Many mistakes in operating your retirement plan can be self-corrected without filing a form with the IRS or paying a fee. Eligible operational failures include:
- failure to follow the terms of the plan
- excluding eligible participants
- not making contributions promised under the plan terms
- loan failures
Document failures aren’t eligible for self-correction. A document failure occurs when you don’t have your plan document up-to-date or if your plan document doesn’t fully comply with the tax law.
Significant and insignificant failures
An insignificant operational failure can be self-corrected at any time. You must self-correct a significant failure within a certain timeframe. See the summary chart.
Significance is determined based on the facts and circumstances. Factors to consider include:
- other failures in the same period (not how many people are affected)
- percentage of plan assets and contributions involved
- number of years it occurred
- participants affected relative to the total number in the plan
- participants affected relative to how many could have been affected
- whether correction was made soon after discovery
- reason for the failure
No single factor is determinative. Failures are not significant just because they occur in more than one year. The IRS will not interpret these factors to exclude small businesses.
Example: The benefits of 50 of the 250 participants in Plan A are limited by the IRC Section 415(c) compensation limits, but the plan’s contributions for three of these employees nonetheless exceeded the maximum contribution limitations. The sponsor contributed $3,500,000 for the plan year, and the excess contributions totaled $4,550. This failure is insignificant because of the small ratio of the number of participants affected by the failure relative to the total number of participants who could have been affected and the amount of the failure relative to the total employer contribution to the plan for the plan year. The failure is still insignificant if the same failure occurred for three separate plan years, or if the three different participants were affected in each of the three years.
Other eligibility requirements for self-correction
- The plan sponsor must have routinely followed established procedures to operate the plan in compliance with the law. A plan document alone isn’t evidence of established procedures.
- The failure occurred because:
- an oversight or mistake occurred in applying the plan’s procedures, or
- the procedures that were in place, while reasonable, weren’t sufficient to prevent the occurrence of the failure.
Plan document failures aren’t eligible
Plan document failures, including late plan amendments, aren’t eligible for self-correction. Please use the Voluntary Correction Program to resolve these failures.
More on self-correcting plan errors:
- Self-correction of retirement plan errors
- Steps to self-correct plan errors
- Timing of retirement plan self-correction
- Special rules for self-correction of retirement plan errors
- FAQs regarding the self-correction program