Even with the best intentions and precise management, plan errors can occur. Some errors are simple and may be self-correcting. Other errors may require your client to complete one of the optional IRS debugging programs. If a plan error occurs, the plan sponsor must act quickly to ensure that appropriate corrective action is completed and that controls are put in place to prevent recurrence. Although this is not a complete list, some of the most common errors in the qualifying plans are:
o The plan document was not updated correctly;
o The plan did not work according to the plan document;
o The employee was not properly accounted for or applied;
Unqualified employees were allowed to participate (or reverse);
o Contributions were not deposited in a timely manner;
o No Participants pay the loan payments in a timely manner.
Invalid settlement applied to participants' accounts.
The deposits and annual reports were not completed or distributed correctly;
o The plan failed to take appropriate corrective action for failed non-discrimination tests.
The US Tax Authority recently published a comprehensive guide to the 401 (k) system reform that could help plan pastoralists for a better understanding of the Employee Compliance Plan (EPCRS). Under EPCRS, there are three elements:
1) Self-Correction Program (SCP) – allows the plan sponsor to correct some of the plan's failures without contacting the IRS.
2) Voluntary Correction Program (VCP) – The Plan Sponsor may, at any time prior to the review, pay a limited fee and obtain the approval of the IRS to correct the corrections.
3. CAP CAP program – The plan sponsor is allowed to pay a penalty and correct the failure of the plan while the plan is under review.
A complete copy of the manual can be downloaded from the IRS website.
Correcting the plan will often require direction and participation from the investment plan provider, the registrar, the administrator, and the potential legal counsel. If you suspect a plan error, please feel free to contact Steve Lamm at Hicks Pension Services for more information and instructions.