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Practice Management

A Look at Corrective Amendments

John Iekel
 
Mistakes in complying with reporting requirements happen; they may even be all but inevitable. And when they do take place, corrective amendments are a way to fix those errors. A recent webinar took a look at some of them. 
 
“Plan document failures are always considered significant,” remarked Robert Richter, Retirement Education Counsel, American Retirement Association. He focused on three means of correcting errors: amendments under the IRS Employee Plans Compliance Resolution System (EPCRS), amendments under Treas. Reg. 1.401(a)(4)-(11)(g) and corrections to scrivener errors.
 
EPCRS
 
The components of EPCRS are the Voluntary Correction Program (VCP), Self-Correction Program (SCP), the and the Audit Closing Agreement Program (Audit CAP). 
EPCRS had allowed four types of plan document failures to be self-corrected: 
  • loans made without loan provision in plan; 
  • hardships without hardship provision in plan; 
  • violations of Section 401(a)(17), if corrected by increasing the contribution rate for everyone; and 
  • early inclusion of otherwise eligible employees, if predominately non-highly compensated employees
Richter noted that under Revenue Procedure 2019-19, the use of the SCP expanded for certain plan amendments. Under that revenue procedure, one can use the SCP to correct an operational error by plan amendment if: 
 
1. The amendment conforms to plan operation. 
2. The amendment satisfies and is consistent with all other requirements of the Internal Revenue Code and EPCRS; it must have practices and procedures, and a two-year correction period for significant errors.
3. The amendment increases benefits, rights or features. It must increase benefits, rights or features to all eligible participants, said Richter, and it is not clear if this is the same definition of “benefits, rights or features” under the 401(a)(4) regulations. 
 
The expansion of the SCP, Richter added, also addresses certain non-amender failures: (1) missed restatements of pre-approved plans; and (2) failure to timely adopt interim amendments. These are always considered significant errors and must be corrected within the two-year correction period, he said. Further, the failure begins in the plan year that includes the end of the applicable remedial amendment period.
 
Using the SCP for non-amendment failures, Richter said, applies only to 401(a) plans and 403(b) plans. The plan must have a favorable letter and cannot be used: 
  • for failure to timely adopt an initial plan;  
  • to fix demographic (we’ll get to this under -11(g)); nor 
  • for the late adoption of discretionary amendments.
Richter noted that two restatement deadlines have passed: the deadline for 403(b) plans was April 30, 2020, and the deadline for DB plans was July 31, 2020. The deadline for DC plans, however is still to come: July 31, 2022 (the end of the 6-year cycle is Jan. 31, 2023).
 
Treas. Reg. §1.401(a)(4)-11(g) Amendments
 
Treas. Reg. §1.401(a)(4)-11(g) amendments may allow a plan amendment to correct a failure, Richter said, and a corrective amendment may retroactively increase or grant benefits or accruals. They are allowed for purposes of: 
  • satisfying Section 410(b) coverage;
  • satisfying Section 401(a)(4) nondiscrimination;
  • expanding a benefit, right or feature; 
  • the Section 401(a)(26) minimum participation rules under Treas. Reg. §1.401(a)(26)-7); and 
  • Section 415. In that case, they are treated as an annual addition for the year to which it relates, but it is not clear if the timing rule applies (30 days after due date of tax return plus extensions).
Among the ground rules, Richter said, are: 
  • The amendment must be adopted and put into effect on or before the 15th day of the 10th month after the end of the plan year to which it applies.
  • The amendment must have substance.
  • Retroactive benefits must be provided to a nondiscriminatory group of employees when applying the amendment to the prior plan year.
There are some caveats, Richter said. Treas. Reg. §1.401(a)(4)-11(g) does not affect deductions under Section 404 deductions, nor does it affect minimum funding under Section 412. Also, benefits, rights and features cannot be reduced retroactively, while there is a limited exception if one is eliminating a benefit, right or feature, and the plan amendment must be effective for the entire plan year—although there is an exception for benefits, rights or features.
 
Scrivener Errors
 
Scrivener errors frequently are either approved or not questioned by IRS, Richter observed. “Be careful,” he warned, adding, “You just never know.” He said that one should be especially careful when a reduction in benefits is involved. IRS approval does not provide protection from participant causes of action, he noted.