What can you do if your retirement plan operations don’t square with the provisions of your plan document?
For example, your plan provides for a matching contribution maximum of one percent of a participant’s compensation – but your organization has been contributing up to two percent since the last plan amendment. Recognizing that the IRS regards any material deviation from plan provisions as a grounds for revoking the plan’s qualified status, what can you do?
A recent IRS revenue procedure explains how this kind of operational defect can be fixed with a plan amendment – and no IRS filing or expense. This approach is available if the following conditions are satisfied:
- The retroactive plan amendment would increase (and cannot decrease) plan benefits.
- The increase in benefits must apply to all employees eligible to participate in the plan.
So, in the example above, the plan could be retroactively amended to increase the one percent maximum matching contribution to two percent of compensation if the retroactive amendment covers all eligible employees. This last requirement can be tricky as illustrated by the following example:
- An employer’s 401(k) plan excludes overtime pay from participant compensation for benefit allocation purposes. The employer has mistakenly included overtime in compensation when allocating plan benefits. Can this operational failure be corrected by a retroactive plan amendment.
The IRS answer to this question is that a fix by retroactive amendment in this circumstance would be available only if 100 percent of the plan’s eligible employees were also eligible for overtime pay. So, the IRS answer would be “no” except for plans which cover only non-exempt hourly employees, such as a multiemployer plan covering only union employees. Note that other correction options (including self-correction and correction by submitting a Voluntary Correction Program – VCP – filing with the IRS) may be available even if an operating defect cannot be fixed with a retroactive plan amendment.
There are a number of ways to correct defects in retirement plan documents and plan operations. In certain circumstances, these defects can be corrected without an IRS filing. In others, a VCP filing may be required. Consult your professional advisor about the correct approach. Also bear in mind that these fixes are not available after you receive notice that your plan is an audit target. So, taking corrective action now can avoid audit regret later on.