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When the SECURE Act 2.0 was signed into law at the end of last year, it ushered in several changes designed to help resolve the retirement savings gap. This includes several updates to help individuals access, participate in, and enhance saving opportunities, such as expanded part-time worker eligibility and an automatic enrollment requirement. There were also updates impacting plan sponsors, such as new participant overpayment rules and expanded error reporting through the Employee Plans Compliance Resolution System (EPCRS). When combined, the changes, which phase in over five years, are expected to positively affect retirement savings.
Despite the updates, many have yet to be able to take advantage of the changes due to a lack of updated guidance. Specifically, those plans seeking to take advantage of the new rules governing the correction of eligible inadvertent plan failures (Section 302) have been unable to do so. The good news is that the IRS recently released Notice 2023-43, which provides long-awaited interim guidance in the form of questions and answers. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
When can the Self-Correction Program (SCP) be used to Correct Inadvertent Plan Failures?
A plan may use the SCP to correct eligible inadvertent plan failures, including those related to participant loans, in the following circumstances:
- The failure was not identified by regulators prior to demonstrating a specific commitment to self-correction.
- Corrective actions are completed within a reasonable time after error identification. A reasonable time is defined as the last day of the 18th month following the date the failure is identified by the plan sponsor unless it is due to an employer eligibility failure, which is no later than the last day of the sixth month following the date the failure was identified.
- The failure is not egregious and does not relate to an abusive tax avoidance transaction.
- The self-correction satisfies the following criteria:
- A plan sponsor must have established practices and processes designed to promote compliance with regulations.
- The correction principles and rules of general applicability set forth in Revenue Procedure 2021-30.
- Consider using the self-correction method outlined in Appendix A or B of Revenue Procedure 2021-30.
- Not use any prohibited self-correction outlined in the same Procedure.
Which Inadvertent Plan Failures are Ineligible for the SCP?
There are several types of failures ineligible for the new SCP option, including:
- A failure to adopt a written plan.
- A failure in an orphan plan.
- A significant failure in a terminated plan.
- A failure that involves excess contributions to a SEP or SIMPLE IRA that is otherwise correctable by permitting the excess contribution to remain in the affected participant’s IRA.
- A demographic failure that is corrected using certain correction methods.
- An operational failure corrected by a plan amendment that conforms to the terms of the prior operation in a less favorable way than prior operations.
When is a Failure Treated as Identified by Regulators?
A failure is treated as being identified when the plan or plan sponsor comes under examination. This means that once the plan comes under investigation, the inadvertent error may no longer be eligible for self-correction. It is important to note that an insignificant error can be self-corrected even if the plan is under examination.
When has a Plan Demonstrated a Specific Commitment to Implement Self-Correction?
Based on all facts and circumstances, a decision about whether the plan sponsor has demonstrated a specific commitment to implement self-correction will be made. Generally, the actions must demonstrate an active pursuit of failure correction. It is important to note that just completing an annual compliance audit or adopting a general statement of intent to correct discovered failures will not be considered a specific commitment.
We’re Here to Help
The information provided in the recently released interim guidance makes it easier for plans to resolve inadvertent errors through the SCP. Since the guidance is technical and complicated, consulting with a qualified advisor is important to determine how you will be impacted. If you have questions about the information outlined above or need assistance with your benefit plan audit, JLK Rosenberger can help. For additional information, call 818-334-8646, or click here to contact us. We look forward to speaking with you soon.