The requirements for maintaining and operating retirement plans may differ depending upon the type of plan – 401k vs. 403b vs. profit-sharing-only vs defined benefit plan – and may differ because of the specific terms and conditions and features selected by the employer. Plan operation and administration is not one-size-fits-all. Also, there are thousands of pages of IRS and U.S. Department of Labor (DOL) regulations and other guidance adding to the complexity.
It is not uncommon for an employer to make a mistake – an “operational error”. Such an error is not “fatal” and typically will not result in IRS tax penalties if discovered and corrected. The key to doing so, however, is to rely on formal correction procedures that the IRS approves.
Many years ago, the IRS published correction guidance known as the Employee Plans Compliance Resolution System (“EPCRS”). The EPCRS guidance has been improved and broadened multiple times by the IRS. The most recent enhancement to EPCRS was issued in July 2021.
Among the changes to EPCRS was an extension of the time, after an error, to find the mistake and complete full correction – the deadline generally now is the end of the third plan year after the plan year in which the error occurs. In the case of an error regarding failing to allow eligible employees to begin participating in a 401k Plan, however, the revised EPCRS guidance reduces the amount of employer corrective contributions that need to be made in certain circumstances if corrections are made soon after the error.
Several years ago, the IRS introduced the concept of “corrective amendments”. The typical EPCRS correction principle is to fix the plan operation so that it matches the written plan terms. However, the IRS recognized that in some cases, it is okay to “retroactively” change the plan terms to conform to the way the plan was operated. The circumstances and conditions for corrective amendments under EPCRS are limited. However, the restrictions have been further relaxed under the recent EPCRS update.
In very limited circumstances, the dollar amount involved in an error may be small enough that it may not have to be corrected. The dollar threshold for some such errors was increased in the revised EPCRS guidance.
The EPCRS guidance is a robust roadmap for plan corrections. If you have discovered a mistake, or when ACSI finds an operational error, we will help you to apply the EPCRS correction alternatives to fix the problem. To learn more, contact email@example.com or www.acsi-ny.com.