The Internal Revenue Service (IRS) released Notice 2023-43 (Notice) on May 25, which provided guidance regarding the expansion of the IRS’s Employee Plans Compliance Resolution System (EPCRS) mandated by Section 305 of the SECURE 2.0 Act of 2022 (SECURE 2.0).
(See also our prior LawFlash for a deeper dive into the expansion by SECURE 2.0 of the ability of plan sponsors to self-correct certain operational failures, as well as our prior ML BeneBits blog post regarding the correction of inadvertent IRA errors.)
How Section 305 of SECURE 2.0 Changed EPCRS
Section 305 of SECURE 2.0 (Section 305) provides that a plan sponsor or IRA provider may self-correct “eligible inadvertent failures” at any time and without regard to when the failure occurred or whether the impact of the failure is significant. Generally, an “eligible inadvertent failure” is any failure that
- is not egregious,
- does not relate to the diversion or misuse of plan assets,
- does not directly or indirectly relate to an abusive tax avoidance transaction,
- occurs despite the existence of established and routinely followed practices and procedures that are reasonably designed to promote and facilitate compliance with the applicable requirements of the Code,
- is not identified by the IRS prior to any actions demonstrating a specific commitment to implement a self-correction with respect to the failure, and
- for which the self-correction is completed within a reasonable period after the identification of the failure.
Section 305 also requires the IRS to revise EPCRS—as currently set forth in Revenue Procedure 2021-30—by December 29, 2024, to take into account the provisions of Section 305.
What Notice 2023-43 Means for Plan Sponsors and IRA Custodians
The Notice provides interim guidance in a question-and-answer format in advance of the required update to EPCRS. As such, the guidance is not comprehensive. However, retirement plan sponsors may rely on the interim guidance in the Notice to self-correct eligible inadvertent failures until EPCRS is updated pursuant to Section 305.
In contrast, the Notice states that IRA custodians may not correct any eligible inadvertent failures under EPCRS before it is updated.
The Notice includes several helpful pieces of guidance. For example, the Notice confirms Section 305’s elimination of the EPCRS rule that prohibited self-correction of “significant” optional failures that first occurred more than three years before the year of correction.
In addition, the Notice confirms that plan sponsors may now self-correct a broader range of failures, including participant loan failures, and provides helpful guidance on some of the terms and requirements in Section 305 (for example, whether a particular failure is "egregious”; when a plan sponsor will be treated as having demonstrated a "specific commitment" to correct a failure; and what constitutes a "reasonable period" for correcting a failure).
Also helpful is confirmation that a plan sponsor may self-correct an eligible inadvertent failure on or after December 29, 2022 (the date of enactment of SECURE 2.0) even if the failure occurred prior to December 29, 2022.
Finally, plan sponsors worried about needing to unwind any self-corrections they completed after SECURE 2.0 was enacted but before Notice 2023-43 is issued can breathe a little easier; the Notice states that the plan sponsor may apply a good faith, reasonable interpretation of Section 305 in completing the self-correction.
Less favorably, Q&A-2 of the Notice lists several eligible inadvertent failures that a plan sponsor may not self-correct prior to the date EPCRS is updated. These include, for example, the failure to initially adopt a written plan, a demographic failure that is not otherwise corrected in accordance with a method set forth in applicable regulations, and an operational failure for which a conforming amendment is less favorable to a participant or beneficiary than the original plan terms.
Until EPCRS is updated, and pending further guidance, plan sponsors wishing to correct these particular failures or using these methods will need to do so through a Voluntary Correction Program (VCP) submission to the IRS.
Further, the Notice does not include any guidance, or indication when the IRS will issue guidance, regarding the correction of overpayments (as addressed by Section 301 of SECURE 2.0) or automatic contribution failures (as addressed by Section 350 of SECURE 2.0).
Treasury and IRS Seek Guidance via Public Comment
The Treasury Department and IRS have requested public comments on the guidance provided in the Notice—as well as any other aspect of Section 305—by August 23, 2023. Specifically sought are comments relating to additional correction methods for eligible inadvertent failures (including general principles of correction if a specific correction method is not specified); a description of common IRA failures and suggestions for correction methods for those failures; and the possibility of further expanding EPCRS to make it available to both IRA custodians and IRA owners.
Stay tuned for further ML BeneBits posts, LawFlashes, and webinars as these developments emerge. To receive updates on the latest developments in employee benefits, including insights on SECURE 2.0, subscribe to our mailing list.