IRS Talks Retirement Plan Errors

Michael Sanders noted 401(k) plans make up the biggest number of examinations for the IRS.  Common errors in 401(k) plans include incorrect employer matching contributions, failure to correct ADP or ACP discrimination testing failures, plan account additions in excess of 415 limits, late deposits of employee deferrals, failure to use correct compensation, failure to include all eligible employees in discrimination testing and the misclassification of highly compensated and non-highly compensated employees.  

Sanders advises that plan sponsor staff responsible for plan administration know the terms of the plan and monitor plan limits throughout the year. He noted the late deposit of employee deferrals constitutes a prohibited transaction and subjects the sponsor to an excise tax as well as the financial burden of restoring income on those deferrals to participants’ accounts.  

Kathleen Schaffer said the most common errors the agency sees in 403(b) plans include excess elective deferrals made to plan, due to employees having more than one W-2 or from not putting in place limits for those employees eligible for the 15-year of service catch up contribution allowed in these plans, and also universal availability violations. Schaffer said the universal availability rules are still misunderstood by some plan sponsors and some entities don’t have dedicated retirement plan staff who are familiar with rules or plan terms.  

According to Schaffer, in Multiple Employer Plan (MEP) arrangements, the most common error is not having participation agreements for all participants. Employers or unions may be contributing to the plan for an employee who has not signed a participation agreement. The agency also sees mathematical errors and improper contribution amounts, often because of high employee turnover in these plans.  

Sanders noted the IRS correction programs are still operating under Rev. Proc. 2008-50. He’s not sure when new guidelines are coming out, but said the biggest change is guidelines for written plan document failures in 403(b) plans.  

The objective of the available programs in Rev. Proc. 2008-50—Self Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (CAP)—is to restore the plan to the position it would have been in had the error not occurred, Schaffer said. The correction must be reasonable and appropriate, and what that means is decided on a case-by-case basis.  

She noted the plan is disqualified as of the date of the error, so corrections must be made as of that date, regardless of any new rules or plan provisions.  

Sanders added,  generally, correction of an egregious error must be made within two plan years, and insignificant failures can be corrected any time through SCP. An example of an egregious error is a plan that only benefits highly compensated employees.  

Self correction is only available for plans that have procedures in place that would allow the correction. Schaffer said such procedures include an accurate and timely census of participants, current plan document and knowledge by the sponsor of its terms and accurate and timely records of employee deferrals.