Updated August 24, 2023
When a retirement savings program is operated inconsistently with the language of the plan document, called plan terms, it can put its tax-qualified status at risk leading to loss of deduction for past contributions, back taxes and penalties. The IRS offers the Employee Plans Compliance Resolution System (EPCRS) to correct these operational mistakes. In many cases, employers may self-correct plan errors without having to notify the IRS. Good News! The SECURE 2.0 Act expanded EPCRS, extending correction periods and providing self-correction opportunities for more errors:
Eligible Inadvertent Failure (EIF) – These are mistakes that occur even when the employer has established practices and procedures to manage their retirement program. Violations that are egregious or relate to the diversion or misuse of plan assets or an abusive tax avoidance transaction are not eligible for self-correction.
Loan Errors – Failures to issue participant loans or repay them under the terms of the plan’s participant loan program. Correction may prevent a failed loan from being viewed as a plan withdrawal, thus avoiding taxation and penalties and getting the loan back on track.
Overpayment to Participant or Beneficiaries – Historically, when participants or beneficiaries received payments exceeding their plan benefits, employers were required to attempt to collect the overpayments. Employers now have more discretion when seeking recovery of overpayments from participants and beneficiaries, including consideration of the hardship it may cause the affected individual. Participants are also given new, additional protections, for instance the new law established time limits for recovery of overpayments.
A Safe Harbor Correction for Automatic Enrollment Errors – Allows employers to correct errors in auto-enrollment and automatic escalation of employee salary deferrals in 401(k) and 403(b) plans without penalty. If certain conditions are met, corrective contributions for missed deferrals may be avoided, however any matching contributions that would have been made had the failure not occurred still must be made. There are specific, time-sensitive requirements to be met, so it is important to act as soon as possible when an error is discovered.
Missed Deferral Correction – Similar to correction of automatic plan feature errors, employers may be eligible to correct inadvertent failures to enroll employees in 401(k) and 403(b) plans without penalty. If certain conditions are met, corrective contributions for missed deferrals may be avoided, however any matching contributions that would have been made had the failure not occurred still must be made. There are specific, time-sensitive requirements to be met, so it is crucial to act as soon as possible when an error is discovered.
Reminder: It is important to remember that having established practices and procedures reasonably designed to ensure compliance of the plan’s operations with the law is a condition for self-correction. The IRS also reminds plan sponsors corrections should be documented.
Notable Exceptions for Use of Self-Correction Under EPCRS
In Notice 2023-43, the IRS outlined when errors may no longer be self-corrected: 1) The IRS initiates plan audit, unless the Service determines that the employer showed a commitment to self-correct the error before the audit. Notably, insignificant errors may continue to be self-corrected even under audit. 2) Self-correction is not completed within a “reasonable period” after finding the error. While what is reasonable is a facts-and-circumstances determination, for most plan mistakes, the Service considers a correction within 18 months to be reasonable. This period is shortened when correcting employer eligibility failure. Thus, if an employer adopts a 401(k) plan while ineligible to do so, they must cease all contributions to the plan as quickly as feasible but in no case later than six months after learning about the mistake.
The IRS listed nine categories of mistakes still not eligible for self-correction, including a failure to adopt an initial written plan document, significant errors in a terminated plan, certain compliance test errors, and operational errors corrected by a plan amendment less favorable to employees than the plan’s original terms.
Let Pinnacle Plan Design Help
If you find a potential mistake, Pinnacle Plan Design can assist you in determining if an error exists and how to correct.
Consultants at Pinnacle Plan Design are actively monitoring new guidance concerning SECURE 2.0. This represents our understanding of the laws at this time. Additional guidance will provide additional clarity. If you have any questions about automatic enrollment and escalation features and how these requirements may impact you, don’t hesitate to contact us at (520) 618-1305