How To Correct Errors In Your Retirement Benefit Plan
Posted December 10, 2010
How to Correct Errors in Your Retirement Benefit Plan
An audit of your retirement benefit plan has uncovered something unexpected. For a number of years, you have not included bonuses and other qualifying income in calculations to determine company contributions to your 401(k). As a result, you could owe thousands of dollars in additional contributions to employee accounts.
You also learned that you didn’t complete changes in employee deferral elections in a timely manner. And to top it off, you just found out that you didn’t update your plan documents to reflect a tax law change that took effect five years ago.
Now what? You can ignore the problem and hope that the Department of Labor (DOL) and Internal Revenue Service (IRS) never discover the errors. Of course, if they do, your plan may be at risk of losing its tax-favored status. Or it could be disqualified altogether.
Take action
The best course of action is to admit your errors and correct them according to IRS guidelines. Three IRS programs are available through the Employee Plan Compliance Resolution System (EPCRS) for the voluntary correction of retirement plan defects and document issues:
Self-Correction Program (SCP) – Permits a plan sponsor to correct certain plan failures without application or reporting to the IRS, if certain criteria are met. Correction options are generally based on the significance and timing of the defects. It’s only an option for correction of operational issues. SCP can’t be used for issues such as failure to update a plan document in a timely manner.
Voluntary Correction Program (VCP) – Before a plan is under IRS or DOL audit, this program allows the sponsor to pay a limited fee and receive IRS approval for correction of plan failures. If done in a timely manner, the employer will be protected from disqualification actions.
Audit Closing Agreement Program (Audit CAP) – With this option, a plan sponsor pays a fee and corrects a plan failure that is discovered while the plan is under audit, or during the course of an application for a favorable determination letter. The amount of the fee is negotiable.
EPCRS has been around for years but it was updated in the spring of 2008 to liberalize some criteria and generally expand the relief available to plan sponsors.
IRS Fix-It Guides
As the retirement plan sponsor, the responsibility for identifying errors in your plan lies with you. To help you with that responsibility, the IRS offers two online resources (www.irs.gov):
401(k) Plan Checklist – A checklist of considerations for performing a compliance review of a qualified 401(k) plan.
401(k) Fix-It Guide – A resource for avoiding, finding and fixing operational defects, including errors that can be addressed through EPCRS.
Be proactive
The best way to reduce the risk of these problems, or to identify errors in a timely manner, is to establish adequate internal controls over plan operations. As the plan sponsor, you should be actively involved in the oversight of plan operations, and ensure that there are adequate communications regarding changes in the plan document, plan oversight, plan processes and controls.
Filing Form 5500
If your qualified retirement plan is covered by the Employee Retirement Income Security Act (ERISA), don’t forget to file Form 5500 annually with the Department of Labor. Plans with fewer than 100 participants may be able to file the simplified Form 5500-SF. Sole proprietor and partnership plans file Form 5500-EZ. In any case, penalties will be imposed for incomplete or late filings.
With some preventive maintenance and occasional housekeeping, your employee benefit plan can stay in the good favor of your employees and government regulators.
To learn more about avoiding, finding and fixing errors in retirement plans, download our white paper, Retirement Plan Compliance Check up: How to Find Operational Defects, e-File and Stay in Compliance.
