The SCP is one of three programs for correcting retirement plan errors that together are called the Employee Plans Compliance Resolution System (EPCRS). The other two EPRCS programs are the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).
You can self-correct an insignificant operational error at any time to preserve the tax-favored status of your plan. An operational error occurs when you don’t follow the written terms of the plan. Even where the operational error is significant, you may still be able to self-correct if action is taken in a timely manner.
For more information on the Self-Correction Program, see Self-Correction of Retirement Plan Errors.
These FAQs provide general information and shouldn’t be cited as legal authority.
- Can I restore my plan’s qualified status without making a VCP submission to the IRS under EPCRS?
- Can I ever self-correct a plan error past the two-year correction period and still not have to make a VCP submission?
- What are insignificant operational failures under the SCP?
- Can I call or write the IRS and ask if my failure is insignificant?
- What practices and procedures must be in place to be eligible for relief under the SCP?
- Is there a way to get IRS approval prior to audit regarding the appropriate way to correct a failure under the SCP?
- When self-correcting significant operational failures, what actions must a plan sponsor take by the end of the two-year correction period?
- Can a failure of the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) tests in a profit-sharing plan be corrected under the SCP?
- If a vesting failure occurs in which the plan terms were not followed, should the plan sponsor use SCP or the Voluntary Correction Program to correct the problem?
Can I restore my plan’s qualified status without making a VCP submission to the IRS under EPCRS?
Yes, in some cases you can restore your plan's qualified status by self-correcting the failure before the last day of the second plan year following the plan year for which the failure occurred.
Example: XYZ Company established a money purchase pension plan in 2004 and received a favorable determination letter. During 2018, while doing a self-audit of the operation of the plan for the 2016 plan year, the plan administrator discovered that, despite its established practices and procedures, XYZ Company failed to make the required contribution to the plan. XYZ Company is a calendar year taxpayer and the due date of its tax return is March 15th. XYZ Company filed a six month extension for this return. The due date of the contribution for the 2016 plan year was September 15, 2017. XYZ Company did not make this contribution at this time. Upon discovering the error, XYZ Company made the required contribution by the end of the 2018 plan year. The contribution was credited with earnings at a rate appropriate for the plan from the date the contribution should have been made to the date of correction. By making this corrective contribution before the end of the 2018 plan year, the plan met the requirements of self-correction and would retain its qualified status.
Can I ever self-correct a plan error past the 2-year correction period and still not have to make a VCP submission?
It depends. You can go beyond the 2-year correction period if the amount of the contribution is “insignificant.” EPRCS states that an insignificant operational failure can be corrected at any time. Self-correction is available for correcting an insignificant operational failure even if the plan or plan sponsor is under examination and even if the operational failure is discovered on examination. For a list of the factors to consider in determining whether or not an operational failure under a plan is insignificant, see below and Retirement Plan Errors Eligible for Self-Correction.
What are insignificant operational failures under the SCP?
The SCP permits plan sponsors to correct significant operational failures within two years of the year in which the failure occurred, provided the other requirements of the SCP are satisfied, whereas insignificant failures can be self-corrected at any time. Many factors are considered in determining whether operational failures are insignificant. These include, but are not limited to:
- whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure);
- the percentage of plan assets and contributions involved in the failure;
- the number of years the failure occurred;
- the number of participants affected relative to the total number of participants in the plan;
- the number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure;
- whether correction was made within a reasonable time after discovery of the failure; and
- the reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors).
This is not an exclusive list and no single factor is determinative. Failures will not be considered significant merely because they occur in more than one year. In addition, the IRS will apply these factors in a way that will not preclude small businesses from being eligible for the SCP merely because of their size.
The following examples illustrate the application of insignificant failures. Each example assumes that the eligibility requirements relating to SCP have been satisfied and that the plan has no operational failures other than those identified below.
Example 1: Employer X established Plan A, a profit-sharing plan. In 2016, the benefits of 50 of the 250 participants in Plan A were limited by Section 415(c). However, when the IRS audited Plan A in 2018, it discovered that, during the 2016 limitation year, the annual additions allocated to the accounts of 3 of these employees exceeded the maximum limitations under Section 415(c). Employer X contributed $3,500,000 to the plan for the plan year. The amount of the excesses totaled $4,550. Under these facts, because the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure, and the monetary amount of the failure relative to the total employer contribution to the plan for the 2016 plan year, are insignificant, the Section 415(c) failure in Plan A that occurred in 2016 would be eligible for self-correction.
Example 2: The facts are the same as in Example 1, except that the failure to satisfy Section 415 occurred during each of the 2014, 2015, and 2016 limitation years. In addition, the three participants affected by the Section 415 failure were not identical each year. The fact that the Section 415 failures occurred during more than one limitation year did not cause the failures to be significant; accordingly, the failures are still eligible for self-correction.
Can I call or write the IRS and ask if my failure is insignificant?
No, the IRS will not give an opinion as to whether or not the operational error is insignificant (unless the plan is under an Employee Plans examination). If you want certainty that the plan is still qualified, consider making a submission under the Voluntary Correction Program.
What practices and procedures must be in place for a plan to be eligible for relief under the SCP?
The IRS is concerned that the practices and procedures of a plan foster compliance with the requirements of the Internal Revenue Code.
- Practices and procedures may be formal or informal.
- Practices and procedures must be routinely followed.
- Practices and procedures need not be in place for a specific failure (as long as practices and procedures exist that evidence an overall effort on the part of the plan sponsor to maintain the plan in compliance with the Internal Revenue Code requirements).
- A plan document alone is not sufficient to establish evidence of good practices and procedures.
- An example of an acceptable practice or procedure outside of the plan document is a checksheet routinely followed for determining whether an employee is a key employee for purposes of meeting the top-heavy requirements.
Is there a way to get IRS approval prior to audit regarding the appropriate way to correct a failure under the SCP?
The SCP is a voluntary employer-initiated program that does not involve IRS approval; therefore, the IRS will not approve a plan sponsor's method of correction prior to audit. However, Revenue Procedure 2016-51 contains General Correction Principles designed to assist a plan sponsor in determining the appropriate method of correction for a failure. In addition, Appendix A and Appendix B of Revenue Procedure 2016-51 provide sample correction methods for certain failures. To the extent the plan sponsor uses the applicable correction method given in either of these appendices, the IRS will consider the correction a reasonable and appropriate correction for the failure. If the plan is audited, the IRS has the right to review whether the taxpayer made the correct determination that the failure was eligible for self-correction as well as whether the correction method is acceptable.
When self-correcting significant operational failures, what actions must a plan sponsor take by the end of the two-year correction period?
In general, correction must be completed by the end of the two-year correction period in order for a plan to be entitled to relief under the SCP. However, where a plan sponsor substantially completes correction within the correction period, the plan sponsor will not lose the relief provided under the SCP merely because correction wasn’t completed during the correction period.
There are two circumstances under which correction is considered to have been substantially completed:
- during the correction period, the plan sponsor is reasonably prompt in identifying the operational failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment to completing correction of the operational failure as expeditiously as practicable; and
- within 90 days after the last day of the correction period, the plan sponsor completes correction of the operational failure.
- during the correction period, correction is completed with respect to 85% of all participants affected by the operational failure; and
- after the correction period, the plan sponsor completes correction of the operational failure with respect to the remaining affected participants in a diligent manner.
In addition, a plan sponsor will not be considered to have failed to fully correct within the correction period where a plan sponsor takes reasonable action to find but has not located all current and former participants and beneficiaries to whom additional benefits are due. Reasonable action includes a commercial locator service, a credit reporting agency or internet search tools. If an individual is later located, the additional benefits must be provided to the individual at that time.
Can a failure of the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) tests in a profit-sharing plan be corrected under the SCP?
Yes. A failure of the ADP or ACP tests is treated as an operational failure for purposes of EPCRS. Under IRC Sections 401(k) and (m), a plan sponsor has until the end of the plan year following the plan year in which an excess contribution or excess aggregate contribution was made to correct the failure. The two-year self-correction period applicable to significant operational failures does not begin until the expiration of the statutory correction period.
Example: In 2018, a calendar year 401(k) plan sponsor discovers that, when testing its 2016 contributions for the ADP test, mistakes were made in determining the correct amount of compensation that should have been taken into account under the test. When the ADP test was rerun with the correct data, the plan sponsor discovers that the ADP test was failed. Assuming the other eligibility requirements of the Self-Correction Program are satisfied, if the ADP failure is a significant operational failure, the plan sponsor may correct the failure to satisfy the ADP test by the end of the 2018 plan year. If the ADP failure is an insignificant operational failure, the plan sponsor has even longer to correct the failure, and may correct even upon audit of the plan.
If a vesting failure occurs in which the plan terms were not followed, should the plan sponsor use SCP or the Voluntary Correction Program to correct the problem?
The decision of whether to use the SCP or Voluntary Correction Program to correct an operational failure depends on a number of factors, including: (1) the type of failure involved, (2) the practices and procedures under the plan, (3) whether the failure is significant, (4) whether a favorable letter has been issued with respect to the plan, (5) whether the failure is egregious, (6) when the failure is discovered, and (7) the amount of comfort the plan sponsor has with respect to the method used to correct the failure.
For a vesting failure, acceptable correction methods are described in Appendix B, section 2.03 of Revenue Procedure 2016-51. If the plan sponsor uses one of the two correction method for vesting failures described in the revenue procedure, it will have assurance that the IRS will find that correction method acceptable and the plan would be entitled to relief under the SCP with respect to its correction method. If the plan sponsor has acceptable practices and procedures and the failure is insignificant, the plan sponsor may use the SCP to correct the failure at any time, even if the plan is under examination. If the failure is significant, the plan would be entitled to relief under the SCP only if the failure is identified and corrected within the two-year correction period under the SCP and only if a favorable letter has been issued with respect to the plan. If the failure would be considered egregious, it would be eligible for correction under the Voluntary Correction Program, but not under the SCP.