Exceeding the limit of half the vested account balance but not more than $50,000. If a plan loan exceeds the maximum limit, the correction is to allow the participant to repay the amount in excess of the limit at the time the error is discovered and to re-amortize the remaining loan balance. Re-amortization permits reduction of future payments by taking into consideration any overpayments made based on the excess loan balance. This will require the employer to make a submission to the Voluntary Compliance Program (VCP).

For example, assume a participant had a vested account balance of $60,000 and a nonconforming loan was issued for $40,000. The repayments of principal and interest on $40,000 are higher than those necessary to repay the maximum permissible loan amount of $30,000. Under the new EPCRS correction method, any extra amounts already paid will be used to reduce the amount to be repaid after correction occurs and this will be reflected in the corrected amortization schedule.

Exceeding the five-year term. If a loan was initiated with a repayment period in excess of five years and the loan was not used to purchase a primary residence, the employer would be able to shorten the term of the nonconforming loan to five years by making a submission through the VCP. The appropriate correction is to shorten the remaining term of the loan, based on the date the error was discovered, so the loan will mature within five years of its origination date. In addition, the loan repayment schedule must be re-amortized and the revised payments completed within five years from the loan origination date. If the discovery is beyond five years from the origination date, this correction procedure is unavailable.

Paying overdue amounts during the grace period. If a participant is behind in repayments but still within the grace period, he or she will now have a choice to either repay the overdue amount as a lump sum or to re-amortize the past due amounts over the remaining loan period.

IRS Requests comments on Roth contribution corrections: Code section 402A permits a 403(b) plan to offer employees the opportunity to designate their elective deferrals as Roth contributions for taxable years beginning after December 31, 2005. The IRS has asked for input regarding appropriate correction methods for instances where a plan fails to provide an eligible employee with the opportunity to make Roth elective deferrals and the plan permits a designation of elective deferrals as either traditional pre-tax or after-tax Roth contributions. It is important to remember that in 403(b) arrangements there can be no eligibility requirements to make deferrals so that someone eligible to make pre-tax deferrals also has to have the right to make the Roth deferrals, if the plan offers them.