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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
