Denver area companies that offer 401(k), 403(b) and other retirement plans are required to maintain compliance with the rules and regulations imposed by the Department of Labor (DOL) and the IRS. The rules which are designed to protect participants, their investments and ensure the proper disbursement of benefits, are regularly updated and changing. This can make it challenging for plan sponsors to maintain compliance and can lead to incidences of errors or mistakes. Since to err is human, as the old English adage asserts, the IRS created the Employee Plan Compliance Resolution System (EPCRS) which provides a process for correcting various errors using one of three programs. While helpful for many Denver plan sponsors, the IRS recently expanded the Self-Correction Program (EPCRS Revenue Procedure 2019-19) to expand the number of plan errors which can be corrected using the program. To help clients, prospects and others understand the changes, Hanson & Co has provided a summary of key details below.
Expanded Error Corrections
- Failure to Obtain Spousal Consent for Loans – The new regulations permit plan sponsors to use the Self Correction Program (SCP), under certain circumstances, to correct failure to obtain spousal consent for a plan loan. The plan sponsor must notify the affected participant and participant’s spouse of the issue, and then receive spousal consent for the existing loan. If the plan sponsor is unable to obtain spousal consent, then they must use another program to correct the problem.
- Number of Plan Loans Exceeds Maximum – The change now permits plan sponsors to correct the error of issuing too many plan loans to a participant. According to the regulations, the plan sponsor can pass a plan amendment to correct the issue.
- Failure to Repay Plans Loans – The new regulations allow plan sponsors to correct this error by requiring the participant to make a lump sum payment which would include all missed payments and corresponding interest, re-amortizing the outstanding loan balance or a combination of both. It’s important to note the IRS has stated this correction method may not be used if the maximum repayment period for the loan has expired.
- Plan Loans in Default – Plan sponsors may now correct loan default errors by reporting the loan as a participant distribution in the year when the default occurred. The distribution amount must be reported to the IRS using Form 1099-R.
Retroactive Plan Amendments
The recent changes also permit a plan sponsor to correct errors through the issuance of retroactive plan amendments. Common instances where a retroactive plan amendment might be used include allowing hardship distributions, permitting plan loans or a change in eligibility requirements. In order to adopt these amendments, three conditions are met. First, the corrective amendment must result in an increase of the participant’s benefit, right or feature. The increase mentioned in the first condition must be provided to all employees eligible to participate in the plan and finally, the increase must be permitted under IRC rules and should satisfy general SCP principles.
Maintaining compliance with established rules is essential to preventing issues of plan disqualification. It’s also essential to ensuring a smooth benefit plan audit process. Since these changes are currently in effect, it should make it easier for plan sponsors to correct errors. However, if you have questions about the changes or need assistance with a Denver 401k audit, Hanson & Co can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.