Introduction
On May 5, 2006, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2006–27 (the “Revenue Procedure”), the long-awaited update to the Employee Plans Compliance Resolution System (“EPCRS”). EPCRS is a program designed to encourage plan sponsors to correct certain qualification failures while allowing plans with “defects” to continue providing retirement benefits to participants on a tax-favored basis. Although the new Revenue Procedure generally becomes effective on September 1, 2006, plan sponsors have the option of using it on or after May 30, 2006. This Revenue Procedure modifies and supersedes Revenue Procedure 2003–44, which was issued in June 2003 and was the earlier consolidated statement of the correction programs under EPCRS. In the following discussion, capitalized terms are terms that are defined in the Revenue Procedure.

Current Structure of EPCRS
Although the Revenue Procedure makes many changes to EPCRS, it has not modified the existing three-program structure:

• Self-Correction Program (“SCP”). Under this program, plan sponsors can identify and correct either significant or insignificant Operational Failures without the need to notify the IRS or pay a fee.
• Voluntary Compliance Program (“VCP”). VCP permits plan sponsors to request that the IRS approve a proposed method for correction, and can be used to correct all Qualification Failures (e.g., Operational, Plan Document, Demographic, and/or Employer Eligibility Failures). In order to utilize this program, the plan may not currently be the subject of an audit (“Under Examination”) by the IRS and the plan sponsor must pay a fee to the IRS.
• Audit Closing Agreement Program (“Audit CAP”). If a plan is Under Examination by the IRS, a plan sponsor may correct failures uncovered by the IRS and pay a fee that is generally larger than the VCP compliance fee.

Highlights of EPCRS Changes
The following is an overview of the significant changes made to EPCRS by the Revenue Procedure:

• Under SCP, plan sponsors may adopt retroactive plan amendments to correct certain plan failures, such as allowing loans and hardship distributions, even though the plan document does not provide for such distributions.
• The following new methods have been added to correct certain plan loan failures (through VCP) to prevent a default (and its income tax consequences) where the period for repaying the loan has not yet expired. In order to be eligible for relief from income tax reporting, such plan loan failures should generally be a result of employer action (or inaction):
  • Loans that exceed the statutory limit. The approved method of correction is to allow participants to repay the excess amount, and to reamortize the remaining balance.For example, In 2002 a Plan Sponsor approves a request for a $60,000 loan to be repaid over five years. The plan loan exceeds the statutory limit by $10,000. In 2006, the Plan Sponsor discovers the error and has the discretion to require the Participant to repay the excess amount in a lump sum and have the remaining loan balance reamortized for the remainder of the loan period.
  • Failure to provide for a repayment schedule that conforms to the statutory requirements. Plan sponsors have the discretion to shorten the remaining term of the loan so that it will be repaid within the maximum allowable period measured from the origination date of the loan.For example, in 2002 the Plan Sponsor approves a request for a loan to be paid over six years (the loan is not for the purchase of a principal residence) instead of the statutory five year term. In 2006, the Plan Sponsor discovers the error and has the discretion to require the Participant to repay the loan balance in 2007, which will be within five years of the origination date.
  • Defaulted loans. The plan sponsor has the discretion to allow a participant to either repay (in the form of a lump sum) or reamortize the loan.For example, in 2002 the Plan Sponsor approves a request for a loan to be paid quarterly over five years through payroll deduction. The Plan Sponsor fails to set up payroll deduction, and the loan is in default. The Plan Sponsor may allow the Participant to repay the remaining loan balance in a lump sum or to reamortize the loan for the remaining loan period.
• The approved method to correct for the failure to include an eligible employee in a non-safe harbor 401(k) plan has been expanded:
  • A plan sponsor can make a qualified nonelective contribution (QNEC) equal to 50% of the deferrals the employee would have made (the “missed deferral”), based on the actual deferral percentage for the excluded employee’s group (highly or non-highly compensated).
  • If the missed deferral was eligible for a matching contribution, the plan sponsor must also make a QNEC equal to the matching contribution that the participant would have received on 100% of the missed deferral (instead of using the actual contribution percentage).
• EPCRS is not available to plans or plans sponsors who are parties to Abusive Tax Avoidance Transactions.
• Determination letter applications are generally no longer required when correcting certain Qualification Failures by plan amendment, unless the amendment is adopted to correct a non-amender failure and/or the amendment is adopted to correct failures in the plan’s cycle year/year of termination.
• VCP and Audit CAP have been expanded to include Orphan Plans, and the IRS has the discretion not to require full correction and to waive VCP fees for terminating plans.
• The compliance fee for a plan whose sole failure is in satisfying the minimum distribution rules for 50 or fewer employees has been reduced to $500.00.
• Plans which have failed to adopt good faith amendments to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the final and temporary regulations regarding minimum required distributions and “interim” amendments (i.e., amendments that must be adopted during a plan’s 5 year cycle. See Rev. Proc. 2005–66) may now take advantage of a streamlined submission procedure contained in a new Appendix F, in addition to a reduced compliance fee of $375.00.
  • However, “nonamenders” that are discovered during the determination letter process not related to a VCP submission will be subject to a fixed fee based on the on the number of plan participants and the relevant legislation (e.g., the fee for a plan with 501–1,000 participants that is a GUST “nonamender” is $21,000).
• The VCP Checklist has been updated to reflect the streamlined submission procedure of Appendix F, and the option to submit an acknowledgement letter (Appendix E).
• Certain correction methods in Appendix A and Appendix B of the Revenue Procedure now apply to 403(b) plans, SEPs, and SIMPLE IRAs.

Conclusion
This article highlights a number of the more significant changes to EPCRS, but does not address every change from the prior Revenue Procedure. We recommend that plan sponsors who are considering using EPCRS seek legal advice to ensure proper compliance with its programs.