The Internal Revenue Service (IRS) issued Notice 2023-43 on May 25, 2023, providing interim guidance on the expansion of the Employee Plans Compliance Resolution System (EPCRS) to self-correct certain Eligible Inadvertent Failures (EIFs) under section 305 of the SECURE 2.0 Act of 2022 (SECURE 2.0). Section 305 directs the Secretary of the Treasury (or its delegate) to revise the current EPCRS guidance (Revenue Procedure 2021-30) or any successor guidance within two years of the enactment of SECURE 2.0 (December 29, 2022).
EPCRS is a system that enables plan sponsors of qualified plans to correct plan failures in accordance with IRS procedures. Rev. Proc. 2021-30 outlines the correction principles, general applicability rules, and acceptable correction methods.
Notice 2023-43 is being provided in advance of the formal update to Rev. Proc. 2021-30 and is not comprehensive. It also does not address changes made by SECURE 2.0 related to the recovery of plan overpayments (section 301), corrections of automatic enrollment or automatic escalation of employee elective deferral failures (section 350), or any parts of section 305 under the authority of the U.S. Department of Labor.
This interim guidance applies to the self-correction of certain EIFs from the issuance of Notice 2023-43 (May 25, 2023) to the date Rev. Proc. 2021-30 is updated. Self-corrections during this time in accordance with this Notice will be treated as having applied a good faith, reasonable interpretation of section 305 of SECURE 2.0. Self-corrections completed on or after December 29, 2022, and before May 25, 2023, may apply a good faith, reasonable interpretation of section 305 of SECURE 2.0 in completing the correction.
Eligible Inadvertent Failure
Section 305(e) of SECURE 2.0 defines an EIF as a failure that occurs despite the existence of practices or procedures that satisfy the standards set forth in section 4.04 of Rev. Proc. 2021-30. It does not include failures that are egregious, that relate to the diversion or misuse of plan assets, or that are directly or indirectly related to an abusive tax avoidance transaction.
The key takeaways for qualified plans and 403(b) plans are:
- Plan sponsors may self-correct EIFs, including those relating to a plan loan to a participant but excluding those under 2., below, if certain conditions are met.
- EIFs that may not be self-corrected include:
- The failure to initially adopt a written plan
- A failure in an orphan plan
- A significant failure in a terminated plan
- Certain demographic failures
- An operational failure corrected via plan amendment to conform the terms of the plan to the plan’s prior operations in a manner less favorable to participants or beneficiaries
- The failure of an employee stock ownership plan (ESOP) that involves tax consequences other than plan disqualification under Internal Revenue Code section 409
- Certain provisions of Rev. Proc. 2021-30 do not apply during the interim period with respect to self-correction of an EIF (generally making it easier to self-correct by being able to disregard certain previously applicable requirements, prohibitions, and timeframes).
- An EIF is treated as having been identified by the Treasury Secretary and therefore no longer eligible for self-correction when the plan or plan sponsor comes under IRS examination, unless the plan sponsor has demonstrated a specific commitment to implement a self-correction with respect to the EIF (see 6., below) before the plan or plan sponsor comes under examination.
- Plan sponsors may self-correct a failure (including an EIF) that is insignificant, even if the plan or plan sponsor is under examination and even if the failure is discovered during the examination.
- A determination as to whether actions taken by a plan sponsor demonstrate a specific commitment to implement a self-correction on an EIF will be made on a facts and circumstances basis. The actions must generally demonstrate that the plan sponsor is actively pursuing correction of the specific identified failure. Merely having completed an annual compliance audit or adopting a general statement of intent to make corrections are not sufficient to demonstrate this commitment.
- A failure that is corrected by the last day of the 18th month following the date the failure is identified will generally be treated as having been made within a reasonable period after it is identified. EIFs related to employer eligibility failures are treated as having been corrected within a reasonable period after it is identified only if the plan sponsor ceases all contributions to the plan as soon as reasonably practicable (but not to exceed six months) after the failure is identified.
- Plan sponsors may self-correct EIFs that occurred prior to December 29, 2022.
- Self-correction of an EIF with respect to which an excise tax or additional tax applies does not automatically result in a waiver of the tax. Plan sponsors can request the IRS to not pursue such taxes through a Voluntary Correction Program (VCP) submission to the IRS.
- Plan sponsors may correct an EIF through a VCP application under Rev. Proc. 2021-30.
- There are no new recordkeeping requirements with respect to the self-correction of an EIF. However, current IRS recordkeeping requirements continue to apply.
Please contact your Milliman consultant for additional information on how these provisions may impact your plan(s).