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CCH® PENSION AND BENEFITS — 3/26/08

Plan amendment can correct some mistakes using Self-Correction Program

Some corrections for failure to follow the plan terms in operation can be made using plan amendments through the IRS’s Self-Correction Program (SCP). Generally, the Employee Plans Compliance Resolution System (EPCRS) is a series of correction programs that can be used to correct plan mistakes, that, if left uncorrected could result in the loss of tax-favored benefits for a plan. The SCP permits plan sponsors to correct plan mistakes without paying a fee or contacting the IRS. The SCP is appropriate for the correction of operational failures, that is, mistakes that are made when the terms of the plan are not followed in operation.

Generally, the failure to follow the plan’s terms may be corrected using one of the following methods:

• The plan sponsor can fix what was done in the plan’s operation by correcting the mistake to match the plan’s terms; or
• The plan sponsor can retroactively amend the plan to match the way the plan was operated.

The SCP is generally available if correction is made using the first method. Correction under the second method is available for only three operational failures, which are listed in Rev. Proc. 2006-27, Appendix B, Sec. 2.07 (CCH Pension Plan Guide ¶17,299R-86). This Rev. Proc. describes all the EPCRS correction methods in detail. The three permissible corrections via plan amendment are:

• Maximum Compensation Failures. A defined contribution plan that allocates contributions or forfeitures based on a participant’s compensation that exceeds the Code Sec. 401(a)(17) limit.
• Hardship Distributions and Plan Loan Failures. The operational failure of making hardship distributions or plan loans to employees under a plan that does not allow them may be corrected by retroactively amending the plan to provide for hardship distributions or plan loans that were already given.
• Early Inclusion of Otherwise Eligible Employee Failures. The operational failure of including an otherwise eligible plan in the plan too early may be corrected by retroactively amending the plan.

A plan sponsor who amends a plan to correct a failure using SCP must submit an application for a favorable determination letter, identifying the amendments separately in the application. The application must be submitted before the end of the plan’s applicable remedial amendment period described in Rev. Proc. 2007-44 (CCH Pension Plan Guide ¶17,299S-25).