The IRS has released Revenue Procedure 2021-30, which modifies and supersedes Revenue Procedure 2019-19, and makes certain modifications to the Employee Plans Compliance Resolution System ("EPCRS"). One significant modification is the addition of new correction methods for overpayments to participants and beneficiaries from a defined benefit pension plan. The new correction methods for overpayments are described in detail below.

Effective date: Rev. Proc. 2021-30 is generally effective as of July 16, 2021, however a few changes become effective January 1, 2022.

BACKGROUND

The EPCRS is a comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code (“Code”), but that have not met these requirements for a period of time. It permits plan sponsors to correct certain plan document, operational, demographic or eligibility failures in order to continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self Correction Program ("SCP"), the Voluntary Correction Program ("VCP"), and the Audit Closing Agreement Program ("Audit CAP").

The most recent revenue procedure for the EPCRS had been Rev. Proc. 2019-19. Under Rev. Proc. 2019-19, overpayments could be corrected by adjusting future payments and returning past overpayments to the plan with interest. A plan sponsor was permitted to make a contribution to make up overpayments that a participant or beneficiary received. It was also possible that the plan could be retroactively amended to increase the benefit so that the plan document conformed to plan operations.  The IRS stated that it was reviewing comments regarding overpayments that had been received pursuant to the request in Rev. Proc. 2015-27.

Modifications to the EPCRS Program

Rev. Proc. 2021-30 makes the following changes:

Generally Effective July 16, 2021

• Plan sponsors may provide overpayment recipients the option of repaying an overpayment in a single sum payment, through an installment agreement, or through an adjustment in future payments.
• Two newly added correction methods (discussed below) are now allowed to fix operational failures when plan participants or beneficiaries receive overpayments from defined benefit plans.
• The self-correction period for significant operational failures is extended from the last day of the second plan year following the plan year for which the failure occurred to the last day of the third plan year following the plan year for which the failure occurred. Note this also has the effect of also extending the safe harbor correction method in Appendix A of Rev. Proc. 2021-30 to correct missed elective deferrals for failures lasting more than three months but not beyond the extended SCP correction period for significant failures.
• Retroactive plan amendments to correct operational failures are no longer required to benefit all participants in the plan.
• Effective January 1, 2021, the sunset date of the safe harbor correction method to correct missed elective deferrals for eligible employees subject to an automatic contribution feature in Code section 401(k) or 403(b) plans is extended from December 31, 2020, to December 31, 2023.
• The threshold for certain de minimis amounts for which a plan sponsor is not required to implement correction is increased from $100 to $250.

Effective January 1, 2022

• Anonymous VCP submissions are eliminated.
• 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.
• Audit CAP sanctions must be paid through the Pay.gov website rather than by certified check or cashier’s check.

New Correction Methods for Overpayments

Rev. Proc. 2021-30 now provides the “funding exception correction method” and the “contribution credit correction method.” The new correction methods were added in response to comments received by the IRS. The new methods are described in greater detail below, but will often mean that a participant or beneficiary has no need to return the overpayments.

Restrictions on use - The two new methods may not be used if the overpayments are associated with a failure to satisfy statutory limits (including the limits of Code sections 401(a)(17), 415(b), and 436), or are made to a disqualified person as defined in Code section 4975(e)(2), or are made to an owner-employee as defined in Code section 401(c).  Additionally, the contribution correction method may not be used if the plan has a funding deficiency or unpaid minimum required contribution as of the end of the last plan year before the plan year for which the plan sponsor takes into account the corrected benefit payment amount for funding purposes (taking into account contributions made after the end of the plan year that are credited to that plan year).

• Funding exception correction method - Corrective payments are not required for a single-employer plan subject to Code section 436, provided that the plan's certified or presumed adjusted funding target attainment percentage ("AFTAP") applicable to the plan as of the date of correction is equal to at least 100 percent. In the case of a multiemployer plan, corrective payments are not required if the plan's most recent annual funding certification as of the date of correction indicates that the plan is not in critical, critical and declining, or endangered status. Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount. For purposes of EPCRS, no further corrective payments from any party for past overpayments are required.
• Contribution credit correction method - The amount of overpayments required to be repaid to the plan is the amount of the overpayments reduced (but not below zero) by the “contribution credit.” The contribution credit is determined as the sum of:

(A) the cumulative increase in the plan's minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance, or funding standard account credit balance), beginning with (1) the plan year for which the overpayments are taken into account for funding purposes, through (2) the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and

(B) certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.

Under this method, the overpayments and the contribution credit are determined without regard to adjustments for interest. Additional contributions that are added to a plan’s prefunding balance, made to remove or avoid benefit restrictions of Code section 436, withdrawal liability payments and other contributions made to a multiemployer plan (all of which are automatically added to the credit balance), and contributions made to correct other qualification failures may not be counted towards the contribution credit.

If the amount of overpayments is reduced to zero after the contribution credit is applied, then future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount. Furthermore, no further corrective payments from any party for past overpayments are required.

If a net overpayment remains after the application of the contribution credit, the plan sponsor or another party must take further action to reimburse the plan for the remainder of the overpayment (called the “net overpayment”). The net overpayment can be recouped by either (1) the plan sponsor or another party making a single sum payment to the plan equal to the net over payment, or (2) the plan sponsor takes reasonable steps to recoup the net overpayment from the recipient through (i) a single sum payment, (ii) an installment agreement, or (iii) adjusting future benefit payments. Section 2.05(4)(b) of Appendix B of Rev. Proc. 2021-30 provides additional rules that apply with respect to an installment payment or the reduction of future benefit payments under this correction method. Written notification is required if there will be recoupment of the net overpayment from the recipient, and the recipient will need to be offered a choice of the three options.

CHEIRON OBSERVATION: The additional correction methods are a welcome recognition by the IRS that the recoupment of past overpayments is not necessary in all cases. The new correction principles are beneficial to plan sponsors because they reduce the need to seek repayment from participants or beneficiaries who received overpayments, and in some cases, do not require the plan sponsor, participants, or beneficiaries to reimburse the plan for overpayments to participants. The contribution credit method will require some help from the plan’s actuary to determine the increase in the minimum funding requirements attributable to the overpayments.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.