PSNC 2017: How to Repair Common Plan Errors

What programs are available to help when a plan error gets committed?

By Rebecca Moore | June 09, 2017
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No one is perfect, not even plan sponsors. Mistakes will be made.

Speaking at the 2017 PLANSPONSOR National Conference, in Washington, D.C., Tami Guimelli, assistant vice president, Employee Retirement Income Security Act (ERISA) attorney, benefits consulting group at John Hancock Retirement Plan Services, discussed common plan mistakes and how to navigate the regulators’ various correction programs.

Guimelli explained that the self-correction program (SCP) is part of the Internal Revenue Service (IRS)’ Employee Plans Compliance Resolution System (EPCRS) and allows plan sponsors to correct operational plan failures. The voluntary correction program (VCP) covers operational failures, but also demographic failures and plan document failures.

There is a fee involved with the VCP. Plan sponsors file a formal submission process and pay a per-participant fee. Guimelli said the IRS will review the plan sponsor’s proposed correction and, hopefully, approve it and send the sponsor a compliance letter. The sponsor will have 150 days to fix the error.

The closing agreement program (CAP) is the most expensive IRS correction program, but sometimes the fee can be negotiated down. An error that would require the CAP could be one the IRS finds during an examination of the plan; it would disqualify the plan and make it and participant contributions subject to taxation.

Guimelli noted it is easier to fix a problem before the IRS finds it.

There is a difference between a significant and insignificant failure. Guimelli explained that the determination is based on facts and circumstances—whether it is a one-time or recurring error, how many participants it affects, how much in plan assets is affected, and how long the error has existed. She said, if the error has been going on for two years or less, it could be considered insignificant. If it is insignificant, it can be fixed at any time, even if the plan is under audit.

If the error is significant, though, the plan sponsor must correct it no later than the end of the second plan year following the failure. For example, Guimelli said, if a plan failed actual deferral percentage and actual contribution percentage (ADP/ACP) testing and didn’t fix the testing failure by the end of the following year, that’s when the two-year-period correction program under the IRS EPCRS would start.

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