Last week, the IRS announced changes to its voluntary program that allows employers to correct retirement plan operational errors. The program, known as the Employee Plans Compliance Resolution System (EPCRS), allows employers to correct operational errors by either (i) seeking IRS approval of a proposed corrective action; or (ii) self-correcting by taking a prescribed corrective action.

In the recent announcement, the IRS identified three opportunities for employers to make much smaller corrective contributions if the corrections are made soon after the errors occur. The first correction relates to automatic contribution arrangements. If an employer fails to follow its automatic contribution arrangement with respect to one or more employees and the employer corrects this error within nine and one half months after the end of the plan year in which the employees should have been first enrolled, the employer does not need to make a contribution for missed employee deferrals to the affected employees. If the correction is not made in this time frame, then the correction would likely require a contribution equal to 50% of the automatic deferral rate for each affected employee.

The second opportunity applies to any employer who discovers and begins correction of elective deferral errors within three months of the error. This correction also allows the employer to correct without making a 50% contribution for missed deferrals. The third opportunity applies when the correction is not discovered in the first three months but is fully corrected within two plan years. If the correction is made in this time frame, the employer may make a contribution equal to 25% (rather than 50%) of the missed deferrals. In each of these situations, the employer must finish the correction timely, notify the impacted employees and make the employer matching contributions (if any). These new correction methods are available immediately.

This latest guidance from the IRS highlights the importance of regularly conducting plan audits, particularly with respect to the interplay between an employer’s payroll and HRIS systems and the retirement plan’s recordkeeping systems. We recommend that employers design a periodic self-audit program to review their plan’s operational compliance. For many employers, relying on the CPA’s annual audit of the retirement plan may not be adequate to take full advantage of these corrections.

Additional Information

If you would like to discuss updating your retirement plan procedures to minimize errors and correction costs, please contact your Kutak Rock LLP attorney or a member of the Employee Benefits Practice Group.