Expanded Self-Correction Programs Address Retirement Plan Errors
During the life of a qualified retirement plan, employers may discover that they have failed to operate their plan in accordance with IRS regulations or the plan document. These errors are typically unintentional, and can sometimes go unnoticed for years. Whether this is the result of personnel overlooking key features, being unfamiliar with the provisions, or the accidental elimination of plan provisions during a restatement of the plan document, these errors can lead to costly fines or the potential disqualification of the plan if not corrected.
Fortunately, the IRS offers several correction programs, including the Self-Correction Program (SCP), so employers can proactively address errors in their qualified retirement plan. While this program was previously very limited in scope, the IRS recently issued Revenue Procedure 2019-19 on April 19, 2019, allowing its broader use. By expanding this program, the IRS hopes to facilitate plan compliance while reducing the costs and burdens to employers.
Three ways to correct a qualified retirement plan
The IRS offers several programs to help plan sponsors address operational failures within qualified retirement plans, such as 401(k)s, profit sharing, Savings Incentive Match Plans for Employees (SIMPLEs), and Simplified Employee Pensions (SEPs). Here are three of the most popular programs:
- Self-Correction Program (SCP) — With this recently-expanded program, there are no forms to submit and no fees.
- Voluntary Correction Program (VCP) — This is the IRS’ formal submission program. There are forms to complete, fees, and a formal review and approval process.
- Audit Closing Agreement Program (CAP) — This program requires the plan sponsor to negotiate an agreement and a sanction with the IRS.
Before the implementation of Revenue Procedure 2019-19, operational failures could not be corrected by plan amendment (other than in limited circumstances), and plan sponsors were required to submit such corrections under the IRS’ Voluntary Correction Program (VCP). In fact, there were only a few operational failures that could be corrected using a retroactive plan amendment, including:
- Allowing hardship distributions from a plan that did not include hardship distribution provisions
- Issuance of a participant loan from a plan that did not allow loans
- Early employee participation in the plan, prior to satisfying eligibility requirements
- Additional contributions to correct an allocation made in violation of the annual compensation limit
- Correcting a failure of the Actual Deferral Percentage (ADP) non-discrimination test by making a qualified non-elective contribution (QNEC) to participants when the feature is not otherwise available under the plan
Now, certain plan operational failures may be corrected by plan amendment if the following three conditions are satisfied:
- The plan amendment results in an increase of a benefit, right, or feature (benefits under the plans may not be reduced or made more restrictive).
- The increase in the benefit, right, or feature is available to all eligible employees.
- The increase in the benefit, right, or feature is permitted under the Internal Revenue Code, and the correction principles of Section 6.02, Rev. Proc. 2018-52 are satisfied.
Which failures may be self-corrected under SCP now?
The new regulations also expand the types of failures that may be self-corrected under SCP, including:
- Errors related to the failure to repay a plan loan according to the terms of the plan (a defaulted loan). These errors may be self-corrected by allowing a single-sum repayment, re-amortization of the outstanding loan balance, or a combination of both, with no corresponding submission to the IRS.
- Deemed distributions of participant loans may be reported in the year of correction. Previously, reporting relief had to be requested from the IRS prior to reporting in the year of correction.
- Number of loans issued which exceed the maximum number of loans allowed by the plan. The plan may be amended retroactively to allow this.
- An option to obtain spousal consent for plan loans, when spousal consent was not received. The plan sponsor must notify the affected participant and spouse, allowing the spouse to provide their consent to the loan. If spousal consent is not received, then this must be corrected under VCP.
This relief of plan loan failures may be corrected via the plan amendment as long as Code Sections 401(a) and 72(p) were satisfied when the loans were first made available, and the plan loans are available on a non-discriminatory basis.
Plan loans in excess of statutory limits (typically plan loans exceeding 50 percent of one’s vested account balance), or plan terms that do not meet the requirements of Internal Revenue Code Section 72(p), must be corrected using either VCP or Audit CAP.
Plan document failures (inclusion or exclusion of language that is required in the plan document) can now be corrected via the plan amendment, but only within the two-year correction period (by the last day of the second plan year following the plan year in which the failure occurred). SCP is not available to correct the failure to adopt a 401(k) or 403(b) plan by the required deadline.
Employers can still submit errors to the IRS
Even though SCP is an efficient self-service option, some employers still may prefer to submit corrections through VCP, the formal IRS correction program. Under VCP, the employer submits a correction to the IRS alongside any necessary fees. If the IRS approves of the method of correction, they’ll send the employer a formal no-action letter, stating that the plan remains in compliance and will not be disqualified in relation to the operational failure. Both SCP and VCP offer effective solutions to resolve plan errors. It’s up to the plan sponsors to select which option they are most comfortable with.
How we can help
CLA’s employee benefit plan professionals know qualified retirement plans and are familiar with the unique nuances of each correction program. We can help you design and administer a plan that remains compliant so you can focus on your business instead of costly errors.