A Retirement Plan Protected From IRS Attack
-- Mission Impossible? Not Any More...

Your mission, Jim, should you choose to accept it, is to administer our retirement plan in such a manner that the IRS will not threaten its tax qualified status, despite the occasional mistakes you and your team will make in administering the plan.

This charge previously created an impossible mission for human resource and employee benefits professionals who inevitably would find errors committed in the plan's operation. Such errors place a plan in a precarious position because of the IRS's stance that it can disqualify a retirement plan on the basis of an error, causing negative tax implications for both the company and the plan participants. Faced with this threatening possibility, an administrator's only means of accomplishing this mission was to submit to the IRS a description of the errors and to correct the errors in an IRS approved manner. This course of action was often less than satisfactory because the IRS's two voluntary correction programs, the Voluntary Compliance Resolution Program and the Walk In Closing Agreement Program, were often time consuming and by the end of the process, expensive.

Now, through a newly blessed self-correction of errors program widely referred to as APRSC, plans may be able to correct operational errors without filing an IRS submission. APRSC defines an operational error as an error arising from the failure to comply with the terms of the plan. For example, if a plan provides that all employees will become eligible to make 401(k) deferrals after completing one year of service, then failure to provide an eligible employee with the opportunity to make 401(k) deferrals after the employee completes one year of service constitutes an operational error. The error is considered an operational error regardless of the reason why the error arose.

The beauty of APRSC is that it allows a plan to correct an operational error without being subject to penalties, filing fees or IRS submissions. This means that a plan may have a clean bill of health in a much more rapid and cost-effective manner. To rely on the protection of APRSC and retain the plan's tax qualified status despite operational errors, the following requirements must be met:

  • the errors must be corrected by the end of the plan year following the plan year in which the errors occur
  • the errors must be corrected by placing the plan and the plan participant in the place they would have been in had the errors not occurred
  • the plan must be administered under established practices and procedures that are reasonably designed to prevent operational errors
  • the errors must have arisen from the plan's failure to follow its procedures
  • the plan must have a current determination letter
  • the plan must not be under an IRS audit at the time the errors are corrected
  • the plan must not have received notice that the IRS has scheduled a plan audit
  • the errors must not involve the misuse or diversion of plan assets

 


It is too late to utilize APRSC once the plan receives notice that it is scheduled for an audit. Further, the most useful APRSC correction method is only available for errors corrected by the end of the plan year following the plan year in which the errors occur. After the one year period, APRSC is limited to "insignificant" operational errors, a standard that is difficult to meet. Under APRSC, plans must correct all errors for all years in which errors exist. Because of the limited scope of APRSC after the one year correction period, plan administrators who want to have APRSC in their arsenal should attempt to identify and correct operational errors as soon as possible. 

Nancy C. Brower  is a partner in the law firm of Poyner & Spruill, practicing in the Employee Benefits Section in the firm's Charlotte office.

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