Section 305 of SECURE 2.0 added rules for self-correcting a new category of retirement plan errors under the Employee Plans Compliance Resolution System (“ECPRS”). Specifically, Section 305 allows an “eligible inadvertent failure” to be self-corrected at any time, even if the error is considered a “significant” operational error under EPCRS. Section 305 provides that the correction period for eligible inadvertent failures is “indefinite and has no last day.” Prior to Section 305, significant operational errors were required to be corrected no later than the last day of the third plan year after the plan year for which the failure occurred.
An eligible inadvertent failure means a failure that occurred notwithstanding established practices and procedures supporting Internal Revenue Code (“Code”) compliance. An eligible inadvertent failure does not include a failure that is egregious, or that relates to the diversion or misuse of plan assets, or that directly or indirectly relates to an abusive tax avoidance transaction. Section 305 applies to retirement plans subject to Code Sections 401(a), 403(a), 403(b), and governmental plans, including single employer plans, multiple employer plans, and multiemployer plans.
Despite the period during which a significant eligible inadvertent failure can be self-corrected being indefinite and having no last day, plan sponsors should still promptly identify and correct significant operational errors. Not doing so puts the self-correction and potentially plan tax qualification at risk.
Self-Correction Conditions
Why does this urgency exist? Section 305 and the interim guidance on Section 305 issued by the Internal Revenue Service in Notice 2023-43, include three conditions for self-correcting eligible inadvertent failures, each of which makes it prudent for a plan sponsor to act quickly in addressing plan failures. Specifically, to self-correct an eligible inadvertent failure:
- the plan sponsor must demonstrate a “specific commitment” to self-correct the eligible inadvertent failure,
- the specific commitment must occur prior to the time the Secretary of Treasury identifies the failure, and
- the self-correction must be completed within a “reasonable period” of time after the plan sponsor identifies the failure.
Notice 2023-43 provides that whether a plan sponsor has demonstrated a “specific commitment” to self-correct an eligible inadvertent failure will be based on all the facts and circumstances. A specific commitment will exist if the plan sponsor demonstrates that it was actively pursuing correction of the specific identified failure. The mere completion of an annual compliance audit, or a plan sponsor’s adoption of a general statement of intent to correct failures when discovered, is not sufficient. Based on this, plan sponsors should promptly identify operational errors, and once a specific operational error is identified, plan sponsors should actively pursue corrections. Section 305 and Notice 2023-43 do not provide guidance on what it means to actively pursue a correction.
Because a plan sponsor must demonstrate a specific commitment to self-correct an eligible inadvertent failure prior to the failure being identified by the Secretary of Treasury, it is important to understand what it means for the Secretary of Treasury to “identify” a failure. Notice 2023-43 provides that a failure is identified by the Secretary of Treasury when a plan or plan sponsor comes “Under Examination” under EPCRS Section 5.08. A plan or plan sponsor comes Under Examination under EPCRS Section 5.08 generally if:
- the plan is under Form 5500 series or other Employee Plans examination,
- the plan sponsor is under Exempt Organization examination,
- the plan is under IRS Criminal Investigation Division investigation, or
- the IRS provides notice of possible plan failures during its review of IRS Forms 5300, 5307, and 5310.
Interestingly, one comment submitted to the IRS on Section 305 and Notice 2023-43 asserted that the IRS exceeded its authority in Notice 2023-43 by interpreting the language of Section 305 that the Secretary of Treasury must “identify” a failure as only requiring a plan or plan sponsor to be Under Examination. The commentator noted that a plan or plan sponsor could be Under Examination without the government having any knowledge of any plan failures since many failures are first identified during the examination process. The commentator urged the IRS to follow the formal language of Section 305 by requiring the Secretary of Treasury to actually identify the specific failure involved.
Once a plan sponsor identifies an eligible inadvertent failure and has demonstrated a specific commitment to self-correct it by actively pursuing correction, Section 305 requires the correction to be completed within a reasonable period after the failure was identified. Notice 2023-43 provides that whether a correction has been completed within a reasonable period after it was identified will be determined based on all relevant facts and circumstances. In addition, if self-correction of an eligible inadvertent failure is completed by the last day of the 18th month following the plan sponsor’s identification of the failure, the failure will be treated as having been completed within a reasonable period, with one exception. If the failure is an employer eligibility failure (e.g., an employer sponsors a Code Section 403(b) plan but is not a type of employer eligible to do so), the plan sponsor will be treated as having self-corrected the error if the plan sponsor ceases contributions to the plan as soon as reasonably practicable and the correction is completed no later than the last day of the sixth month following the plan sponsor’s identification of the failure.
Some comments submitted on Section 305 and Notice 2023-43 noted that it is possible that the requirement that a plan sponsor complete self-correction of eligible inadvertent failures within a reasonable period after the plan sponsor identifies the failure could result in a correction having to be completed before the end of the EPCRS three year significant failure correction deadline. The commentators said that Congress intended to expand EPCRS’s correction deadline, not contract it, and suggested that the revision to EPCRS to account for Section 305 could provide that a plan sponsor must correct within a reasonable period after identifying the failure, but not earlier than the end of the three-year significant correction deadline.
Conclusion
The ability of a plan sponsor to self-correct an eligible inadvertent failure indefinitely and with no last date appears to broaden the time allowed in the EPCRS’ correction process that applies to significant operational failures. However, the reality is that plan sponsors must still diligently identify and correct errors. Plan sponsors should implement established practices and procedures to support compliance with the Code as required by Notice 2023-43 and have an effective process for identifying and correcting operational errors and then documenting the correction efforts. An important part of this process is consulting with experienced employee benefits counsel to develop policies and procedures and implement compliant corrections to retirement plan operational failures.
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About the Author: Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Co-Chair of the Firm’s Employee Benefits & Executive Compensation Practice Group. His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement, and other deferred compensation plans. He frequently represents employers in connection with multiemployer fringe benefit fund issues. He also serves as legal counsel to many 401(k) and pension investment and administrative committees. He can be reached at 734-623-1945 or JSchreier@dickinsonwright.com, and you can find his bio here.