As we have previously reported, the SECURE 2.0 Act (SECURE 2.0), signed into law on December 29, 2022, represents a huge package of provisions affecting retirement plans, including 401(k) plans, that will have an enormous overall effect over the next several years. Of the over 90 individual provisions contained in SECURE 2.0, one which is effective immediately — and which has major present-day implications for 401(k) plan sponsors and administrators — significantly expands the IRS Employee Plans Compliance Resolution System (EPCRS), a comprehensive program designed to help plans correct mistakes (generally referred to as “failures”) that might otherwise adversely affect a plan’s qualified status, or result in fines or other sanctions.
NOTE: See our article entitled “401(k): What Do I Need to Know About SECURE 2.0? Overview of Significant Provisions, Part I” for a general discussion of the EPCRS changes. For an overview of EPCRS, see our reference article entitled “401(k) EPCRS Overview”.
The current ground rules for EPCRS are contained in IRS Revenue Procedure (Rev. Proc.) 2021-30. Among other changes, SECURE 2.0 expands the self-correction program (SCP), which is one of three components under EPCRS. Though the statutory language directs the IRS to issue an updated Rev. Proc. incorporating the new SECURE 2.0 provisions within two years of the law’s passage, the nature and scope of the changes create questions that need to be addressed now, being that the changes are already effective.
In response to this need, on May 25, 2023, the IRS released Notice 2023-43, which – happily for plan sponsors and other affected individuals – answers at least some of the more pressing questions.
DISCLAIMER: This article is intended only as a brief overview of Notice 2023-43 as it applies to most 401(k) plans. It is not intended as an exhaustive discussion of the new Notice, or to address the details of EPCRS, plan corrections generally, prior IRS or other guidance on this topic, plan qualification, additional legal requirements for 401(k) plans, or similar topics. As always, please consult your own ERISA attorney or professional advisor for individualized advice concerning your own 401(k) plan.
Expanded Self-Correction Under SECURE 2.0.
As explained in the EPCRS Overview referenced above, the IRS correction program consists of three components: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (CAP). The most advantageous component in most cases is SCP, which permits plan sponsors to self-identify and self-correct many types of operational and certain other failures, without the need to obtain advance approval from the IRS in the form of a complicated submission, and without payment of the fee required for VCP. In recent times, the IRS has steadily expanded the scope of failures that may be corrected through SCP in an effort to encourage plan sponsors to diligently find and remedy inadvertent mishaps – a favorable outcome for both employers and plan participants.
SECURE 2.0 added another layer to the expansion of SCP, effective December 29, 2022, in the following regards:
- The expanded SECURE 2.0 SCP correction scheme generally permits 401(k) plans to self-correct any “eligible inadvertent failure.” An “eligible inadvertent failure” is defined as any failure that occurs despite a plan’s having in place practices and procedures that are “reasonably designed to promote and facilitate compliance with the applicable requirements of the Internal Revenue Code.”
- “Eligible inadvertent failures,” however, do not include any failures that are “egregious” (see below), relate to the diversion or misuse of plan assets, or are related, directly or indirectly), to an abusive tax avoidance transaction.
- The former distinction between “significant” and “insignificant” failures, along with the former three-year time limit for correcting “significant” operational failures, has generally been eliminated.
- Under the new rules, there is no longer a time limit on when corrections may be made after the occurrence of a failure. However, the statute specifies that they must be made within a “reasonable period” (see below) following discovery of the failure.
- The scope of plan loan failures that can be corrected under SCP has been substantially expanded.
The statutory text of SECURE 2.0 failed to address certain critical questions — among them: (1) how the December 29, 2022 effective date is to be applied to failures discovered and/or corrected prior to such date; and (2) what constitutes a “reasonable period” for purposes of completing corrections following discovery of a failure. Since two years until the next Rev. Proc. is a long time to have to wait on these answers, assuming a plan needs to be corrected right now, the IRS did the 401(k) plan community a big favor by issuing Notice 2023-43 – even if the guidance may not have answered every conceivable issue that might arise under the new SECURE 2.0 rules.
Highlights of Notice 2023-43:
The following is intended as a broad overview of the most prominent features of Notice 2023-43 that should apply to most 401(k) plans:
Under the interim guidance, plan sponsors may self-correct an “eligible inadvertent failure” (see above), including a failure relating to a plan loan, as long as the failure is not specifically excepted (i.e. by statute or in Rev. Proc. 2021-30 or its successor), and provided that certain conditions are met, including:
- The failure is not identified by the IRS (on audit or otherwise) prior to any actions taken by the plan sponsor that demonstrate a specific commitment to implement a self-correction;
- The failure is self-corrected within a “reasonable period” — which is now defined in the guidance as the last day of the 18th month following the date on which the failure was identified, except for employer eligibility failures — for example, an employer that is not permitted under the Internal Revenue Code to sponsor a particular type of plan, such as a 403(b) plan, but purports to do so — which must be corrected by the last day of the 6th month following the date on which the failure was identified;
- The failure is not “egregious” (for example, it does not involve a plan that has consistently and improperly covered only highly compensated employees, or provides more favorable benefits for an owner of the employer); it does not directly or indirectly relate to an abusive tax avoidance transaction; and it does not relate to the diversion or misuse of plan assets; and
- The correction satisfies all provisions applicable to self-correction in current Rev. Proc. 2021-30 other than the following provisions, which are no longer relevant:
- The former requirement that the plan must have a favorable determination letter.
- The former prohibition of self-correction for demographic failures (generally stated, these are failures that relate to the plan’s not properly following nondiscrimination, minimum participation, or minimum coverage requirements, other than mere operational failures, or employer eligibility failures).
- The former prohibition of self-correction for employer eligibility failures (see above).
- The former prohibition of self-correction of certain loan failures (which, as previously stated, is now expanded under SECURE 2.0 to include most types of loan failures).
- The former provisions relating to self-correction of “significant” (under the prior criteria) failures that have been substantially completed before the plan or plan sponsor is under examination (i.e., going forward, the mere fact that the plan or plan sponsor becomes under examination at a time when self-correction of a “significant” failure has been substantially completed should no longer automatically negate the self-correction).
- As previously stated, the former requirement that “significant” failures must be completed, or substantially completed, by the last day of the third plan year following the plan year in which the failure occurred.
Failures That May Not Presently Be Corrected Until EPCRS is Formally Updated.
Notice 2023-43 provides that certain “eligible inadvertent failures” may not be self-corrected – at least not until the new EPCRS Rev. Proc. incorporating the SECURE 2.0 changes has been released — including the following examples that are most likely to apply to typical 401(k) plans:
- A failure to initially adopt a written plan document, as required by the Internal Revenue Code and ERISA (see our reference article entitled “401(k) Document Review” for more information);
- A failure involving an “orphan plan” (i.e., a plan that, for a variety of reasons, no longer has a plan sponsor);
- A failure in a terminated plan that would be “significant” under the pre-SECURE 2.0 criteria;
- Certain demographic failures (see above); and
- Plan amendments to conform the terms of the plan to the plan’s past actual operations, if such amendment is less favorable for a participant or beneficiary than the original plan terms would have been.
Reliance and Effective Dates.
Plan sponsors may rely on Notice 2023-43 beginning on May 25, 2023 and ending on the date that Rev. Proc. 2021-30 is updated and replaced to incorporate the applicable provisions of SECURE 2.0.
If a self-correction is completed by a plan sponsor on or after December 29, 2022 and before May 25, 2023, the plan sponsor is permitted to apply a good faith, reasonable interpretation of the SECURE 2.0 expanded EPCRS provisions in completing the self-correction.
Importantly, Notice 2023-43 explicitly provides that a plan sponsor is not prevented from self-correcting a mistake using the SECURE 2.0 rules on or after December 29, 2022 merely because the mistake occurred prior to December 29, 2022. Presumably, this applies to self-corrections that are undertaken or completed on and after such SECURE 2.0 effective date.
OBSERVATION: Notwithstanding the above, under Notice 2023-43, it remains unclear as to which set of rules (pre-SECURE 2.0 or post-SECURE 2.0) would apply in the event that a mistake is discovered but not corrected (or correction initiated) before December 29, 2022. If faced with that situation, we strongly recommend that you check with your own ERISA attorney or other professional advisor.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.