United States

Follow new guidance when correcting qualified retirement plan errors


The IRS has released updated guidance that should help companies that have made errors in the form or operation of their qualified retirement plans. If your company offers such plans, you understand that the tax consequences for compliance mistakes can be drastic. The plan can lose its tax-qualified status or, in the case of a 403(b) plan, participants can lose the exclusion from gross income for their plan account.

The requirements to become and to maintain a qualified retirement plan under sections 401(a) and 403(a) or a tax sheltered annuity plan under section (b) are exhaustive and, thus, errors in either form or operation are not uncommon.

The IRS has historically allowed plan sponsors to keep a plan’s qualified status by voluntarily correcting certain errors when identified. New Revenue Procedure 2016-51 explains what types of errors qualify and what the correction methods are that need to be undertaken.

The main changes to the procedures are to incorporate changes to the determination letter program where they apply to the Employee Plans Compliance Resolution System (EPCRS). Otherwise, the new Rev. Proc. combines guidance related to correction of overpayments from plans, reduction in compliance fees related to plan loan failures, and failures to timely enroll employees into an elective deferral plan into one comprehensive procedure.

As of Jan. 1, 2017, the IRS will only be issuing determination letters when an employer either initially establishes or terminates a qualified plan. In addition, the IRS decided not to issue determination letters at all for section 403(b) plans. Accordingly, EPCRS no longer requires plan sponsors to seek a determination letter in connection with any self-correction or voluntary correction program applications. In addition, one of the conditions of self-correction or voluntary correction (with IRS approval) is that the plan have a “favorable letter”. Therefore, the Rev. Proc. update also identifies under what circumstances the IRS will consider a qualified plan or section 403(b) plan as having a favorable letter.

Employers should make sure that Rev. Proc. 2016-51 is reviewed when plan errors arise after Jan. 1, 2017, so that any corrections are in compliance with the procedures. Doing so may allow your plans’ qualified status or income exclusion to remain intact despite inadvertent errors.  

Anne Bushman

Senior Manager

Anne advises companies on various executive compensation, employee stock ownership and employee benefits matters affecting closely-held businesses. Reach her at anne.bushman@rsmus.com.

Areas of focus: Washington National TaxCompensation & BenefitsTax Reform