Updated IRS Correction Principles and Changes to VCP Outlined in EPCRS Revenue Procedure 2021-30


The IRS Employee Plans Compliance Resolution System (EPCRS) permits any size business or organization that sponsors a retirement plan (including SEP and SIMPLE IRA plans) to identify and correct plan failures. EPCRS offers three correction programs:

  • Self-Correction Program (SCP) – Correct certain plan failures without contacting the IRS or paying a user fee.
  • Voluntary Correction Program (VCP) – Correct failures not eligible for SCP or to get IRS written agreement that specified failures were properly corrected.
  • Audit CAP – Resolve failures discovered during an IRS audit that can’t be corrected using SCP.

Rev. Proc. 2021-30PDF updated EPCRS, making several major changes and other revisions to the correction programs. Following are highlights of some of these changes.

Significant operational failures: The correction period for self-correction of significant operational failures is extended from two to three years.

Retroactive plan amendments: The revenue procedure removes the requirement that all participants in the plan benefit from the retroactive amendment, making it easier to use retroactive plan amendments to correct operational failures under SCP.

Expanded correction principles allow plan sponsors to fix operational failures when plan participants or beneficiaries receive payments that are in excess of the plan’s written terms. The new principles reduce the need to seek repayment from participants or beneficiaries who received overpayments and, in some cases, do not require the plan sponsor to reimburse the plan for overpayments to participants.  

General overpayment correction principles

  • Recovery of overpayments from affected recipients is not always required by EPCRS. Generally, it’s a choice made by plan sponsors, as EPCRS permits other correction alternatives. For example, the plan sponsor could fix the failure by retroactively conforming the plan’s written terms to the plan’s operation under SCP or VCP if certain conditions can be met.
  • New correction options supplement, but don’t replace, existing guidance under EPCRS. Full recovery from the employer or another party or reduction in subsequent payments owed overpayment recipients are still permitted.
  • Correction options under EPCRS do not prevent plan fiduciaries or other government agencies from taking other actions to recover overpayments under ERISA or other federal laws.
  • Revisions to section 6.06 are designed to reduce the burden on many plan sponsors and affected recipients of overpayments with regards to the recovery of such payments.
  • Correction principles involving overpayments generally require:
    • Written notice to affected participants/beneficiaries that such overpayments are classified as taxable and are not eligible for rollover.
    • Reduction of ongoing payments to affected retirees or impacted beneficiaries who received an overpayment to the correct amount under the terms of the plan.

New correction options for recovery of overpayments paid from defined benefit plans:

1.  Funding Exception Correction Method (section 6.06(3)(d)(i) & Appendix B, section 2.05(1) and (3))

Elements & Description: Funding Exception method

  • If the plan’s funding level is sufficient (determined at the time of correction), it’s not necessary to recover overpayments from the plan sponsor or the individual who received the overpayment.

Conditions: Funding Exception method

  • For plans subject to IRC 436, the plan’s AFTAP or presumed AFTAP at the time of correction is at least 100%.
  • For multiemployer plans, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status as defined in IRC 432 at the time of correction.
  • Under EPCRS, the plan sponsor can’t seek recoupment from any overpayment recipient if they use this correction method.

2. Contribution Credit Correction Method (section 6.06(3)(d)(ii) & Appendix B, section 2.05(1) and (4))

Elements & Description: Contribution Credit method

  • Contribution credits are applied to reduce the amount of the overpayment (determined without interest) that needs to be repaid to the plan.
  • The credits arise from the increased minimum funding contributions due to the reduction in plan assets or increases in liability due to the error or certain additional contributions. 
  • For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credits are applied, then no additional corrective action needs to be taken to recover the overpayment.
  • If a net amount is owed to the plan, then the plan sponsor or another party must reimburse the plan for the net amount owed.
  • If the plan sponsor chooses to seek recovery from the overpayment recipient, it must provide written notice and three repayment options must be offered:
    • Installment agreement
    • Adjusting future benefit payments
    • Single sum payment
  • Written notice to recipient must include:
    • Amount of the overpayment
    • A description of the error
    • Estimated repayment amounts (or reductions in future benefit payments) under each option
    • Amount of the recipients benefit after reduction to the correct amount
  • Installment rules:
    • Can’t charge interest until installment payments begin
    • Appropriate interest must accrue on the net amount of owed overpayment beginning on the date the installments begin
    • Installment period must be at least five years.
  • Limits on adjusting future benefit payments:
    • Reduction can’t exceed 10% of the corrected payment
    • No interest can accrue prior to the date the corrected payments begin
    • Appropriate interest must accrue on the amount of the net overpayment beginning on the date the corrected periodic payments begin.

Conditions: Contributions Credit method

  • The plan can’t have a funding deficiency or unpaid minimum required contribution.
  • Credits cannot include certain contributions:
    • Contributions added to funding balances
    • Contributions used to avoid or remove restrictions under IRC 436
    • Contributions for withdrawal liability
  • Plan sponsor can’t seek recoupment from recipients if contribution credits reduce the amount owed to the plan to zero. 

3. Modify the return of overpayment & adjustment of future payments correction methods: (Rev. Proc. 2021-30, section 6.06(3)(c) & Appendix B, section 2.05(2)

Elements and Description: Modify the return of overpayment & adjustment of future payments methods

  • Plan sponsor may permit a recipient of an overpayment to repay the amount owed via installment payments.

Conditions: Modify the return of overpayment & adjustment of future payments methods

  • Old rules still available and have not been modified.

Note - New overpayment correction options are generally not available:

  • If the overpayment recipient is an owner employee as defined in IRC Section 401(c) or a disqualified person as defined in IRC Section 4975(e)(2), or
  • If the overpayment is associated with failures to comply with a statutory limit (i.e. IRC Sections 401(a)(17), 415(b) and 436).
  • For governmental plans, the Funding Exception Correction Method or Contribution Credit Correction Method is not available.
  • The Funding Exception Correction Method may not be available to multiemployer plans or defined benefit multiple employer plans (“CSEC plans”) since all contributions above the minimum funding amount are automatically added to funding balances. 

Anonymous submissions: The IRS eliminated the procedures that permitted anonymous or John Doe VCP submissions. Anonymous VCP submissions made on or after January 1, 2022, will not be processed by the IRS.

Anonymous pre-submission conference: The IRS will permit plan sponsors or their representatives to make an anonymous written request for a pre-submission conference to discuss a potential VCP submission at no cost to the plan sponsor. Following the pre-submission conference, if the plan sponsor submits a VCP request, it can no longer be anonymous.

The sunset of the safe harbor correction method available for missed elective deferrals for eligible employees who are subject to an automatic contribution arrangement in a Section 401(k) or 403(b) plan is extended by three years (from December 31, 2020, to December 31, 2023).

  • The limits on small overpayments and excess amounts that don’t require correction is increased from $100 to $250.
  • Sanction amounts owed to the IRS as part of Audit CAP must be paid electronically through the Pay.gov website.
  • Several items were revised to update citations or cross-references, provide additional clarity, and other small changes.

Submit comments on improvements to EPCRS:

The Treasury Department and the IRS invite comments from the public on how we can improve EPCRS. Submit comments electronically or see section 17 of Rev. Proc. 2021-30 for information on how to submit by mail.

Effective date:

Rev. Proc. 2021-30 became effective July 16, 2021. However, provisions for the elimination of anonymous VCP submissions, addition of the ability to make written requests for a pre-submission conference, and the change in the payment method for Audit CAP sanctions weren’t effective until January 1, 2022.

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