New Ways to Self-Correct Overpayments Under EPCRS
On July 16, 2021, IRS issued Revenue Procedure 2021-30 to update the Employee Plans Compliance Resolutions System (the “EPCRS”). The update in part expands the opportunities for plan sponsors to self-correct failures under the EPCRS by: (1) extending the self-correction period from two to three years; (2) expanding the ability for plan sponsors to correct operational failures using plan amendments; (3) extending the safe harbor correction method for certain elective deferral failures; and (4) expanding guidance on the recoupment of overpayments.
This SW Benefits Blog focuses on the expanded guidance on the recoupment of overpayments. By making the following changes to the EPCRS, Revenue Procedure 2021-30 increased the flexibility that plan sponsors have when it comes to self-correcting an overpayment:
- New Optional Forms of Repayment: Revenue Procedure 2021-30 allows plan sponsors to give overpayment recipients the option to repay an overpayment in a lump sum payment, installment payments, or through an adjustment to their future payments.
- New Funding Exception Correction Method: Revenue Procedure 2021-30 added the new funding exception correction method. Under this method, corrective payments are not required for certain well-funded defined benefit plans. A single-employer plan is eligible for this method if the plan’s adjusted funding target attainment percentage is at least 100%. The method requires plan sponsors to reduce future benefit payments to an overpayment recipient to the correct payment amount, but does not require or permit further corrective payments or reductions.
- New Contribution Credit Correction Method: Revenue Procedure 2021-30 also added the new contribution credit correction method for defined benefit plans. Under this method, corrective payments are still required, but are reduced by a “contribution credit.” The reduced corrective payments equal the amount of the overpayment reduced by: (A) the increase in the plan’s minimum funding requirements attributable to the overpayment for a certain period; and (B) certain contributions paid to the plan in excess of the minimum funding requirements after the overpayment was made. Similar to the funding exception correction method, this method requires plan sponsors to reduce future benefit payments to an overpayment recipient to the correct payment amount. If the contribution credit reduces the corrective payment down to zero, no further corrective payments or benefit reductions are required.