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Correct Your Retirement Plan Errors

A retirement plan helps you and your employees save money for retirement. However, plan errors can jeopardize your plan’s tax-favored status. Here are a few things you should know:

  1. How do plan errors happen?
  2. Why should I correct plan errors?
  3. How can I correct plan errors?
  4. Are there any resources to help me correct plan errors?

How do plan errors happen?

Despite your best intentions, different plan errors may happen. For example:

  • You don’t allow eligible employees to participate in the plan on time.
  • You don’t use the correct plan definition of compensation for certain plan operations (for example, contributions and nondiscrimination testing).
  • You miss the deadline to amend your written plan document for tax law changes.

To reduce the likelihood of plan errors, your plan should have internal controls.

Why should I correct plan errors?

Correct plan errors for you and your employees to continue to receive the tax benefits of having a qualified retirement plan, including:

  • Your deduction (up to certain limits) for plan contributions
  • Your employees' tax deferral of their pre-tax contributions and earnings until distribution

See Tax Consequences of Plan Disqualification for additional information.

How can I correct plan errors?

Generally, there are two ways you can correct plan errors if your plan isn’t being audited and you’ve discovered the error on your own.

  • Use the Self-Correction Program without paying any fee or notifying the IRS if:
    • your plan has sufficient compliance practices and procedures to avoid errors, and
    • the plan errors are insignificant operational mistakes, or significant operational mistakes that you correct within an IRS specified timeframe.

  • For any errors you can’t or don’t wish to correct under the Self-Correction Program, you can use the Voluntary Correction Program, which allows you to
    • correct qualification failures (errors that affect your plan’s tax favored status) with IRS approval, and
    • pay a fee based on the number of plan participants.

Are there any resources to help me correct plan errors?

You can use the Fix-It Guides to help you find, fix and avoid common mistakes in the following plan types:

  • 401(k)
  • 403(b)
  • SEP

You should also review:

Page Last Reviewed or Updated: 10-Feb-2014