Legislative Update: Updated Correction Procedures for 401(k), 403(b) and Simple IRA Plans go into Effect

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Disclosure: I work for ADP.  This information is purely educational, and based on Gov’t Regulation.

Eye On Washington: Legislative Update

Updated: March 27, 2013

Legislative Update: Updated Correction Procedures for 401(k), 403(b) and Simple IRA Plans go into Effect

Retirement plans must comply with a myriad of requirements under the Internal Revenue Code (“Code”) in order to remain tax-qualified. Plan sponsors, at times, have found it challenging to understand and stay compliant with all of these requirements. To assist plan sponsors, the Internal Revenue Service (“IRS”) established the Employee Plans Compliance Resolution System (“EPCRS”) that prescribes correction principles and methods that plan sponsors may rely upon as being reasonable and appropriate methods to correct certain errors that occur in the course of the plan’s operation and/or with regard to plan documentation.

On April 1, 2013, new procedures under the EPCRS, set out in the IRS’s Revenue Procedure 2013-12, went into effect. Some of these changes are summarized below:

New 403(b) Plan Corrections

Effective in 2009, Section 403(b) plans became subject to requirements under the Code similar to qualified plans. Under the new procedures, plan sponsors of Section 403(b) plans may correct errors in ways similar to those available to qualified plans.

Revised VCP Filing Procedures

Plan sponsors that wish to obtain IRS approval of a correction using the voluntary correction program (VCP) under the EPCRS must now file the application using Form 8950 and include Form 8951 (regarding compliance fees). VCP applications must be sent to the IRS’s Covington, KY service center rather than the IRS’s Washington, DC office. Streamlined VCP approvals for enumerated corrections may be sought using the model documents that appear on Schedules 1 to 9 in Appendix C, Part II of Rev. Proc. 2013-12.

Lost Participant Procedures

In light of the IRS’s discontinuance of its letter forwarding program on behalf of plan sponsors last year, the IRS revised the reasonable actions that plan sponsors must take to locate lost participants who are owed a benefit to include, first, sending a letter via certified mail to the participant’s last known address. If this is unsuccessful, the plan sponsor should use one or more search tools to locate the participant (such as the Social Security letter forwarding program, a commercial locator service or credit reporting agency, as the plan sponsor deems appropriate).

Correction of Certain Matching Contribution Failures

If a 401(k) plan fails to make a matching contribution on behalf of a plan participant, the plan sponsor may now make a corrective matching contribution on behalf of the affected participant that is subject to the plan’s vesting schedule. (This rule would not include contributions made to satisfy safe harbor requirements under Code Section 401(k)(12)). Previously, plans that corrected a missed matching contribution had to make a qualified nonelective contribution (“QNEC”) that was fully vested.

Plan Forfeitures Cannot Be Used for QNECs

The new procedures clarify that if a plan sponsor corrects a nondiscrimination test failure by making a QNEC to the plan, the plan sponsor must make a new employer contribution to the plan to make the QNEC, rather than use plan forfeitures.


The new procedures clarify that any earnings required to be credited to a participant’s account for full correction may include investment losses, at the plan sponsor’s option (in addition to including gains).


If a plan made a distribution to a participant, but the payment was made in error solely because the participant did not have a distributable event, so long as the distribution was otherwise permitted under the plan and properly calculated, the plan sponsor does not have to make the plan whole for the amount of the overpayment, if the participant fails to repay the plan after being requested to do so.

Safe Harbor Correction for Improperly Excluded Employees

The EPCRS prescribes ways to make corrections if an employee is improperly excluded from making elective deferrals under a 401(k) plan. The new procedures expand such guidance to include corrections under a safe harbor plan under Code Sections 401(k)(12) or 401(k)(13) (regarding a qualified automatic contribution arrangement or QACA), a Code Section 403(b) plan, and a SIMPLE IRA. Certain aspects of the new guidance must still be clarified by the IRS, however.

Correction of Section 415(c) Errors

In an effort to make it easier for plan sponsors to self-correct recurring excess annual additions under Code Section 415(c), the IRS announced it will relax its policy requiring plan sponsors to maintain policies and procedures to prevent excess annual additions if (1) the plan permits elective deferrals and nonelective employer contributions (but not matching contributions), and (2) the excess is routinely corrected by returning elective deferrals within 2½ months after the end of the limitation year.

Corrective Amendments by Adopters of Prototype Plans

If a plan sponsor has adopted a pre-approved prototype plan, and must adopt a corrective amendment to its plan, the plan can continue to rely on the favorable opinion letter obtained by the pre-approved prototype plan sponsor (even if the corrective amendment was not in the pre-approved plan document) if: (i) the corrective amendment would otherwise be permitted under the rules for pre-approved plans and (ii) no other modification has been made to the plan that would cause the plan to lose its reliance on the opinion or advisory letter.

Correction of Section 457(b) Plans

The IRS indicated that it will accept, on a provisional basis, submissions of Code Section 457(b) plans maintained by governmental entities using EPCRS-type standards. This process is not yet available for Section 457(b) plans maintained by not-for-profit organizations, however.

For further information, see Revenue Procedure 2013-12, 2013-4 I.R.B. 313 on http://www.irs.gov or contact your legal or tax adviser.


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