The Employee Plans Compliance Resolution System (EPCRS) is the IRS’ comprehensive correction system for tax-qualified retirement plans, currently set forth in Rev. Proc. 2008-50 (we expect a new EPCRS Rev. Proc. to be released in the near future). One correction method under EPCRS allows operational failures to be voluntarily corrected using a plan amendment that conforms the term of the plan to the plan’s prior operation (the so-called “retroactive amendment” correction method). Specifically, EPCRS states that an operational failure may be corrected under its voluntary correction program (VCP) “by plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of §§401(a), including the requirements of §§401(a)(4), 410(b), and 411(d)(6).” See EPCRS §4.05(1).
In our experience, however, the IRS imposes two additional requirements when an employer wants to fix an operational failure by retroactive amendment: (1) the applicant must demonstrate the employer’s intent during the period of the failure; and (2) the applicant must demonstrate the employees’ expectations during the period of the failure. These additional requirements seem to be an important component of a successful retroactive amendment VCP application. Indeed, in the March 22, 2011 BNA Pension and Benefits Reporter an IRS representative, discussing retroactive amendments in the context of a plan mergers, stated “you would have to give us enough documentation to show what the intent of the employer was and what the employees understood the benefits to be.” In another example, the IRS put the requirement this way in its response to a VCP submission seeking to use the retroactive amendment correction method:
“Could you provide any evidence showing employer intent and employee expectation? Such evidence might consist of meeting minutes, communications with consultants, and communications with employees.”
EPCRS does not state that there is any requirement that an applicant show either employer intent or employee expectation in order to be eligible to correct an operational failure via the retroactive amendment correction method. In fact, the words “intent” and “expectation” are not in EPCRS. Nevertheless, the IRS appears to consistently require evidence of intent and expectation before allowing retroactive amendments. Perhaps we will see these requirements articulated in the updated EPCRS procedures. Until then, an applicant should expect to answer these two somewhat unexpected questions after they have submitted a VCP application. To be forewarned is to be forearmed.