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Which 401(k) Plan Errors Can Be Self-Corrected?



QUESTION: Our company recently adopted a 401(k) plan. So far, things are running smoothly, but we know mistakes can happen. We understand the IRS has a program that allows plan sponsors to submit corrections for IRS approval, but are there errors we can correct without IRS involvement?

ANSWER: The IRS’s Employee Plans Compliance Resolution System (EPCRS) includes three correction programs for errors that affect a plan’s tax-qualification. Two of these are IRS-supervised, but the third, the Self-Correction Program (SCP), allows plan sponsors to correct certain errors without IRS filings, supervision, or user fees. If an employer qualifies to use SCP, and the failure is corrected in accordance with the program’s requirements, the IRS will not treat the plan as failing to meet the plan qualification rules because of the failure.

Until recently, SCP was limited to the correction of operational failures, but in 2019, the IRS expanded SCP to permit the correction of certain plan document failures, i.e., plan provisions—or missing plan provisions—that cause the plan to be disqualified. For example, if a previously permissible plan term becomes a disqualifying provision, failure to timely correct that provision is a plan document failure that might now be correctable under SCP if the applicable conditions are met. Failure to timely adopt a discretionary plan amendment is not considered a plan document failure (but it may create an operational failure). SCP cannot be used to correct the initial failure to adopt a plan document.

Operational failures are failures that arise solely from a failure to follow the plan document. Examples include:

  • Not offering an eligible employee the opportunity to elect and make elective deferrals;
  • Not implementing elected deferrals;
  • Failing to make matching or profit-sharing contributions required by the plan;
  • Not timely correcting an ADP or ACP testing failure;
  • Failing to make required minimum distributions; or
  • Distributing nonvested benefits.

Operational failures are classified under SCP as either insignificant or significant. Significance is determined by a variety of factors, including the number of failures, the percentage of plan assets and contributions involved, the number of years affected, the number of participants affected relative to the total number of participants, whether the failure is corrected within a reasonable time after it is discovered, and the reason for the failure. For multiple failures, significance must be judged in the aggregate. All plan document failures that can be corrected under SCP are considered significant.

Significant failures are subject to additional conditions. For example, significant failures can only use SCP if they are corrected quickly—generally, by the last day of the second plan year after the year for which the failure occurred. (That period is extended for some nondiscrimination testing failures.) The self-correction period for significant failures may end earlier if the plan comes “under examination” by the IRS. And SCP is unavailable if the operational failure is considered “egregious” (e.g., consistently and improperly covering only highly compensated employees). By contrast, insignificant failures may be corrected at any time, and they may be corrected even if the plan comes under examination and the failure is discovered during the examination.

Using SCP can simplify and speed up corrections, and lower their cost, but it is not always the best option. For example, a plan amendment to self-correct by conforming the plan document to its prior operations can only be used under SCP in very limited circumstances. Even when an acceptable correction method is available under SCP, plan sponsors will sometimes elect to use the IRS-supervised Voluntary Correction Program (VCP) instead because they are not certain their errors qualify for SCP or because they want an IRS compliance statement that specifies the necessary corrective action and binds the IRS if the plan sponsor satisfies the conditions of the compliance statement.

It is important to remember that not all plan-related errors are operational errors or plan document errors that can be corrected using SCP. For example, SCP would not be available to correct a plan demographic failure (e.g., a coverage testing failure that must be corrected by increasing benefits), so the correction would require IRS involvement. Finally, some errors fall outside EPCRS entirely because they are not plan-qualification errors. For some of those errors, e.g., fiduciary breaches and delinquent annual reporting, correction programs are maintained by the DOL.

For more information, see EBIA’s 401(k) manual at Sections XXXI.I (“DFVC Program Using EFAST2”), XXXV.B (“Correction Programs, Qualification Failures, and Resources”), XXXV.D (“Self-Correction Program (SCP)”), and XXXVI (“Correcting Plan Mistakes: DOL’s VFC Program”).

Contributing Editors: EBIA Staff.

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