SECURE 2.0’s new self-correction rules: A Q&A with attorney Sharon Kowal Freilich

The SECURE 2.0 Act is lawmakers’ response to increasing concern about Americans making ends meet during their retirement years. A key component of this law passed in December 2022 — and included in the Consolidated Appropriations Act, 2023 — includes changes that make it easier for retirement plan sponsors to correct errors or failures in order to protect participant benefits.

The SECURE 2.0 Act, which stands for Setting Up Every Community Retirement Enhancement, expands the Employee Plans Compliance Resolution System (EPCRS), the IRS’s program which allows plan sponsors to correct errors to protect benefits and make sure plans are tax compliant. In Notice 2023-43, the IRS provides interim guidance, which became effective May 25, regarding these changes.

We talked to attorney Sharon Kowal Freilich, chair of the Labor, Employment Law & Employee Benefits practice at Connecticut law firm Pullman & Comley, about what retirement plan sponsors need to know.

Q. How does SECURE 2.0 affect errors and how they should be corrected?

A. EPCRS has three mechanisms for handling plan failures or errors: self-correction, the Voluntary Compliance Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Before SECURE 2.0 took effect, many significant operational failures — including most participant loan failures — and document failures had to be corrected through either VCP or Audit CAP. Both are far more expensive options than self-correction.

Eligibility to self-correct an identified error was conditioned on the plan having a favorable letter from the IRS. When an error could be self-corrected, plan sponsors only had a three-year window from the date the error occurred to fix it. SECURE 2.0 introduced the term “Eligible Inadvertent Failures” to expand the types of errors that can be self-corrected and the time limit for completing the correction.

Q. What are Eligible Inadvertent Failures?

A. An Eligible Inadvertent Failure is any operational or document failure that occurs despite practices and procedures being in place to prevent it. Plan sponsors must be able to show that it did have procedures in place to avoid the error, and that it routinely followed them. The error had to have occurred because of an oversight or a mistake in applying those procedures — not because no procedures were in place.

Generally, under SECURE 2.0, there is no set deadline for completing the self-correction of an identified Eligible Inadvertent Failure. In addition, Notice 2023-43 IRS clarifies that the requirement that the plan have a favorable determination letter to self-correct no longer applies.

Q. What is the new timeline to make these corrections?

A. Instead of the former three-year window for self-corrections of significant failures, plan sponsors can now self-correct errors without a fixed timeline for completion of the correction, unless one of the following is true:

• The plan or plan sponsor comes under IRS examination before the plan sponsor begins actively pursuing correction of an identified failure; or
• The self-correction is not completed within a reasonable period after the failure is identified.

In other words, plan sponsors want to identify the problem before the IRS does and fix it right away. The recent IRS guidance clarifies that if a self-correction of a failure is completed by the last day of the 18^th month following the date the failure is identified, the correction will be treated as being completed within a reasonable period.

Q. But there are still limits to self-correcting. What is not allowed?

A. Egregious failures may not be self-corrected. These include errors that relate to diversion or misuse of plan assets, or those directly or indirectly related to abusive tax avoidance transactions.

The IRS identified other failures which may not be self-corrected prior to more formal guidance being issued including failure to initially adopt a written plan (e.g., the plan document was not signed) or a significant failure in a terminated plan.

Q. What about participant loan failures?

A. The SECURE 2.0 Act permits self-correction of participant loan failures that previously had to be approved through a VCP filing, or Audit CAP. Now defaulted participant loans and participant loans that exceed the maximum limit, duration or amortization requirements can be self-corrected.

Participant loan failures trigger a breach of fiduciary duty. Before SECURE 2.0, the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) provided relief for loan-related fiduciary breach issues.

Now, self-correction counts as meeting VFCP requirements. The DOL may impose reporting or other procedural requirements for parties who want to go the route of relying on automatic compliance with VFCP for plan loan failure correction. The DOL has not yet issued interim guidance.

Q. What is the first thing plan sponsors should do?

A. They should make the most of the opportunity presented by SECURE 2.0 to begin an internal audit. Take a good look at the plan, review all the documents and the corresponding procedures, and make sure there’s not a disconnect between the two.

If they find that they do need to self-correct an error, the sooner the better. The IRS is actively encouraging this. It recently completed a pilot program for self-audits in which it invited 100 plan sponsors to identify what could be self-corrected within 90 days. It seems likely that the pilot program will become permanent in some form, although details such as the response time could change.

Related: Employers need help implementing SECURE 2.0: Advocacy group asks IRS for guidance

SECURE 2.0 still has a few technical glitches that Congress will gradually iron out, but plan sponsors should not let that dissuade them from taking advantage of the chance to self-correct errors. Notice 2023-43 encourages self-correction and identifies issues which currently cannot be self-corrected. Bottom line, self-identifying and correcting failures in a timely fashion leads to better results than correcting them while subject to an IRS examination or DOL investigation.