Fixing 401(k) Plan Errors Without IRS Involvement: What Employers Should Know

Question: Our company recently began offering a 401(k) plan. So far, things are running smoothly, but we know mistakes can happen. We’ve heard the IRS has a program for plan sponsors to fix mistakes. Are there some errors we can correct without IRS involvement?

Answer: Yes. The IRS’s Employee Plans Compliance Resolution System (EPCRS) provides three ways to correct mistakes that affect a plan’s tax-qualification. Two of them require IRS filings and fees, but the third — the Self-Correction Program (SCP) — lets employers correct certain errors on their own, without IRS involvement. If corrections are made properly under the SCP, the IRS will treat the plan as still qualified.

Originally, the SCP was limited to fixing operational errors (when the plan isn’t run according to its terms). In 2019, the IRS expanded SCP to include certain plan document errors, such as when an outdated plan provision becomes disqualifying. However, the SCP doesn’t apply if the plan document was never adopted in the first place, or if an employer failed to adopt a discretionary amendment on time. Consulting a business taxation service Brookfield can help ensure compliance and avoid costly errors in plan administration.

Examples of Operational Errors that May Be Self-Corrected Include:

• Failing to let an eligible employee make deferrals,
• Not carrying out elected deferrals,
• Missing matching or profit-sharing contributions,
• Late correction of nondiscrimination testing failures,
• Failing to make required minimum distributions, and
• Paying out non-vested benefits

The SCP classifies failures as either insignificant or significant:

• Insignificant errors may be corrected at any time, even if discovered during an IRS audit.
• Significant errors must usually be fixed by the end of the second plan year after the year in which the failure occurred. The SCP isn’t available if the mistake is considered egregious (for example, repeatedly excluding all but highly paid employees).

Even though the SCP is flexible and cost-effective, it isn’t always the best choice. Some employers prefer to use the IRS’s Voluntary Correction Program (VCP) to obtain an IRS compliance statement, which provides assurance that the IRS agrees with the correction.

Finally, not every mistake can be fixed under the SCP. For example, demographic testing failures (like coverage testing) usually require IRS involvement, and other problems such as fiduciary breaches or late Form 5500 filings fall under U.S. Department of Labor correction programs. Consulting the Best business tax experts Brookfield can help ensure proper compliance and guide you in correcting any future errors in your 401(k) plan.