IRS Issues New Guidance on Employee Plans Compliance Resolution System

Under changes made in the SECURE 2.0 Act of 2022, the IRS has issued Revenue Procedure 2026-34 to expand the Employee Plans Compliance Resolution System (EPCRS). Under this system, plan sponsors can resolve certain operational errors either through self-correction, voluntary correction, or correction under audit, depending on the significance of the error and whether the employer or the IRS discovers the issue. 

The new rules define eligible inadvertent failures as those where the failure occurs “despite the existence of practices and procedures that satisfy the standards set forth in section 7.02 [of the regulations]. An Eligible Inadvertent Failure does not include 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.” The prior regulations divided operational failures into significant or insignificant failures and those due to operational errors or plan document errors. Corrections had to apply to a three-year window from when the problem started. If failure was due to a problem with the plan document, the three-year window also applied, and the plan had to have a letter of determination that was applicable at the time. The new self-correction rules eliminate the favorable letter-of-determination requirement and extend to cover plan document, eligibility, and demographic failures.

For ESOP companies, the most important change has to do with inadvertent overpayments to participants. Sponsors are no longer required to recoup inadvertent overpayments unless they violated statutory rules about how much employees are allowed to receive. If an overpayment is made, it is eligible for rollover into another plan. If recouped, it is not eligible for rollover, and the employer must notify the employee.