Making mistakes is a part of life that everyone has to deal with. It is said to err is human. Now what sets people apart from each other is how they overcome them, learn and make changes. Managing a retirement plan is actually quite similar. The sheer number of rules and regulations means there are times when legitimate oversights and errors may happen. In fact, larger plans create a greater opportunity for error. The good news is that the IRS has a process in place for certain errors to be quickly and easily addressed through the self-correction program (SCP). This program provides an easy and penalty free method to correct insignificant errors. To help clients, prospects and others understand SCP and eligible errors; JLK Rosenberger has provided a summary of key information below.
In order to resolve a plan management error using the self-correction program, the error in question must be considered insignificant. Examples of insignificant errors include: failure to follow the terms of the plan, excluding eligible participants, not making proper contributions as required by plan terms and loan compliance failures. The IRS provides guidance to help plan sponsors identify whether a violation is insignificant, including:
- The number of other failures that occurred in the same period.
- The percentage of plan assets and contributions involved.
- The duration of the problem (one year or several).
- Number of participants impacted relative to the total number in the plan.
- Whether or not a correction was made shortly after identification or a time delay ensued.
- The reason the failure occurred in the first place.
It’s important to note that no single criterion would exclude an error from the self-correction program. The IRS points out in their guidance that a failure is not necessarily significant because it occurred in more than one year. Unfortunately, the IRS does not offer guidance beyond general statements about what errors can be resolved through SCP, so it’s important to carefully assess the issue to ensure it qualifies for the SCP. There are several resources on the IRS website that can help guide the process.
Steps to Correction
The IRS recommends that a plan sponsor using the following steps when making a correction through self-correction program:
- Confirm Eligibility – Since the IRS does not provide guidance on whether an error is eligible for self-correction, it’s wise to consult a professional advisor if there is uncertainty.
- Corrections – The plan sponsor should make any needed corrections to ensure those impacted by the error have had their situation rectified immediately. This means their accounts and other financial details should be addressed so it reflects what would have happened if the error was not committed.
- Documentation– It’s important to document the steps taken to correct the error and include them as part of operating procedures for the future.
- Process Changes – Finally, the plan sponsor must implement new administrative procedures, as necessary, to ensure the same mistake does not happen again.
Keeping the plan’s operation in compliance with IRS regulations is essential. If the retirement plan has recently uncovered a plan issue or errors, it’s important to rectify it as soon as possible. If you have a question about a potential error or needed assistance with the annual ERISA audit, JLK Rosenberger wants to help. For additional information please contact us at 949-860-9890, or click here to contact us. We look forward to speaking with you soon,