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:
- How do plan errors happen?
- Why should I correct plan errors?
- How can I correct plan errors?
- 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.
- A plan loan to a participant goes into default and you did not issue a Form 1099-R to report the deemed distribution.
To reduce the likelihood of plan errors, your plan should have internal controls.
Why should I correct plan errors?
Correct plan errors so that you and your employees can 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 or that you correct within an IRS-specified timeframe.
- For failures fixed after April 19, 2019, SCP was expanded to permit:
- The self-correction of certain plan document failures,
- Correction options and possible relief from deemed distributions associated with certain, specified failures involving plan loans made to plan participants, and
- Additional opportunities for correcting certain operational failures by plan amendment
- For any errors you can’t or don’t wish to correct under the Self-Correction Program, you can use the Voluntary Correction Program.
- correct qualification failures (errors that affect your plan’s tax-favored status) with IRS approval, and
- pay a user fee generally based on the amount of assets that are in the plan.
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:
- SIMPLE IRA
- Revenue Procedure 2019-19
- Expanded Self Correction Program - EPCRS Rev. Proc. 2019-19
- Fixing Common Plan Mistakes - articles that describe how to spot problems in your plan and correct mistakes.
- A Guide to Common Qualified Plan Requirements - list of some important plan requirements to help you apply practices, procedures and internal controls to monitor your plan operations.