Why Time is of the Essence More than Ever in Correcting Retirement Plan Errors
Errors in retirement plans happen even to the most well-intentioned plan sponsors. Several decades ago, the IRS published the first version of the Employee Plans Compliance Resolution Program (EPCRS), which outlines procedures by which plan sponsors can correct errors in their qualified retirement plans. Some of these errors could be self-corrected, while others could only be corrected by going through the Voluntary Correction Program. The last several iterations of EPCRS have expanded the types of errors and time periods by which plan sponsors could self-correct errors in their plans. Last December, Congress went even further expanding the types of retirement plan errors that a plan sponsor can now self-correct.
SECURE 2.0 provides that a plan sponsor can self-correct “eligible inadvertent failures” in their qualified retirement plans and 403(b) plans. An eligible inadvertent failure is any failure that occurs despite the plan sponsor having practices and procedures in place reasonably designed to promote and facilitate overall compliance in form and operation with applicable Internal Revenue Code requirements. Self-correction is not permitted if the failure is egregious, relates to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction.
EPCRS provides that significant operational failures must be corrected by the end of the third plan year following the plan year in which the error first occurred. SECURE 2.0 removes the need to determine whether most errors are significant and extends the period of self-correction. Eligible inadvertent failures can be self-corrected at any time, as long as they are corrected within a reasonable period of time after discovery of the error. In Notice 2023-43, the IRS provided interim guidance until it can revise and publish an updated version of EPCRS. In this Notice, the IRS provided that whether an eligible inadvertent failure is corrected within a reasonable period of time is determined based on all facts and circumstances, but except for employer eligibility failures, an error will be deemed to be corrected within a reasonable time as long as it is corrected by the last day of the 18th month following the date the plan sponsor identifies the failure. For an employer eligibility failure to be deemed to be corrected within a reasonable time, the plan sponsor must cease all contributions to the plan as soon as reasonably practicable after the failure is identified and, in no event, cease contributions by the last day of the 6th month following the date the plan sponsor identifies the failure.
Another change from EPCRS is that plan sponsors are now still eligible to self-correct eligible inadvertent failures even after the plan is under investigation as long as the plan sponsor can demonstrate that they had a specific commitment to correct the failure before the IRS identified the error. Whether a specific commitment existed will also be based on all facts and circumstances. It is not yet known what will be enough to demonstrate a specific commitment, but in the Notice, the IRS stated that it is more than the mere completion of annual compliance audit or adoption of a general statement of intent to correct the failure. The IRS also confirmed that insignificant failures may still be corrected even when discovered on audit.
While we have always recommended correcting errors quickly after you discover them, SECURE 2.0 and the subsequent guidance now give us more definitive timelines on when the correction must be completed. Also, taking immediate action upon discovery will help show a specific commitment to self-correction even if the correction is not completed before the plan is selected for audit. Our Employee Benefits Team assists plan sponsors of all sizes in determining the best way to correct errors in your plan. If you find an error or want additional information on the new rules, please reach out to any of the attorneys on our Employee Benefits team.