The pandemic has disrupted many businesses and it is understandable that retirement plan sponsors may have unintentionally fallen behind when it comes to keeping track of compliance procedures and deadlines. However, once a plan mistake has been made or a deadline missed, it is important to correct it in a timely manner, so tax-favored status is not lost.
Generally, retirement plan mistakes can be corrected in one of two ways:
- During a plan’s operation, a mistake can be fixed to match the plan’s terms, or
- In certain circumstances, an employer may retroactively amend the plan so that its provisions match the way the plan was operated.
Suspending or Reducing Employer Contributions
An issue that arose during the pandemic was the suspension or reduction of employer matching contributions. This is not a surprise, with many businesses, especially small businesses, being hit hard by the COVID-19 crisis. In fact, more than 1 in 10 plans (11.5%) with fewer than 50 participants reduced or suspended their matching contribution, which is three times the number of organizations with 5,000 or more participants. But there is good news, according to the U.S. Defined Contribution Plan Sponsor Survey, most employers that suspended or reduced employer contributions in 2020 expect to reinstate them in 2021, with 60% reinstating the contribution to the same level.
It is important for plan sponsors to note that:
- If the retirement plan provides matching or nonelective contributions that are written into the plan document, a formal plan amendment is required to suspend or reduce contributions.
- This then requires a Summary Material Modification (SMM) which updates the Summary Plan Description (SPD).
- Plan Sponsors have 210 days after the end of the year in which the material change was adopted to distribute the SMM to participants.
- Although not required, it is encouraged to notify participants sooner rather than later.
A discretionary employer contribution that is not stated in the plan document does not require a formal plan amendment if the employer chose not to make one during the pandemic. It is still a good idea to communicate this to participants who may have received a discretionary contribution in the past so that they may make changes to their deferral rates as needed.
EPCRS Relaxes Correction Requirements
The good news is that many non-egregious plan errors can be self-corrected through the IRS’ Employee Plans Compliance Resolution System (EPCRS). EPCRS offers the Self Correction Program (SCP), which allows plan sponsors to correct many operational plan errors without contacting the IRS or paying a fee. An operational error occurs when you fail to follow the plan document.
Recently Revenue Procedure 2021-30, updated EPCRS which made some major changes to its correction programs. It has expanded its self-correction options with changes effective as of July 16, 2021. Below are a few highlights:
- For significant operational failures, the self-correction period is extended from two to three years.
- The requirement that all plan participants benefit from the retroactive amendment was removed, which makes it easier to use retroactive plan amendments to correct operational failures under SCP. This is helpful as operational failures typically do not impact all plan participants.
- There is now an extension of a safe harbor correction method to correct missed elective deferrals for eligible employees in 401(k) and 403(b) plans that have an automatic contribution feature.
The Bottom Line
Plan Sponsors should review their retirement plan document annually to ensure the plan is still in compliance. EPCRS has relaxed many of its requirements, making it easier for self-correction. The IRS understands that mistakes happen and ultimately wants errors to be corrected so a plan will not be disqualified. If a mistake has been made, document each step of the correction process, and keep notes in a file that explains why a corrective action was taken. Having procedures in place will be helpful in case the retirement plan is ever audited down the road.
Your ABG representative is available to help you answer any questions you may have about correcting an error or filing a formal amendment.