Employee Plans Compliance Resolution System Q&A

by King & Spalding

Authors, Kenneth A. Raskin, New York, +1 212 556 2162, kraskin@kslaw.com and James P. Cowles*, Atlanta, +1 404 572 3455, jcowles@kslaw.com.


To encourage employers to provide a tax qualified retirement plan, and to encourage employees to participate in such retirement plans, the Internal Revenue Code ("IRC") provides tax incentives to both employers and employees. To receive these tax advantages, the retirement plan must satisfy certain requirements. Generally, any failure to meet these requirements may result in the "disqualification" of the retirement plan, which would result in the retroactive loss of tax deductions for the employer, retroactive income for an employee, taxation of plan earnings and loss of the employee's ability to rollover a distribution from the plan to avoid current taxation.

If an employer unintentionally fails to comply with the qualification requirements of the IRC with respect to its plan, the employer may be able to avoid disqualification of the retirement plan if the failure is corrected using the Employee Plans Compliance Resolution System ("EPCRS").

King & Spalding has assisted many clients in correcting retirement plan failures using EPCRS. We thought it would be helpful to include a Q&A in the newsletter to assist you in determining what failures to comply can, and cannot, be corrected using the EPCRS.

Below is our first installment of what will be an ongoing Q&A in our Compensation and Benefits Insights Newsletter. We encourage you to email your questions to us at kraskin@kslaw.com. We will attempt to address your questions in future newsletters. Obviously, we cannot provide specific advice in a newsletter article, but we will provide general information to assist you in answering your questions about EPCRS.

For reference, the current EPCRS guidance is contained in IRS Revenue Procedure 2013-12.


Question: Can an employer "self-correct" a compliance failure in a tax qualified retirement plan without a formal submission to the IRS?

Answer: An employer may self-correct certain "operational failures" made during the administration of a tax qualified retirement plan and maintain the tax qualified status of such plan without submitting any information to the IRS. Generally, to be eligible for self-correction, a plan must have received a Favorable Determination Letter from the IRS and have operational procedures in place that are intended to prevent the failure from occurring.

An "operational failure" is a failure that occurs during the administration of the plan, but the terms of the plan with regard to such failure comply with the applicable IRC requirements. For example, an operational failure would occur if a 401(k) plan document prohibited a participant from contributing an amount in excess of the IRC 402(g) limit (which is $17,500 for 2014) but, due to a payroll error, the participant exceeded such deferral limit.

There are two types of operational failures that may be self-corrected, significant and insignificant. If an operational failure is determined to be insignificant, the correction can be made at any time (as long as it is made within a reasonable time after it is discovered). If an operational failure is determined to be significant, the correction must be substantially completed by the last day of the second plan year following the plan year in which the significant operational failure occurred (with certain limitations). Note that this correction period is based on the occurrence of the failure, not on the date it is discovered.

In determining whether an operational failure is insignificant, an employer must consider (but is not limited to) the following seven factors:

  1. whether other failures occurred during the period being reviewed;
  2. the percentage of plan assets and contributions involved in the failure;
  3. the number of years the failure occurred;
  4. the number of plan participants affected relative to the total number of plan participants;
  5. the number of plan participants affected as a result of the failure relative to the number of plan participants who could have been affected;
  6. whether the correction was made within a reasonable time after discovery of the failure; and
  7. the reason for the failure (for example, a data entry or arithmetic error).

For example: Employer X sponsors a profit-sharing plan. During an audit, the employer discovers that, due to a payroll error, three of the 250 plan participants received contributions in excess of the limits allowed by the plan and the IRC during a plan year. Employer X contributed $3,500,000 to the plan for the plan year and the amount of the excess contributions totaled $4,550. There were no other operational failures made during the plan year. After considering all of the required factors, the employer determined that the operational failure was insignificant because the number of participants affected relative to the total number of participants who could have been affected was only 1.2% and the monetary amount of the failure relative to the total employer contribution was only .13%. The employer corrected the error within a reasonable time after discovery of the failure.

To correct an operational failure, the employer must generally fully correct the failure, which means the plan and the affected participants must be put in the same place they would have been had the failure not occurred. This could require the employer to make additional contributions to the plan. However the failure is corrected, we strongly suggest employers draft a detailed memorandum on the determination of whether the failure was insignificant or significant, how the correction was made and how the correction method was determined.

In certain instances, a "full" correction of the operational failure may not be required. For example, if a corrective distribution due a participant is $75 or less and the cost of processing and delivering the distribution is greater than $75, the plan sponsor is not required to make the corrective distribution.

*Non-lawyer Employee Benefits Consultant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.