IRS Issues Guidance on Expanded Self-Correction Under SECURE 2.0
The SECURE 2.0 Act of 2022 (SECURE 2.0), enacted on December 29, 2022, significantly expanded the IRS’s Employee Plans Compliance Resolution System (EPCRS) to allow employers to self-correct (i.e., without filing with the IRS) a wider range of retirement plan compliance failures than under pre-SECURE 2.0 EPCRS, both in terms of the types of failures eligible for self-correction and the eligibility conditions for self-correction (see our previous client Advisory for a summary of key changes made by SECURE 2.0). On May 25, 2023, the IRS issued Notice 2023-43 (Notice) to provide interim guidance to plan sponsors on certain aspects of EPCRS as modified by SECURE 2.0. The Notice is not comprehensive, and the IRS anticipates fully updating the EPCRS Revenue Procedure in the future to reflect SECURE 2.0.
SECURE 2.0’s expansion of the ability of retirement plan sponsors to self-correct is important for employers because it reduces employers’ risk of non-compliance by providing an easier, less costly path to remediate compliance failures that commonly arise in the administration of retirement plans. This positive impact of SECURE 2.0 carries over to the transactional context by reducing a buyer’s potential exposure for certain compliance failures with a target’s retirement plans, whether or not the failures are identified during due diligence. As a practical matter, this may facilitate the consummation of transactions more efficiently.
Key aspects of the IRS’s interim guidance include the following:
- Immediately Effective: The Notice confirms that self-correction, as expanded by SECURE 2.0, is effective immediately and is available for compliance failures that occurred prior to the enactment of SECURE 2.0.
- Impact of IRS Audit: Historically, the opportunity to self-correct a significant compliance failure ended once the plan or plan sponsor came under IRS examination, unless the self-correction had already been substantially completed. Under the new, more lenient, guidance, self-correction becomes unavailable for significant failures only when a plan or plan sponsor comes under examination by the IRS and the plan sponsor has not previously “demonstrated a specific commitment to a self-correction” of the failure. Insignificant failures remain eligible for self-correction after the IRS has commenced an audit, even after the failures have been discovered by the IRS.
- Favorable Determination Letter Not Required: The Notice eliminates several prior restrictions on the availability of self-correction, including the need for a favorable determination letter.
- Restrictions on Self-Correction: The Notice specifies certain failures that plan sponsors cannot self-correct before EPCRS is fully updated by the IRS, including significant failures in terminated plans, operational failures rectified by plan amendment in ways that are unfavorable to participants, and initial plan document failures.
- Transition Rule: Corrections completed between the effective date of SECURE 2.0 and the issuance of the Notice will be respected if they reflect a good faith, reasonable interpretation of the SECURE 2.0. Compliance with the Notice’s terms will also be treated as meeting this standard.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.