Operational Non-Compliance in ERISA Qualified Plans Can Cause Problems for Employers

September 15th, 2008

Most employers who sponsor a qualified retirement plan are aware of the requirement that the plan must have a written plan document.  However, just having that document is not enough.  ERISA plan qualification rules also require that the plan be administered according to provisions contained in the governing plan document.  If the plan’s operational administration does not follow the plan document, then the plan is not in compliance and is subject to fines and sanctions, up to plan disqualification.

Unfortunately, just hoping that your retirement plan operations are working correctly is not enough.  In the ERISA retirement plan world, some of the biggest mistakes made by employers are operational errors rather than errors in the actual structure or documents of the plan.  Because not all operational mistakes are “bad” or harmful to employees, many employers do not feel there is an issue if they make an operational error, provided it is to the benefit of the employee.  However, even errors that result in favor of the employee cause a plan operation issue.

For example, a plan document provides that employees are eligible to participate only after 1 year of service, but the employer generously allows newly hired employees to participate immediately upon employment.  This generosity on the part of the employer, while beneficial rather than harmful to employees, is a failure to follow the terms of the plan and would constitute an operational failure that could create problems for the plan’s qualification if not corrected.

According to the IRS, some of the reasons employers give to explain why their plans are not operationally compliant include:

  • Not knowing how to identify and fix any errors.
  • Not wanting to have any unnecessary contact with the IRS.
  • Assuming that the required annual financial audit identifies any errors that need to be addressed.
  • Assuming that auditing the plan for operational compliance would be too expensive.

Employers should routinely self-audit their retirement plans for operational compliance.  This self-audit should be performed at least annually or more often if there are any significant change in demographics or if the employer is involved in a merger or acquisition.  Unfortunately, the annual financial audit performed by your CPA won’t necessarily catch all operational issues that might exist.

If operational mistakes are found, employers need to use the tools available to them to correct the errors quickly and with the minimum of expense.  The IRS recently released the “401(k) Fix-It Guide”, available on the IRS’ website, which provides employers with a list of the most common plan errors and advice on how to fix mistakes for 401(k) plans.

Additionally, one of the best tools available to employers in their quest to correct operational plan errors is the IRS’ Employee Plans Compliance Resolution System (EPCRS).  The EPCRS is a comprehensive system of correction programs offered by the IRS to employers who offer qualified retirement plans.  This program allows employers/plan sponsors to correct plan failures through three separate components:

  • The Self-Correction Program (SCP),
  • The Voluntary Correction Program (VCP), and
  • The Audit Closing Agreement Program (Audit Cap).

The EPCRS was recently updated to assist employers in their voluntary compliance efforts.  The changes are effective as of September 2, 2008 and include:

  • Standardized application forms,
  • Reduced filing fee for some plan loan failures, and
  • Expanded situations where waiver of income and excise taxes are allowed.

Everyone knows that mistakes happen.  Under ERISA, the trick is to identify and correct those mistakes quickly and cost-effectively.  Contrary to popular opinion, the IRS is more interested in ensuring plans are compliant than in “catching” employers doing something wrong.  Benefits counsel can assist your organization in self-auditing your plan to help identify any errors and working with you and any necessary governmental agency to resolve issues.  Please contact our office with any questions or for more information.

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