Even when solid procedures, paid experts, and great diligence are in play, mistakes get made in the sponsorship of retirement plans. It’s always best for plan sponsors to be proactive about identifying and attending to errors. Provisions in the SECURE 2.0 Act make corrections for the protection of participant benefits even more viable than previous regulations. Experts explain.
Reporting for Benefits Pro, Lynn Cavanaugh shares that SECURE 2.0 “includes changes that make it easier for retirement plan sponsors to correct errors or failures in order to protect participant benefits,” and encourages plan sponsors to take advantage, noting:
The SECURE 2.0 Act, which stands for Setting Up Every Community Retirement Enhancement, expands the Employee Plans Compliance Resolution System (EPCRS), the IRS’s program which allows plan sponsors to correct errors to protect benefits and make sure plans are tax compliant. In Notice 2023-43, the IRS provides interim guidance, which became effective May 25, regarding these changes….SECURE 2.0 still has a few technical glitches that Congress will gradually iron out, but plan sponsors should not let that dissuade them from taking advantage of the chance to self-correct errors. Notice 2023-43 encourages self-correction and identifies issues which currently cannot be self-corrected. Bottom line, self-identifying and correcting failures in a timely fashion leads to better results than correcting them while subject to an IRS examination or DOL investigation.
Attorney Sharon Kowal Freilich, chair of the Labor, Employment Law & Employee Benefits practice at Pullman & Comley explains that under SECURE 2.0, the Employee Plans Compliance Resolution System (aka EPCRS) there are three mechanisms for addressing plan failures or errors: “self-correction, the Voluntary Compliance Program (VCP), and the Audit Closing Agreement Program (Audit CAP).” Additionally, note: SECURE 2.0 introduced the term “Eligible Inadvertent Failures” to expand the types of errors that can be self-corrected and the time limit for completing the correction. As Freilich details:
An Eligible Inadvertent Failure is any operational or document failure that occurs despite practices and procedures being in place to prevent it. Plan sponsors must be able to show that it did have procedures in place to avoid the error, and that it routinely followed them. The error had to have occurred because of an oversight or a mistake in applying those procedures — not because no procedures were in place.
Generally, under SECURE 2.0, there is no set deadline for completing the self-correction of an identified Eligible Inadvertent Failure. In addition, Notice 2023-43 IRS clarifies that the requirement that the plan have a favorable determination letter to self-correct no longer applies…..Instead of the former three-year window for self-corrections of significant failures, plan sponsors can now self-correct errors without a fixed timeline for completion of the correction….
Being proactive is highly advantageous for plan sponsors when it comes to addressing errors. However, once the need for correction is identified, action must be expedient. According to Freilich the window of opportunity closes “if the plan or plan sponsor comes under IRS examination before the plan sponsor begins actively pursuing correction of an identified failure.” The same is true if the self-correction is not completed within a timely manner. It’s also important to understand that there are limits to self-correcting: “Egregious failures may not be self-corrected. These include errors that relate to diversion or misuse of plan assets, or those directly or indirectly related to abusive tax avoidance transactions.” Summing up, the expert recommendation for plan sponsors is:
Make the most of the opportunity presented by SECURE 2.0 to begin an internal audit. Take a good look at the plan, review all the documents and the corresponding procedures, and make sure there’s not a disconnect between the two. If they find that they do need to self-correct an error, the sooner the better. The IRS is actively encouraging this. It recently completed a pilot program for self-audits in which it invited 100 plan sponsors to identify what could be self-corrected within 90 days. It seems likely that the pilot program will become permanent in some form, although details such as the response time could change.
Don’t Do This…
Assume that the plan’s third party administrators and service providers have you covered in the event of errors. For plan sponsors, the reality is: fiduciary responsibilities can be reduced, but never eliminated. Experts remind us: “Some plan sponsors think if they outsource administration, oversight, or supervision of employee benefit plans, that they’re also outsourcing the liability. The liability exposure in that instance is the decision that’s made to utilize third party services.”
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