Interim guidance addresses expanded self-correction program

The IRS recently released Notice 2023-43 to provide interim guidance on the significant expansion of the Self-Correction Program (SCP) for eligible inadvertent failures for retirement plans.

The SCP was significantly expanded with a package of retirement incentives enacted on Dec. 29, 2022. The retirement package is commonly referred to as “SECURE 2.0” because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted in 2019 (see our previous story on the impact of SECURE 2.0).

The SCP is one of the component programs under the Employee Plans Compliance Resolution System (EPCRS), which is a system of correction programs for sponsors of qualified retirement plans, Section 403(b) plans, simplified employee plans and SIMPLE IRA plans that have failed to satisfy specific requirements. The current EPCRS program is set forth in Rev. Proc. 2021-30.

SECURE 2.0 expanded the types of failures that can be corrected under SCP to include certain eligible inadvertent failures. The term “eligible inadvertent failure” is defined broadly to include a failure that occurs despite the existence of practices and procedures that are reasonably designed to promote and facilitate overall compliance with the applicable Code requirements (other than any failure that is egregious, relates to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction).

SECURE 2.0 directed the IRS to revise Rev. Proc. 2021-30 no later than two years after the date of enactment (Dec. 29, 2024) to take into account the expanded ability to self-correct certain eligible inadvertent failures.

Notice 2023-43 is intended to provide interim guidance in the form of 12 Q&As in advance of an update to Rev. Proc. 2021-30. Among other issues addressed, the notice: 

• Provides that a plan sponsor may self-correct an eligible inadvertent failure before Rev. Proc. 2021-30 is updated if certain conditions are satisfied (see Q&A-1) and certain exceptions do not apply (see Q&A-2)
• Provides interim interpretive guidance that applies with respect to corrections of eligible inadvertent failures 

When SECURE 2.0 was enacted, it was not clear the extent to which (if any) the expanded ability to self-correct eligible inadvertent failures was available before the revisions to Rev. Proc. 2021-30 were issued. There are a number of ambiguities in the legislative text. For example, one of the conditions for self-correcting an eligible inadvertent failure is that it must be corrected within a “reasonable period” after identification of the failure, which was not defined. Under the current EPCRS self-correction program, the correction of significant failures generally has to be completed by the end of the third plan year following the plan year in which the failure occurs (as opposed to when it was identified).

Notice 2023-43 confirms, among other guidance, that certain eligible inadvertent failures generally can be corrected now, before the issuance of the revisions to Rev. Proc. 2021-30, if the following conditions prescribed in the notice are satisfied (in addition to those discussed above and subject to the list of specific exceptions provided in Q&A-2 of the notice):

• The failure was not identified by the IRS before any actions demonstrating a specific commitment to implement a self-correction with respect to the failure
• The self-correction satisfies all of the provisions applicable to self-correction currently set forth in Rev. Proc. 2021-30 (other than the specific provisions listed in Q&A-3 of the notice), including but not limited to:
  • Applying correction principles and rules of general applicability currently set forth in section 6 of Rev. Proc. 2021-30
  • Avoiding a correction method that is prohibited under Rev. Proc. 2021-30
  • Self-correcting using a correction method set forth in Appendix A or B of Rev. Proc. 2021-30 (and the correction methods described in Appendices A and B are deemed to be reasonable and appropriate methods of correcting a failure), though this is not required 

Notice 2023-43 also provides interim interpretive guidance, including that a “reasonable period” for self-correction generally is determined by considering all relevant facts and circumstances. However, the notice also provides a “safe harbor,” which generally provides that a failure will be treated as having been completed within a reasonable period if it has been corrected by the last day of the 18-month period following the date that the failure is identified (see Q&A-7 of the notice).

In addition, SECURE 2.0 expands the SCP to allow certain loan failures to be self-corrected that are not eligible for self-correction under the current EPCRS procedures. To obtain reliance on the correction of those loan failures under the current EPCRS provisions, a plan sponsor must seek approval from the IRS by filing an application under the Voluntary Correction Program (VCP), another component correction program under EPCRS.

SECURE 2.0 provides that loan failures may be self-corrected in accordance with the rules of section 6.07 of Rev. Proc. 2021-30 (other than the prohibition of self-correcting certain loan failures currently specified in section 6.07). Under section 6.07, the general rule is that plan loan failures can be corrected under SCP, subject to the following express exceptions. The failure of plan loan terms to satisfy the following terms may only be corrected under VCP (or Audit Closing Agreement Program): 

• Maximum loan amount provisions (loans are generally limited to the lesser of $50,000 or 50% of a participant’s vested account balance)
• Maximum repayment term requirement (generally five years except for certain loans secured by a personal resident)
• Level amortization requirement (which generally requires substantially level amortization of a loan over the term of the loan with payments not less frequently than quarterly) 

The specific correction methods prescribed in section 6.07 (including an operational failure to repay a loan in accordance with the applicable loan terms described above) generally are not available if the maximum period for repayment of the loan has expired. Notice 2023-43 is not clear on whether or not this general “exception” under section 6.07 continues to apply under the new expanded SCP to prevent self-correction going forward — that is, only if the maximum loan repayment period has expired can the loan failure be self-corrected under the new expanded SCP for eligible inadvertent failures.