Knowledge is Power
Plan sponsors should strive to prevent plan operational mistakes by training their plan officials to recognize the relevant risks and to have a heightened awareness of the potential for error in each area including eligible compensation, participant eligibility, contribution calculations, missed required distributions, incorrect or ineligible distributions, failure to use forfeitures, and use of accurate census data for discrimination testing.
If not properly corrected, operational, plan document, or demographic errors or omissions are qualification failures that give the Internal Revenue Service (IRS) the ability to disqualify the plan. Plan disqualifications would cause all the tax deferrals to become immediately taxable, which would be a detriment to plan participants. Since the IRS does not want to harm innocent plan participants, plan disqualifications are rare. Instead, sanctions are assessed against employers and plan fiduciaries who made the mistakes and did not correct them timely. To avoid penalties, plan sponsors should follow the IRS’s correction program, the Employee Plan Compliance Resolution System (EPCRS).
EPCRS
The Employee Plans Compliance Resolution System (EPCRS) is the IRS framework for correcting failures in qualified retirement plans (e.g., 401(k), 403(b), SEP, SIMPLE IRA) that could cause the plan to lose its tax-favored status. The three main programs are the Self Correction Program (SCP), the Voluntary Compliance Program (VCP), and Audit Cap.
The Self-Correction Program (SCP) lets plan sponsors correct the most common operational failures without IRS involvement or a user fee. SCP is not available to correct document failures or qualification issues not appropriate for self-correction under SCP. This article will focus on the proper self-correction of the most common errors found during financial statement audits.
The Voluntary Correction Program (VCP) involves a submission of a written application to the IRS describing the error, proposing a correction, and providing backup documentation. VCP is used for both operational and document failures not eligible for SCP or when the plan sponsor wants formal IRS approval for a correction that is not pre-approved in SCP. To use VCP, the Plan must not be under IRS audit at the time of submission and the plan sponsor (not the plan) must pay a user fee (currently $1,500–$3,500 based on plan assets.) View our All Good Things Come to an End: A Tale of Significant Changes in VCP Fees Affecting Small Benefit Plans blog for more information. Once the IRS agrees with the proposed correction, it will issue a Compliance Statement confirming approval.
The Audit Closing Agreement Program (AuditCAP) addresses the correction of significant failures discovered during an IRS audit or examination. Insignificant failures can still be self-corrected after the IRS examination has begun. Other errors must be corrected pursuant to a closing agreement with the IRS, and a negotiated sanction or penalty must be paid in an amount that is generally higher than VCP but lower than the penalties for disqualification.
The bottom line is that SCP, VCP, and AuditCAP were created to help plan sponsors keep the plan qualified and protect participant benefits, and which correction program is used depends on the nature and severity of the failure, or whether the plan is under IRS review:
- Use SCP for small, early, operational errors.
- Use VCP for larger or non-eligible errors, or when you want IRS approval for a correction that is not pre-approved.
- Use AuditCAP if the IRS finds a failure that is not insignificant during an audit.
The Department of Labor’s Delinquent Filer Voluntary Compliance Program (DFVCP) and Voluntary Fiduciary Compliance Programs (VFCP) are beyond the scope of this article.
The SCP Correction for the Most Common Errors
The following section will enumerate the 20 most common errors identified during our plan audits and how to self-correct them under SCP.
1. Deferrals Withheld do not Agree with Deferrals Deposited
Matters Identified: Total deferrals withheld per payroll report do not agree with total deferral deposits to the trust, so a comparison by person was performed to isolate the contribution errors by person.
Correction Required:
- Amounts underfunded, adjusted for lost earnings, should be contributed to the affected participants.
- EPCRS specifically states that “corrective contributions are required to be made with respect to a current or former participant, without regard to the amount of the corrective contributions.”
- Amounts overfunded, adjusted for earnings, should be moved to the Plan’s unallocated plan asset account, except when they meet the permitted deminimis threshold:
- Rev Proc. 2021-30- Section 6.02(5)(e): Small Excess Amounts – Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $250 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover).
2. Timely Remittance of Deferral Contributions and Participant Loan Repayments
Background: The Department of Labor (DOL) requires the employer to segregate all employee contributions and loan repayments from its general assets as soon as administratively feasible. The DOL has repeatedly stated that the seven-day safe harbor available to small plans does not apply to large plans and that instead, they will look at patterns of deposit to establish how soon each large plan employer is able to remit deferrals and loan repayments.
Matters Identified: Deferrals and loan repayments were remitted between 3 and 7 days after the respective payroll dates.
Correction Required: Plan management must identify the late deposits and deposit lost earnings to the affected participant accounts and comply with the Department of Labor’s new self-correction component of the Voluntary Fiduciary Compliance Program, as needed. In most cases, the plan’s service providers, auditor, or ERISA counsel can assist with the interest calculation for an additional fee. View our Calculating Earnings for 401(k) and 403(b) Plan Corrections: Do Your Best to Do Better! blog for more information.
3. Discrimination Testing Performed with Unreconciled Census
Matters Identified: The payroll totals do not agree to the totals on the census data submitted for the discrimination tests.
Corrections Required: If incomplete or incorrect census data was used for the discrimination tests, and the test did not pass, plan management should consider whether the test needs to be rerun to determine a) whether additional refunds are needed, or b) whether HCEs were inadvertently refunded too much. Additionally, the plan sponsor should consider whether ERISA counsel should be retained to determine the appropriate correction if Highly Compensated Employee Refunds represent an Overpayment.
Annually, before submitting census data to the third-party administrator or the bundled provider to complete the discrimination tests, the column totals on the census report should be reconciled to the original-source payroll documents.
4. Incorrect Contribution Sources
Background: Different source codes have different distribution restrictions and different tax effects on the participants when they take a distribution.
Matters Identified: Contributions were not remitted to the Plan with accurate source type, including pre-tax deferrals, Roth deferrals, rollovers, employer match, employer profit sharing, employer safe harbor nonelective, and QNECs.
Correction Required: If payroll withholdings were done correctly and the remittance to the trust was deposited in the wrong source, plan management must identify all source corrections needed and request adjustments be made in the recordkeeping system to match what was reported to the participant on the W-2. Additionally, plan management must improve its policies and procedures to ensure contributions are remitted to the Plan with accurate source type.
5. Early or Late Entry into the Plan
Matters Identified: Entry dates as defined by plan provisions were not properly identified based on the date when participants met the eligibility requirements. Specifically, some employees contributed to the Plan prior to or after their calculated entry date, either due to late automatic enrollment or a delay in the implementation of participant elections. We discussed it with plan management, and they agreed.
Correction Required: Plan management must collaborate with the Plan’s service providers to execute a correction consistent with EPCRS or SECURE 2.0.
Correction May Not Be Required for Early Entry Resulting in Small Excess Amounts – Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $250 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount.
If the Excess Amount is greater than $250, the plan can distribute the excess to the participant, or the plan sponsor can retroactively amend the plan to reconcile the plan provisions to the plan operations.
However, if the Excess Amount exceeds a statutory limit, it must be distributed to the participant or forfeited if it was an employer contribution. If the participant or beneficiary has already received a distribution of an excess amount that exceeds a statutory limit, a notice must be distributed to the participant indicating that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically is not eligible for tax-free rollover). Corrective contributions plus interest must be deposited to participants who were not entered timely after making their election or who were not automatically enrolled timely, if required by plan provisions.
Corrective contributions plus interest must be deposited to participants who were not entered timely after making their election or who were not automatically enrolled timely, if required by plan provisions. The following chart summarizes the corrective contributions required for improper exclusion of newly eligible participants:
| Deferrals Begin by the First Paycheck ON OR AFTER | Corrective Contribution | Notice Requirement |
| First 3 months of the plan year | 0% QNEC
100% Missed Match |
No Notice |
| A rolling three-month period beginning with the first omission | 0% QNEC
100% Missed Match |
Notice Required |
| Automatic Contribution Arrangement by 9 1/2 months after the plan year of the failure | 0% QNEC
100% Missed Match |
Notice Required |
| Eligible inadvertent failures other than situations described above | 25% QNEC
100% Missed Match |
Notice Required |
| Eligible inadvertent failures other than situations described above | 50% QNEC
100% Missed Match |
No Notice |
| If the participant notifies the employer of the failure, deferrals must start by the last day of the month following the notification. | ||
- The omitted contribution can be based on:
- the participant’s election that was not implemented,
- the average deferrals for participants in the affected employee’s classification,
- for safe harbor plans, 403(b) plans and LTPT employees, the greater of:
- 3% or
- the contribution amount that is matched at 100%.
Service providers, including the auditor, are generally available to compute the missed contribution for an additional fee.
Plan management must implement policies and procedures to ensure accurate participant demographic data is tracked to determine proper eligibility dates and entry dates based on plan provisions. Plan management should complete a historical review of plan entry dates and initial contributions by employees to ensure no other missed entry dates require correction. Plan auditors and service providers are available to assist for an additional fee.
6. Use of the Wrong Definition of Eligible Compensation
Matters Identified: The compensation used for calculating employee deferrals or the employer contribution is not consistent with the definition of eligible compensation stated in the plan document.
The following types of wages were excluded from compensation when the plan document states these are eligible wages:
and/or
The following types of wages were included in compensation when the plan document states these are not eligible wages.
Correction Required: Plan management must arrange for the calculation of and deposit of corrective contributions to the affected participants consistent with EPCRS or SECURE 2.0.
The correction options include depositing a Qualified Nonelective Contributions (QNEC) for employees missed deferral opportunity, missed match, and related lost earnings and/or the distribution of employee excess elective deferrals to the affected participants.
Failures to withhold on eligible compensation must be corrected by depositing a QNEC amounting to:
- 50% of the deferral amount that should have been withheld, and 100% of the match on the entire omitted deferral, as applicable, or
- A QNEC of 25% of the missed deferral amount, plus 100% of the match on the entire omitted deferral can be contributed if the participant is issued a notice.
The plan’s service providers and/or auditor are available to assist with the computation for an additional fee.
7. Employer Match True-up Calculation Not Performed
Background: The plan document requires the match computation to be based on annual wages. The plan sponsor deposits the match with each paycheck as a budgetary and administrative convenience, but an annual true-up calculation must be performed at year end.
Matters Identified: During our audit, we noted that there are insufficient controls in place to ensure that the employer match is accurately calculated and remitted to the Plan. Specifically, the plan sponsor did not verify that each participant had received the full match using total deferrals divided by total eligible compensation to determine the annual deferral percentage for which an annual match was owed. Some of the employees sampled increased or discontinued their deferral election during the year, leading to a true-up match being owed to the following participants:
Correction Required: Plan management must identify or retain a service provider or the auditor to identify all affected employees and compute the employer true-up match contributions owed to each affected participant. Additionally, plan management put policies and procedures in place to ensure accurate calculation and deposit of employer true-up match contributions.
8. Untimely Notification or No Evidence of Notification to Newly Eligible Employees
Matters Identified: During our audit, we noted that plan management does not have adequate internal controls in place to ensure that newly eligible employees are timely notified and educated about their ability to participate in the Plan. There was no evidence that sampled participants who are not contributing were notified. For other sampled participants, notification and education was done after the newly eligible participants’ entry date based on plan provisions.
Correction Required: For participants who were not notified timely of their eligibility to participate in the Plan, the employer needs to calculate and deposit corrective contributions to the improperly excluded participants, including Qualified Nonelective Contributions (QNEC) for employee missed deferral opportunity, missed match, if applicable, and related lost earnings, in accordance with EPCRS. The following chart summarizes the corrective contributions required for improper exclusion of newly eligible participants:
| Deferrals Begin by the First Paycheck ON OR AFTER | Corrective Contribution | Notice Requirement |
| First 3 months of the plan year | 0% QNEC
100% Missed Match |
No Notice |
| A rolling three-month period beginning with the first omission | 0% QNEC
100% Missed Match |
Notice Required |
| Automatic Contribution Arrangement by 9 1/2 months after the plan year of the failure | 0% QNEC
100% Missed Match |
Notice Required |
| Eligible inadvertent failures other than situations described above | 25% QNEC
100% Missed Match |
Notice Required |
| Eligible inadvertent failures other than situations described above | 50% QNEC
100% Missed Match |
No Notice |
| If the participant notifies the employer of the failure, deferrals must start by the last day of the month following the notification. | ||
The omitted contribution can be based on the average deferrals for participants in the affected employee’s classification, and for safe harbor plans, 403(b) plans and LTPT employees, it can be the greater of 3% or the contribution amount that is matched at 100%.
The Notice to Participants
Within 45 days of being given the opportunity to make salary reduction contributions, the affected participants must receive a special notice containing the following information:
- General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred. The general information need not include a statement of the dollar amount that should have been deferred.
- A statement that appropriate amounts have begun to be deducted from compensation and contributed to the Plan (or that appropriate deductions and contributions will begin shortly).
- A statement that corrective allocations have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.
- An explanation that the affected participant may increase his or her deferral percentage to make up for the missed deferral opportunity, subject to applicable limits under section 402(g).
- The name of the Plan and plan contact information (including name, street address, e-mail address, and telephone number of a plan contact).
Service providers, including the auditor, are generally available to compute the missed contribution for an additional fee.
For participants who were notified, but there is no evidence that they chose to opt-out of plan participation, the employer should request and keep opt-out elections as evidenced that the participant chose a 0% deferral contribution.
Plan management must put policies and procedures in place to maintain adequate documentation that supports all eligible employees have been invited to participate in the Plan in a timely manner. If participants choose not to contribute, plan management should keep evidence that the participant chose a 0% deferral, as a best practice.
9. Missed Automatic Enrollment of Newly Eligible Employees
Matters Identified: Some newly eligible employees were not automatically enrolled in the Plan, and there is no documentation that they had opted out of participation. Since no written documentation of opt outs has been obtained, we could not corroborate that the participant was not supposed to be automatically enrolled without alternative audit procedures. Written documentation of opt-outs from auto enrollment is a recommended best practice.
Correction Required: Corrective contributions must be allocated to participants who were not automatically enrolled and did not opt out, including Qualified Nonelective Contributions (QNEC) for employee missed deferral opportunity, missed match, if applicable, and related lost earnings. Opt-out elections should be obtained from all participants who do not wish to be automatically enrolled.
Plan management must maintain documentation that supports each newly eligible employee is either timely auto enrolled into the plan or that the employee has opted out of plan participation.
10. 403(b) Universal Availability Rules – Not Followed
Matters Identified: None of the permissible exclusions were selected on the adoption agreement, but the plan sponsor excluded employees who worked less than 20 hours a week on average, students, or participants who would have contributed less than $200.
Correction Required: The plan sponsor must determine how many years the improper exclusions have taken place. If the period of failure is less than three months, the corrective contribution for the missed deferral opportunity is reduced to zero if the commencement of deferrals occurs within the three-month period from the start of the failure and issuance of the special notice occurs within the 45-day timeframe. 100% of the match on the missed deferrals must be contributed. If the period of failure is beyond the three months, there are two correction options that should be consulted with ERISA counsel:
- The plan sponsor can retain ERISA counsel to file a Voluntary Compliance Program (VCP) application to request permission to retroactively amend the plan provisions to the plan operations. Retroactive reduction of accrued benefits is difficult to obtain when the plan sponsor cannot prove that excluded participants were told that they were excluded from participation in the plan.
- The plan sponsor can make corrective contributions to all affected participants in accordance with the Internal Revenue Service (IRS) Employee Compliance Resolutions System (EPCRS). Corrective contributions should be deposited for all years for which there is information available, with a minimum of the mandated document retention period of seven years.
In accordance with the IRS safe harbor in Revenue Procedure 2021-30 Appendix A.05(6), the employer may deem the lost salary deferral amount to be the greater of:
- 3% of compensation, or
- The maximum deferral percentage for which the plan sponsor provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee.
- Other correction methods may be acceptable to fix this mistake. For example, a 403(b) plan sponsor might determine the missed deferral for excluded rank and file employees using a percentage based on the average deferrals for all non-highly compensated employees in the plan.
The corrective contribution can be 50% of the missed deferral amount (based on the above options) adjusted for earnings through the date of correction. Plan sponsors have the option to reduce the corrective contribution for the lost opportunity cost from 50% of the missed deferral to 25%, if they gave a Notice to all affected participants (see below). A match contribution must be allocated for the full amount of the missed deferral amount, not 50% or 25%.
Within 45 days of being given the opportunity to contribute elective deferrals, the affected participants must receive a special notice containing the following information:
- General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred. The general information need not include a statement of the dollar amount that should have been deferred.
- A statement that appropriate amounts have begun to be deducted from compensation and contributed to the Plan (or that appropriate deductions and contributions will begin shortly).
- A statement that corrective allocations have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.
- An explanation that the affected participant may increase his or her deferral percentage to make up for the missed deferral opportunity, subject to applicable limits under section 402(g).
- The name of the Plan and plan contact information (including name, street address, e-mail address, and telephone number of a plan contact).
Plan management must ensure the plan provisions regarding universal availability are administered in accordance with the plan adoption agreement.
11. Untimely Loan Repayment Setup
Matters Identified: Some participant loans did not have repayments set up to begin in a timely manner.
Correction Needed: The missed payments must be caught up, or the loan must be reamortized if the missed repayments will cause the loan repayment period to exceed the maximum five years permitted by the regulations (or longer for the acquisition of a primary residence), in accordance with the loan policy).
Plan management should request and review a listing of issued loans on a quarterly basis and reconcile the information with the payroll system to ensure that loan repayments are processed on a timely basis.
12. Loan Repayments Deducted Past Payoff Date
Matters Identified: Loan repayments continued after a participant’s loan was paid in full.
Correction Required: Plan management must return excess loan repayments deducted to the participant through a payroll correction. Additionally, plan management should implement policies and procedures to ensure loan repayment deductions are stopped once the loan is paid in full.
13. Delinquent Participant Loans
Matters Identified: Delinquent participant loans were not deemed distributed at the close of the grace period.
Background: IRS Regulations grant a grace period ending the last day of the quarter after loan repayments end for the participant to repay the loan, or the plan sponsor to declare it a deemed distribution. If the defaulted loan is inadvertently not deemed distributed, EPCRS permits the plan sponsor to process a deemed distribution in the year that the error is found. If repayments were discontinued by mistake and the participant is still employed, and the original repayment period has not passed, the repayments can be caught up in a lump-sum or reamortized.
Correction Required: Plan management should collaborate with the participant and/or the plan recordkeeper to complete a correction in accordance with the Internal Revenue Code or EPCRS, as described above.
In the future, plan management must ensure delinquent participant loans are timely deemed distributed.
Distributions
14. Unsubstantiated Hardship Distributions
Matters Identified: Plan management has not adopted the self-certification method in collaboration with the Plan’s third-party administrator or bundled provider. As required in the absence of a compliant self-certification process, the plan did not maintain source documentation to support hardship distributions requested, approved, and paid during the plan year. Documentation substantiating initiation and approval or self-certification of the reason for hardship distributions is necessary.
Correction Needed: For any participants who are still employed, plan management should secure proper substantiation for the hardship distribution already processed. In the future, plan management must ensure that source documentation is maintained to support distributions requested, approved, and paid, either through substantiation of the hardship or a compliant self-certification process. If the participant who received an ineligible hardship does not have the necessary documentation, the distribution could be considered an eligible inadvertent failure on the part of the employer.
SECURE 2.0 Relief from Correction of Eligible Inadvertent Overpayments:
IRS Notice 2024-77 provides that if the overpayment is an eligible inadvertent failure, the plan sponsor does not have to seek repayment from the participant unless the participant is a disqualified person.
Overpayments to disqualified persons under Internal Revenue Code Section 4975(e )(2) cannot be considered eligible inadvertent benefit overpayments. Disqualified people include:
- fiduciaries,
- owners of the company and their relatives (spouse, ancestor, lineal descendants and their spouses),
- officers,
- directors,
- 10% or more shareholders or partners,
- sole proprietors, and
- highly compensated employees who earn more than 10% of the total wages of the employer.
Overpayments to disqualified terminated participants considered to be de minimus ($250 or less) do not require correction.
15. Incorrect Net Distribution Calculations
Matters Identified: Vesting and forfeitures of some sampled participants were calculated incorrectly, which resulted in incorrect distribution payments.
Distribution Amount Too High: Correction Relief for Eligible Inadvertent Overpayment Failures
IRS Notice 2024-77 provides that if the overpayment is an eligible inadvertent failure, the plan sponsor does not have to seek repayment from the participant. Even if the employer takes no further action, the overpayment can be deemed to be corrected, even if the participant rolled it over to an IRA or another qualified plan. Hence, the participant does not owe any excise taxes for an ineligible rollover.
If the plan sponsor reallocates forfeitures, or the plan’s funding is subject to minimum funding requirements, the employer should make the plan whole by contributing the amount of the overpayment to the plan, so as not to negatively impact other participants by not attempting to recoup the overpayment from the participant.
If the plan sponsor chooses to pursue a reimbursement from the participant, and the participant is unable to repay, the distribution will be considered ineligible for rollover. If the participant completed a rollover to an IRA, excess contributions to the IRA will be subject to a 6 percent excise tax for every year the money remains in the IRA. The notice provided to the participant regarding tax treatment of the unreturned portion of the overpayment may be combined with a recoupment request.
The plan sponsor may also choose to amend the plan retroactively to increase the past benefit available to the participant or decrease the future benefit payments to the affected participants in order to adjust for inadvertent benefit overpayments. An amendment to increase past benefits cannot result in a different violation, such as exceeded limits, and cannot reduce anyone’s accrued benefit, which would be inconsistent with an overpayment.
Overpayments to disqualified persons under Internal Revenue Code Section 4975(e )(2) cannot be considered eligible inadvertent benefit overpayments. Disqualified people include:
- fiduciaries,
- owners of the company and their relatives (spouse, ancestor, lineal descendants and their spouses),
- officers,
- directors,
- 10% or more shareholders or partners,
- sole proprietors, and
- highly compensated employees who earn more than 10% of the total wages of the employer.
Overpayments to disqualified terminated participants considered to be de minimus ($250 or less) do not require correction.
Underpayments Must be Corrected
Nothing in EPCRS Rev Proc 2021-30 or IRS Notice 2024-77 eliminates the requirement for the employer to make a participant whole when the participant’s account did not receive enough of a contribution allocation or when there was an underpayment. In fact, EPCRS specifically states that “corrective contributions are required to be made with respect to a current or former participant, without regard to the amount of the corrective contributions.” Estimates are permitted when it is impractical or impossible to compute an exact correction.
For participants who received distribution underpayments, erroneously forfeited amounts should be reinstated to the affected participants’ accounts and subsequently distributed based on each participant’s original distribution instructions. If incorrect vesting computations or any other error caused a distribution to be less than it should have been, the participant must be made whole. The recordkeeper and the plan sponsor must collaborate to reinstate the underpayment amount to the participant’s plan account and process a distribution.
However, Rev. Proc 2021-30, Section 6.02(5)(b) of EPCRS provides some relief in cases involving the delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions.
In the future, plan management should review all distribution payments for correct vesting and forfeitures prior to payments being made by the Custodian. We also recommend that plan management complete a historical review of participant distributions to ensure that there are no other vesting and forfeitures calculated incorrectly that would require correction.
16. Taxes Withheld on Distributions
Matters Identified: The required 10% federal tax withholding for hardships and/or required minimum distributions was not consistently processed, but no source documentation was available to support that the lower tax rate withheld was at the direction of the participant.
Recommendation: Plan management should consult with the plan service provider and implement policies and procedures to maintain documentation of tax withholding waivers or changes by the participant.
17. Mandatory Distributions Not Processed
Matters Identified: Some terminated participant account do not exceed ($5,000 or $7,000) at year-end.
There is no procedural control in place to ensure that mandatory distributions are processed following severance of employment for participants with an account balance of ($7,000 or 5,000) or less, pursuant to plan provisions.
Correction Needed: Plan management must collaborate with its recordkeeper and/or TPA to periodically (at least annually) review the accounts of terminated employees and process mandatory distributions pursuant to plan provisions.
If mandatory distributions cannot be made because participants are unresponsive or cannot be located, the plan sponsor should collaborate with the third party administrator or the recordkeeper to demonstrate compliance with DOL’s missing participants guidance regarding efforts made to locate missing participants or the selection of a rollover distribution option for the benefit of missing participants.
18. Forfeiture Balances Are Not Used Timely
Matters Identified: Forfeitures used during the plan year, if any, are less than the forfeitures available to be used as of the end of the prior plan year. The IRS had granted a grace period to use any available forfeiture balance build-up, but the grace period ended at the end of the 2025 plan year.
Correction Required: The Plan must use or reallocate the forfeited accounts as soon as possible, and plan management must ensure that all forfeitures created are used pursuant to plan provisions.
19. Untimely Compliance Testing Corrections
Matters Identified: The compliance testing was completed later than 2 months and 15 days after the plan year end.
Correction May Be Required: If the compliance testing didn’t pass, plan management must consult with its service providers to verify whether excise taxes are owed for late corrections.
20. Documentation of Review of Plan Meetings and Fiduciary Oversight
Matters Identified: There is no documentation maintained of review of plan meetings or fiduciary oversight over the Plan. With the complexity of tax laws covering the qualifications of the Plan and plan fiduciary responsibilities, it is important that the responsible parties adequately document the due diligence exercised over the operations and oversight of the Plan.
Recommendation: Plan management and plan fiduciaries should meet periodically (as often as needed, but at least annually) and maintain documentation of meeting date, time, and attendees as well as meeting agenda, decisions made, and resulting action items. The periodic meetings should consider items such as:
- Consideration and approval of plan amendments (or recommendation of amendments for the Board of Directors);
- Compliance with ERISA regulations;
- Creation and monitoring of investment policy, selection of investment options, review of Plan’s investment performance and related fees;
- Employee complaints or concerns, if any.
Take Action
Whether it’s strengthening the plan’s processes and procedures to prevent the most common errors, swiftly correcting t errors once they are identified, plan sponsors should take action to ensure that the plan is being operated in accordance with its terms, or that errors are corrected to put the plan back in the position it would have been had the error not occurred. By being proactive and taking action, plan sponsors and service providers can collaborate to turn detection of common errors into prevention of common errors.
Es major precaver, que tener que lamentar.
It’s better to prevent than to have to regret.
