“I’ve heard that plan sponsors now have more opportunities to self correct their retirement plans without IRS submission than before. Could you explain?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Texas is representative of a common inquiry related to a plan sponsor’s ability to self correct its retirement plan without any IRS filing or fees.

Highlights of the Discussion

New Revenue Procedure (Rev. Proc.) 2019-19, effective April 19, 2019, contains updates to the IRS’s Employee Plans Compliance Resolution System (EPCRS), primarily with respect to the Self Correction Program (SCP) contained within. The other correction programs under EPCRS are the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). In the past, SCP was reserved for the correction of certain Operational Failures (i.e., failures in which the sponsor did not operate the plan according to the terms of the plan document). SCP is expanded under Rev. Proc. 2019-19 and, under specific criteria, now allows for self correction of

1. Certain plan document failures for 401(k) and 403(b) plans;
2. Certain plan loan failures; and
3. More operational failures by plan amendment.

SCP-eligible plan document failures

Rev. Proc. 2019-19 was revised to allow self correction for 401(k) and 403(b) plans that fail to adopt a required or interim amendment timely. Keep in mind these document failures are always treated as “significant failures” in the IRS’s eyes. That means, in order to use SCP, the plans must be substantially corrected, in most cases, by the last day of the second plan year following the plan year of the failure (see Section 9 of the Rev. Proc. 2019-19).

EXAMPLE

A calendar-year plan missed an interim amendment that should have been adopted by March 15, 2018. The sponsor can correct under SCP no later than the end of 2020.

Plan document failures may be corrected under SCP only if the plan, as of the date of correction, has a favorable IRS approval letter (e.g., opinion, advisory, or determination). 403(b) plan sponsors must have timely adopted a written plan effective January 1, 2009, or have corrected the document already under VCP or Audit Cap.

SCP-eligible plan loan failures

Errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may now be corrected under SCP. The correction methods are 1) a single-sum repayment of the loan, 2) re-amortization of the outstanding loan balance for the remaining loan period, or 3) a combination of the two.

The failure of a plan to obtain spousal consent for a plan loan, when necessary, may now be corrected through SCP. The plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If the plan sponsor does not obtain spousal consent, the failure must be corrected using either the IRS’s VCP or Audit CAP.

Finally, if a participant takes more loans from the plan than the governing document says he or she can, an Operational Failure occurs. The sponsor may choose to self correct this type of error by adopting a retroactive plan amendment.

SCP-eligible operational failures

Aside from those listed above, other operational failures may qualify for correction by plan amendment under SCP. In order to be eligible, the following three conditions must be satisfied:

1. The amendment results in an increase of a benefit, right, or feature for participants;
2. The increase is available to all eligible employees; and
3. Providing the increase is permitted under the Internal Revenue Code, and satisfies the general correction principles of EPCRS Section 6.02.

Conclusion

Plan sponsors can use the expanded provisions of the SCP according to Rev. Proc. 2019-19 to correct more plan failures without having to file with the IRS and pay a user fee.