Bipartisan legislation has been introduced in the U.S. Senate that would expand the ability of certain retirement plan sponsors to correct inadvertent compliance errors under the IRS’s Employee Plan Compliance Resolution System (EPCRS).
The bipartisan duo of Sens. Rob Portman (R-OH) and Ben Cardin (D-MD), who have long collaborated on retirement policy legislation going back to their days together in the House of Representatives, introduced broad-based IRS reform legislation — the “Protecting Taxpayers Act” (S. 3278) — that includes the expansion of EPCRS.
The American Retirement Association has long been advocating for changes to the EPCRS. In an April 4 comment letter to the IRS, the ARA recommended modifying the EPCRS to expand the use of the self-correction program (SCP) and reduce the burden the voluntary correction program’s (VCP) new pricing structure imposes on small business plans. Moreover, in a June 26 letter to the Senate Finance Committee, the ARA joined with several other industry groups requesting that Congress expand the SCP within the EPCRS to enable businesses with retirement plans to more easily correct common mistakes.
In addition, the ARA previously expressed deep concern over recent changes to the user fees that the IRS charges to correct retirement plan mistakes and the impact that change will have on small businesses and their willingness to sponsor a retirement plan.
Protecting Taxpayers Act
Under the legislation, retirement plan administrators would be permitted under certain circumstances to self-correct under the EPCRS (as described in Revenue Procedure 2016-51) all inadvertent plan violations without additional submissions to the IRS, except to the extent that such failure was identified by Treasury Secretary prior to any actions to implement a self-correction.
Loan Errors: In particular, loan errors that are self-corrected under the EPCRS would be treated as meeting the requirements of the Department of Labor’s Voluntary Fiduciary Correction Program. This would prevent participants from having to immediately include failed plan loans in income or to file an amended return for a prior tax year. Under the current terms of EPCRS, plan loan failures resulting in deemed distributions must be reported in the year of the failure unless the employer corrects the failure through the VCP.
RMD Corrections: Applicable plans and custodians of individual retirement plans would be permitted to self-correct, without an excise tax, any inadvertent errors pursuant to which a distribution is made no more than 180 days after it was required to be made. Currently, individual participants who fail to receive an RMD must individually request a waiver of the excise tax that generally applies to missed distributions. This would provide relief to plan participants who did not receive a required distribution, which oftentimes can be no fault of their own.
EPCRS for IRAs: The legislation also calls for expanding the EPCRS such that custodians of individual retirement plans would be permitted to address inadvertent errors for which the owner of an individual retirement plan was not at fault, including (but not limited to):
- waivers of the excise tax that would otherwise apply under IRC section 4974;
- waivers of the 60-day deadline under the SCP for a rollover where the deadline is missed for reasons beyond the control of the account owner; and
- rules permitting a nonspouse beneficiary to return distributions to an inherited individual retirement plan in cases where, due to an inadvertent error by a service provider, the beneficiary believed the distribution could be rolled over without any part of the distributed amount includible in income.
Additional Safe Harbors: Moreover, the legislation directs the Treasury to expand the EPCRS to provide additional safe harbors for correcting inadvertent failures, including safe harbor means of calculating the earnings that must be restored to a plan in cases where plan assets have been depleted by reason of an inadvertent failure.
The broader IRS reform legislation was discussed at a Senate Finance Subcommittee on Taxation and IRS Oversight hearing entitled “Improving Tax Administration Today” that featured a single panel of witnesses who addressed the current challenges facing the IRS.
The senators noted that their bill complements broad-based IRS reform legislation — the Taxpayer First Act of 2018 — introduced recently by the Senate Finance Committee’s Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR).
Meanwhile, the House of Representatives in April approved IRS reform legislation, but it’s not clear whether Congress as a whole will be able to address the legislation in the remaining time in this session.