On March 27, 2015, the IRS published Revenue Procedure 2015-27. The new guidance revises certain correction methods under the Employee Plans Compliance Resolution System (EPCRS) and makes changes to Revenue Procedure 2013-12, the current version of EPCRS.
The revisions provide plan sponsors with greater flexibility in fixing overpayment errors and reduce compliance fees associated with correcting certain operational failures regarding participant loans and required minimum distributions (RMDs). This article highlights the major revisions in Rev. Proc. 2015-27. Although the effective date is July 1, 2015, plan sponsors are permitted to apply these provisions on or after March 27, 2015.
An overpayment occurs when a payment made to a participant or beneficiary exceeds the amount that should have been made payable under the terms of the plan or based on certain regulatory limitations. Prior to this guidance, overpayment failures were typically corrected by requesting that a participant or beneficiary return the overpayment to the plan. The IRS recognized that it may be financially difficult for some participants and beneficiaries to repay the plan, especially in situations where errors have occurred over lengthy periods of time (e.g., in a stream of pension payments) and involve substantial amounts of interest.
Under Rev. Proc. 2015-27, the IRS is stating that when an overpayment failure results from a benefit calculation error, an appropriate correction method may include having the employer or another person contribute the amount of the overpayment (with appropriate interest) to the plan in lieu of seeking repayment from plan participants and beneficiaries. Another example of an acceptable new correction is for a plan sponsor to retroactively adopt an amendment to conform the plan document to plan operations.
Example: Steve is 80% vested in his employer match. Steve terminates and inadvertently receives a lump-sum distribution of 100% of his employer match. The nonvested amount Steve receives is an overpayment. Rev. Proc. 2015-27 permits the employer to contribute the amount of overpayment to the plan instead of trying to recoup the amount from Steve.
Reduced Compliance Fee for RMD Failures
When an RMD is not distributed from an employer’s qualified plan, the plan could be subject to disqualification. EPCRS contains procedures for correcting these types of failures. The correction involves filing a submission under the Voluntary Correction Program (VC Program) and paying a compliance fee based on the number of participants in the plan.
Prior to Rev. Proc. 2015-27, if the only failure is missed RMDs for 50 or fewer participants, the fee was $500, regardless of the actual number of participants in the plan. Rev. Proc. 2015-27 extends the number of missed RMDs covered by the $500 fee from 50 or fewer participants to 150 or fewer participants. The Rev. Proc. also introduces a higher level of correction for missed RMDs: from 151 to 300 participants for a fee of $1,500. If more than 300 participants fail to receive RMDs, the general fee schedule, which is based on the number of participants in the plan, is utilized.
Reduced Compliance Fee for Loan Failures
Changes have also been made that improve the method of determining compliance fees for plans with a relatively small number of participant loans that fail to satisfy the requirements of Internal Revenue Code Section 72(p). Such failures include issuing participant loans in excess of the maximum amount available, setting up loans that are not in compliance with the maximum repayment schedule, and failing to make repayments in accordance with the terms of a loan.
When these types of failures occur, the IRS requires a VC Program submission, which includes a compliance fee. Prior to Rev. Proc. 2015-27, the fee was based on the number of participants in the plan. The fee is now based on the number of participants with loan failures. If the VC Program submission involves a loan failure and the failure does not affect more than 25% of the plan sponsor’s participants in any year in which the failure occurs, and the loan failure is the only failure described in the submission, then the compliance fee will be:
|Number of participants with loan failures||Compliance fee|
|13 or fewer||$300|
|14 to 50||$600|
|51 to 100||$1,000|
|101 to 150||$2,000|
The fees in this schedule are significantly lower than the general compliance fee schedule and provide considerable relief to plan sponsors that are correcting loan failures.