Enhanced Correction Options: I Didn’t Know What I Was Missing!
Mistakes happen…all the time, especially in retirement plan administration. For years, I have been thankful for the self-correction opportunities granted by the IRS Program, the Employee Plan Compliance Resolution System. With each update to the program, my clients would benefit from additional opportunities to self-correct insignificant errors at any time, or significant errors generally within three plan years of the date of the error. When an error was not eligible for self-correction, the client could file a Voluntary Correction Program (VCP) application. All along, I have thought these were excellent alternatives, but it turns out, everything can always be better. SECURE 2.0’s improved self-correction opportunities showed me that I didn’t know what I was missing.
An Honest Mistake is an Honest Mistake:
Significance and Timing of Failures No Longer a Factor
Why limit self-correction opportunities for honest mistakes based on when they happened or their subjectively determined significance? Any “eligible inadvertent failure” that was not egregious and does not involve the diversion or misuse of plan assets or an abusive tax avoidance transaction can now be self-corrected.
Since the “eligible inadvertent failure” definition is very broad and is not limited to particular types of failures like operational errors or plan document errors, many errors that were previously ineligible for self-correction may no longer have to go through the Voluntary Correction Program (VCP). For example:
- plan loan amounts greater than the limits or repayment terms longer than permitted
- plan document failures such as the failure to timely adopt a compliance amendment
- demographic failures
- employer eligibility failures
Since SECURE 2.0 does not limit the types of failures that can be self-corrected to operational or plan document failures, pension professionals are hopeful that the above errors will be eligible for self-correction but the industry awaits clarification and hopefully an indication that good faith compliance will be accepted until the EPCRS is officially updated.
No Deadline Does not Mean There’s No Rush: Do Not Delay!
This expanded opportunity to self-correct eligible inadvertent failures is available unless:
(1) the failure was identified by the IRS before any actions that demonstrate a specific commitment to implement a self-correction with respect to the failure and
(2) the self-correction was not corrected within a “reasonable” period of time after the failure was identified.
No Deadline Does Not Mean You Can Procrastinate: Eligibility for self-correction is driven by when an error is discovered and not by when it occurred or whether the failure is “significant” or “insignificant.” As a result, it is now possible to correct even significant errors that occurred more than three years ago. Although the SECURE Act 2.0 specifically states that the correction period “is indefinite and has no last day.”, it also requires a good faith effort to correct within a reasonable time, so DO NOT DELAY!
Until the IRS updates EPCRS and clarifies the exact parameters for self-correction, plan sponsors must continue to demonstrate a commitment to establishing policies and procedures to ensure compliance and a commitment to timely self-correction upon identification of an error before it is identified by the IRS.
Read more about the SECURE Act 2.0 in Maria Hurd’s Blog Series
- The SECURE 2.0 Act of 2022: Increased Retirement Savings; Enhanced Self-Correction of Operational Failures; Decreased Costs to Implement a Plan
- SECURE Act 2.0 Brings New and Improved Self-Correction Opportunities
- Coming Soon: SECURE 2.0: Mandatory Automatic Enrollment Coupled with Corrective Contribution Relief for Automatic Enrollment Failures
- Coming Soon: SECURE 2.0: New Distribution Options
