Football and plan corrections are often on my mind this time of the year. As the Bengals kick off their season, late summer is also the time when we receive an influx of questions from plan sponsors regarding correcting retirement plan errors. The timing is predictable because many of these issues come to light as plan auditors are finalizing their review and preparing their reports for the plan’s Form 5500 filing. Retirement plans provide important benefits to employees but administering them is a complicated process. Plan errors are not uncommon and can arise for even the most diligent plan sponsors. Given that an error will inevitably occur during the lifespan of your retirement plan, it is critical that you have a playbook ready to appropriately and timely respond when errors are discovered.
I like the term playbook for correcting plan errors, as it indicates that it’s important to start with a plan in place but be able to adapt if necessary. Just like a quarterback knows that a good play might need to be adjusted after analyzing a defensive set, there is not a one- size- fits -all -solution or linear checklist that can be used to correct all plan errors.
The first step in your correction playbook should always be to assess the damage. Plan provisions should be reviewed to confirm that an error actually occurred under the terms of the plan. We have solved issues raised by auditors for clients by discovering that the auditors had not been provided with the plan’s most recent restatement or amendments that changed the plan’s definition of compensation. Making sure everyone is on the same page is an important place to start. If it does appear that plan terms were not followed, you should review plan records to ensure the scope of the error was limited to the issues raised by the auditor. Plan corrections can be a pain, but an even bigger pain is correcting the same mistake multiple years in a row.
The most common errors we see are related to delinquent participant contributions. The playbook on late deferrals was reset this year when the Department of Labor (DOL) updated its Voluntary Fiduciary Compliance Program and now permits self-correction for certain errors. We have written extensively on these corrections, and you can read more about the DOL’s new update to correction procedures here.
Incorrect application of a plan’s definition of compensation is the next most common error we see raised by auditors. This error can be caused by numerous sources. For example, deferrals might not have been taken out of an employee’s bonus or not taken out of an employee’s final paycheck after termination of employment, or an otherwise eligible class of employees could have been improperly excluded from participating in the plan completely.
After damage has been assessed, the next step in your playbook should be to make appropriate corrections. The IRS has the Employee Plans Compliance Resolution Program (EPCRS) that outlines correction procedures for multiple operational errors, including whether a plan sponsor may self-correct or must correct through its Voluntary Correction Program. The general rule for missed deferral opportunities is to provide affected participants with a 50% QNEC (adjusted for earnings), but many exceptions apply based on the type of error, plan, and timing of corrections.
Many plan sponsors believe that the correction process has been completed once affected employees have been made whole and the plan has been brought into compliance. But the last step of your playbook will remind you to document all corrections, including the steps that have been taken to ensure the error does not continue to occur in the future. This final step is important for fulfilling your fiduciary duties to the plan.
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