures or its correction programs to accommodate some specific, unique needs of governmental employers may be considered. More dialogue on the specific needs of governmental employers under EPCRS is needed to determine appropriate action.

2. Are there de minimis exceptions to correction with respect to contributions (i.e., excess employer match) or calculations (i.e., small lump-sum that was not counted for purposes of calculating high-three or cash balance credit) that have not been made or calculated in accordance with plan terms?

Revenue Procedure 2021-30 contains a number of exceptions to the requirement for full correction that address:

  • small corrective distributions due participants and beneficiaries,
  • the recovery of small overpayments, and
  • small excess amounts.

However, currently, there are no de minimis exceptions relating to corrective contributions.

3. If a plan has a failure that may be corrected under EPCRS and the provisions of the state law relating to the failure to provide a higher benefit than the applicable provision of the Internal Revenue Code, will a state protected benefit be affected by the EPCRS principle of full correction? 

State constitutions, statutes, and state court cases often provide participants with some protection or guarantee of their state provided retirement benefits. These governmental plans must satisfy a number of tax-qualification requirements under the Internal Revenue Code, including the benefit and contribution limits of section 415 and the compensation limits under section 401(a)(17). These plans must also follow their plan terms to retain their tax-qualified status so that the participants receive favorable tax treatment on their benefits and contributions. Under some circumstances, the state provided benefits under the plan can conflict with the Internal Revenue Code requirements. Revenue Procedure 2019-19, containing the provisions of the Employee Plans Compliance Resolution System (EPCRS), provides that generally, “a failure is not corrected unless full correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable year is closed).”

Under the EPCRS process, the correction should be reasonable and appropriate for the failure. What is reasonable and appropriate is based on the facts and circumstances of each case. Whether or not full correction is made is one of the facts and circumstances to be considered. While the IRS’s expectation is that full correction will be made, the existence of a state law protecting pension benefits is one factor, among many, that may be taken into account in determining an appropriate correction method. A correction involving a state protected benefit should be submitted under the Voluntary Correction Program of EPCRS.