Publication: Journal of Pension Benefits
Date/Volume/Issue: Summer, 2019/Volume 26, Number 4
Meet the New Boss:
A Primer on the New Employee Plans Compliance Resolution System
Under Revenue Procedure 2019-19
Adrienne I. Moore
The IRS made changes in regard to EPCRS in September 2018 and subsequently substantially expanded the self-correction program with the release of Revenue Procedure 2019-19.
On September 28, 2018, the Internal Revenue Service (IRS) once again upset our world with the release of Revenue Procedure 2018-52: a new manifesto for the Employee Plans Compliance Resolution System (EPCRS). Although the new EPCRS gave us substantial new procedures for filing Voluntary Correction Program (VCP) submissions online through pay.gov beginning April 1, 2019, it did little to change the substantive methods and types of corrections available. Just over six months later, on April 19, 2019, what was scheduled to be a Good Friday, the IRS, not content with the changes it implemented effective April 1, released Revenue Procedure 2019-19. Once we got over the shock of having to digest a new EPCRS, we realized an Easter miracle had occurred: plan loan failures could finally be self-corrected.
Release of Revenue Procedure 2018-52
In spite of our hopes and dreams (and numerous protests), there were only minor changes to the substantive correction procedures and methods in Rev. Proc. 2018-52. What the IRS gave us instead was a new online submission process for VCP filings, which carried over to the now controlling Rev. Proc. 2019-19. The system went live for use on January 1, 2019, but if you were hoping to still submit paper filings through the mail, your grace period ran out on April 1, 2019. [Rev. Proc. 2019-19 §11.03.] The online process is not without its unique challenges, but overall it greatly streamlines the process for submission. (My favorite feature is that you are no longer required to send original signatures.) Let us walk through the various forms that were used under the previous EPCRS, Rev. Proc. 2016-51, to get a clear understanding of the changes and additions to the process.
Forms 8950 and 8951
Form 8950 still exists in a new form online. The actual specific method for using pay.gov is discussed in detail below. For now, know that once you navigate to the IRS options on pay.gov and select the VCP application, you will be prompted to enter all the same information you are used to inputting on the old Form 8950. The plan types on Line 5 of the old form are no longer coded with numbers but are instead selected from a drop-down menu. Form 8951, which was never updated for the significant changes to the fee structure under Rev. Proc. 2018-4, is thankfully no more. Instead, after entering asset information, the new Form 8950 will automatically calculate the applicable user fee.
As before, Form 8950 contains a penalty of perjury statement that must be attested to by clicking a checkbox. You e-sign the form by typing your name. There is one quirk in the signing process—when you click the penalty of perjury checkbox, the system automatically adds the phrase “pay.gov” to the signature box. Leave this in the box.
Form 2848 and Form 14568
Form 2848 and Form 14568 (and their accompanying schedules) remain the same under the new filing procedures. If you will be filing the submission through pay.gov on behalf of a client, you do need additional language on the Form 2848. Check box 5a and insert the phrase “signing and filing of the Form 8950 and accompanying documents as part of a VCP submission” as other authorized acts. [Rev. Proc. 2019-19 §11.08(2).]
New Addition: Penalty of Perjury Statement
During the reign of Rev. Proc. 2016-51, a penalty of perjury statement was found on Form 8950 and a signed statement only had to be provided by the authorized representative in cases of anonymous submission. The changes in Rev. Proc. 2018-52, continued in Rev. Proc. 2019-19, now require a signed penalty of perjury statement from the applicant in cases where the applicant has authorized a representative to sign and file the Form 8950. [Rev. Proc. 2019-19 §11.04(16).] The result is that, for any submission being filed by an authorized representative, both the applicant will sign a separate penalty of perjury statement and the representative will sign the penalty of perjury statement contained in the Form 8950. The specific language to be used in the applicant’s statement is found in EPCRS. [Rev. Proc. 2019-19 §11.04(16).] For those keeping score at home, this means that anonymous submissions will now require three penalty of perjury statements: one e-signed by the authorized representative on Form 8950, one signed by the authorized representative asserting that the representation complies with the power of attorney requirements, and one signed by the applicant, to be provided to the IRS once the applicant’s identity is later revealed. [Rev. Proc. 2019-19 §10.09(1).]
The Mechanics of the Website
The actual process for filing through pay.gov is fairly simple. Most of your time will be spent putting together the accompanying pdf of the submission documents and checking that it is not over 15 MB. Oh, did I not mention that the size limit on filings is 15 MB? [Rev. Proc. 2019-19 §11.03(2).] Anything over that must be separately faxed to the IRS, because of course it must.
Once you have set up a pay.gov account and are logged in, select “My Forms.” From there, you can get to Form 8950 a couple of ways. Either click on “Explore More Options” or “Find an Agency.” If you go through “Explore More Options,” you will scroll down to “Internal Revenue Service” and then select “View all options.” There, you will see a listing for “Application for Voluntary Correction Program.” If you go through “Find an Agency,” you will need to first jump down to “Treasury” and select the “Internal Revenue Service” from under the Treasury options. Once done, it is the same process as above. You will locate the “VCP Application” and select “Continue.”
Before the IRS even shows you the Form 8950, you will get a large warning about the 15 MB limit as well as instructions stating the specific order that forms and supporting documentation should follow pursuant to the requirements of EPCRS. [See Rev. Proc. 2019-19 §11.11.] After this, you will finally have a fillable Form 8950 before you. Once it is completed and the IRS has calculated the user fee for you, you can continue to the actual filing.
Now is the time for you to understand what a 15 MB pdf file looks like. When I prepare a submission, I find it easiest to prepare all my necessary documents and convert anything in Word or Excel (or otherwise) directly into pdfs. I then combine my pdfs into one document and, if needed to stay under the limit, remove any items at the end until the file is under the 15 MB limitation. You can print everything off and scan it as a single pdf, but this can make meeting the 15 MB limitation a lot more guesswork. It also reduces the quality of the submission image and may increase the size of your submission file, so there is little to no benefit in this practice. After painstakingly arranging documents into their proper order and ensuring they are the proper size, it is only a matter of uploading the pdf through pay.gov. Any part of your submission that exceeds the 15 MB limitation will need to be faxed separately to the IRS at (855) 203-6996. [Rev. Proc. 2019-19 §11.03(7).] I dream of a day when the IRS adopts a secure file sharing service similar to the Department of Labor’s Accellion, but, until that time, our dependence on fax machines remains. Using an e-fax service will make submitting larger VCP applications much easier and avoid actually having to print the portion of the application that exceeds 15 MB and operating that pesky fax machine. You must include the EIN, applicant name, plan name, and IRS tracking ID number on any materials faxed separately. [Rev. Proc. 2019-19 §11.03(7).] This tracking ID, which replaces the control number, is provided as soon as the first 15 MB of the filing is successfully submitted online. (Yes, this means that the Letter 5265 acknowledgment letter is no longer necessary. The receipt of the tracking ID is acknowledgement of the filing.)
After you upload the pdf submission, you will advance to payment information. You can pay directly from a bank account via automatic clearing house (ACH) or with a debit or credit card. The site automatically fills in the applicable user fee based on the information provided on the Form 8950. After you have submitted the payment information, you will review and submit your completed filing. You did it! You saved postage and you successfully navigated the online procedures for VCP filing. Now get yourself to the fax machine.
Release of Revenue Procedure 2019-19
I am firmly in the camp of “people who did not want to read through a new EPCRS over Easter weekend 2019.” But, in the same way that there is no good time to end a relationship, there is no good time to release a revenue procedure. That Good Friday, I dutifully printed out a copy of the new procedure and brought it home, annoyed at the prospect of having homework on such a lovely weekend. My frustration was at least assuaged when I realized what the IRS had done: they had finally, and substantially, expanded the use of the self-correction program (SCP). We still cannot correct demographic or employer eligibility failures through SCP, but we are now able to correct certain plan document and loan failures without availing ourselves of VCP. Since the IRS has not reinstated the previous lower user fees for such failures, the expansion of SCP is a welcome respite.
Plan Document Failures
As of April 19, 2019, certain plan document failures can be corrected through SCP. [Rev. Proc. 2019-19 §4.01(1)(b).] There was much rejoicing. All plan document failures are treated as significant failures, meaning they can only be corrected in the two-year window following the plan year in which the failure occurs. [Rev. Proc. 2019-19 §§4.01(1)(b), 9.02.] If they are not corrected during this window, they will have to go the traditional route through VCP (and using Schedules 1 and 2, Forms 14568-A and 14568-B, respectively, if you are able). Additionally, you cannot use SCP to correct a plan document failure relating to a failure to adopt the initial plan document.
What can be corrected? The plan document failures anticipated by EPCRS, and now eligible for SCP, include nonamender failures, failures to adopt good faith amendments, and failures to adopt interim amendments. [Rev. Proc. 2019-19 Sec. 5.01(2)(a).] Again, all such failures must be corrected within two years following the plan year in which the failure occurred. A fair question to ask, then, is when did the failure occur? At the time of this writing, the next six-year cycle is expected to end on January 31, 2023. If a plan required to restate during that cycle is not restated by that date, there is a plan document failure. Assuming a calendar plan year, SCP dictates that, to be corrected within the required timeline for significant failures, the corrective document must be adopted by December 31, 2025.
There is one more confounding wrinkle when it comes to plan document failures of the nonamender variety. The new procedures require that any plan being corrected through SCP for plan document failures be the subject of a favorable letter, meaning a determination letter or a favorable opinion or advisory letter, as applicable. [Rev. Proc. 2019-19 §§4.03, 5.01(4).] Strictly speaking, if a plan required to restate by January 31, 2023, misses the deadline, it is no longer considered the subject of a favorable letter. It was previously, and it seems an undesirable result that the new self-correction features would not apply to restatements, but it is unclear under the current language. Hopefully, the IRS will issue clarifying language soon.
Correction by Plan Amendment
The updated EPCRS provides significantly greater opportunities to correct plan failures using amendments (yes, even retroactive ones!). Amendments can be used through SCP to correct operational failures by conforming the plan document to the prior operations. [Rev. Proc. 2019-19 §4.05(a).] Such an amendment must meet three requirements: (1) it would result in an increase in a benefit, right, or feature; (2) the increase would apply to all employees eligible to participate in the plan; and (3) the increase is permitted under the Internal Revenue Code (the “Code”) and satisfies the correction principles of Section 6.02 of EPCRS. [Rev. Proc. 2019-19 §4.05(a).] To be allowable under the Code just means that the amendment cannot cause the plan to violate the Code in some other way (e.g., Code Section 415 limits), which is consistent with EPCRS principles requiring that any correction not create a new failure.
There may have been no greater cause for joy than the induction of plan loan failures to the SCP-eligible club, and yet, without coordination with the Department of Labor (DOL), the correction feels rather half-baked. SCP can now be used to correct loan default failures, loans issued in excess of plan limits on the number of loans (but not the amount of the loans, which would be a failure related to Code Section 72(p)(2)(A) and could only be corrected through VCP or Audit CAP), and failures to obtain spousal consent. [Rev. Proc. 2019-19 §6.07.] A defaulted loan can be corrected by making a lump sum payment to bring the loan current (including accrued interest); by reamortizing the outstanding loan balance, including interest, over the remainder of the maximum period that complies with Code Section 72(p)(2)(B) (generally five years with the exception of home loans); or some combination of those two. [Rev. Proc. 2019-19 §6.07(3)(d).]
If the number of loans issued exceeds a plan limitation on the number of available loans, this failure can be corrected by adopting a corrective amendment in accordance with Appendix B Section 2.07(3) of EPCRS. [Rev. Proc. 2019-19 §6.07(5).] This includes correcting even one loan where the plan does not allow for participant loans. [Rev. Proc. 2019-19 Appendix B §2.07(3).] A corrective retroactive amendment is allowed if the amendment satisfies Code Section 401(a), the plan as amended satisfies Code Sections 401(a) and 72(p), and plan loans were available to all participants or solely to one or more nonhighly compensated employees. [Rev. Proc. 2019-19 Appendix B §2.07(3).] If you have only been giving out infinite loans to the plan sponsor’s owner (you know who you are), you are out of luck.
Self-correcting for a failure to obtain spousal consent is intuitive. If you can now obtain the appropriate spousal consent, from the individual who was the participant’s spouse at the time the loan was issued, the failure is corrected. [Rev. Proc. 2019-19 §6.07(4).] If you cannot get the spousal consent, the failure must be corrected through VCP or Audit CAP (marital counseling not included). [Rev. Proc. 2019-19 §6.07(4)(b).]
A note on loan failures: The DOL’s Voluntary Fiduciary Correction Program (VFCP) also covers various improper loans. Under Section 7.3(b) of the VFCP program, the DOL will issue no-action letters related to loan failures if a VCP compliance statement is submitted with all other required items in a VFCP filing. Essentially, the compliance statement shows that the IRS has already judged and approved the correction, and the DOL is comfortable relying on such compliance statement. When self-correcting, of course, there is no resulting compliance statement. The DOL has indicated that they will not issue a no-action letter under Section 7.3(b) if the failure was not corrected through VCP. [Rev. Proc. 2019-19 §2.02(4).] This is important to consider when determining whether to self-correct a loan.
I’ll Tip My Hat to the New Compliance Resolution
Purely anecdotally, I and others at my firm have been pleased with the online submission process. The ability to submit scanned signatures and to pay via credit card, as opposed to check, has sped up our process internally, and so far, knocking on wood and throwing salt over my shoulder, the IRS has averaged about one month from date of submission to date on compliance statement. Alright, we are more than we pleased. We are thrilled with those results. There is no ignoring that VCP continues to be an expensive process for many plan sponsors. For that reason, although the online submission is running well, the expansion of self-correction in Rev. Proc. 2019-19 promises to greatly improve correction opportunities for both plan sponsors and third-party administrators. It is safe to say that, with such comprehensive updates, the new boss is not the same as the old boss.