SOLUTIONS IN A FLASH – RETIREMENT PLAN CORRECTION SOLUTION:
ChatGPT SAID “YOU’VE GOT THIS!” THE IRS DISAGREED.

By: Carolyn M. Cumbee, Esq.

The following events are true, but identities have been changed to protect the “victims.”

Diane Lockhart was a busy Chicago-based attorney with her own law firm. She had grown the firm from just her to 20 attorneys after losing her job at her previous firm. Diane learned that she can’t always rely on others, so she tended to take on tasks herself instead of delegating to others. Her firm’s retirement plan was no different. In an effort to save on costs (and because she thought she had it covered), Diane fired her trusty third-party administrator (“TPA”) and chose to administer her firm’s 401(k) plan on her own.

Diane has recently become a fan of ChatGPT. It is a helpful tool, especially for understanding concepts needed for her 401(k) Plan administration. The firm’s office manager disagreed with terminating the TPA, as well as some of the ways Diane applied the rules governing retirement plans. “I used to work with a TPA at my prior firm and we used to consider something called ‘key’ employees when applying the top-heavy rules,” she said to Diane. Diane had used ChatGPT to determine who needed a top-heavy contribution so she felt confident she had done everything correctly.

The Plan was running smoothly for a few years, or so she thought. Lo and behold, in January 2026, Diane’s firm received a Request for Information from the Internal Revenue Service (“IRS”) regarding the 2023 Plan Year. The Plan was officially being audited! After a process of requesting and reviewing countless documents, combing through census information Diane provided, and interviewing Diane multiple times, the IRS outlined its findings.

The IRS Agent started gently: “Diane, for a Plan Year, the HCE determination uses compensation based on a lookback year. This means that for the 2023 Plan year, we look to compensation earned in 2022. So the COO that you hired in 2023 is not an HCE, because she had no compensation in 2022. Your nondiscrimination testing in 2023 is wrong.”

Diane accepted defeat on that point. She didn’t get that information when inputting her questions to ChatGPT. Because the COO was characterized incorrectly, the ADP test was inaccurately calculated. A refund was now due to HCEs, and because the test was now being corrected after the end of the Plan year following the year being tested, a corrective contribution was due to non-highly compensated employees.

The IRS Agent was a little less gentle as she continued, “When your PPA document needed to be restated for Cycle 3, you apparently attempted to take a basic plan document from a service provider and partially customize it. Because of that, the plan is now considered to be on an individually-designed document. Even though some language was included to update the document to meet the requirements of the 2017 Cumulative List, there are large gaps where updates did not occur. Particularly, you are missing changes or additions to the Adoption Agreement that outlines the particulars of how the Plan was to be administered.”

ChatGPT told Diane that her Plan Document needed to be updated by July 31, 2022. It didn’t tell her that the preapproved document used previously would cease to be preapproved if it was not updated to the Cycle 3 document, or that her changes created an individually-designed plan that was subject to annual updates based on the IRS’s annual Required Amendments List. And, as an attorney, she should have known that taking someone else’s proprietary document and trying to claim it as your own creates a whole other set of legal problems. Diane can only imagine now what her office manager is going to say when she finds out. The gloating will be unbearable.

The IRS Agent took a deep sigh before continuing, “For the last failure, your minority partner, Joe, must receive the 3% top heavy minimum for the 2023 Plan Year. To be considered a key employee, a person must be more than a 1% owner and earn more than $150,000 in 2023. Having just a 1% ownership or earning exactly $150,000 isn’t sufficient.”

When using ChatGPT, Diane hadn’t noticed the “more than” in both components and could only shake her head in disbelief. How could anyone possibly operate a retirement plan sensibly with all of these nuances and details? She barely heard the Agent explain to her that a corrective contribution would have to be made, including earnings, in order to correct this failure.

Diane tried to argue with the IRS on all issues since she used her reliable ChatGPT for definitions, testing, and the plan document provisions. The IRS wasn’t having it. They scheduled a call to discuss the failures and how the Plan needed to be fixed.

Because the IRS Agent found multiple failures due to a clear misunderstanding of how the Plan should be operated, she expanded the audit to include the 2022 and 2024 Plan years. The IRS Agent also indicated that a penalty (well, she called it a “sanction”) would be forthcoming.

Diane learned some hard lessons from this experience. First, plan rules are complicated with nuances that aren’t always detectable at first glance. For the same reason that she wouldn’t recommend people use ChatGPT to prepare their own legal filings, Diane should have realized that she should have listened to her office manager and engaged a TPA to properly administer her Plan. This wasn’t the only rough lesson to be learned. “Just wait until you have to deal with highly paid individuals,” the IRS Agent remarked. “You should really consider getting professional assistance to help you make the corrections we are requiring.” When she took a moment to think about it, Diane realized how disastrous it would be if one of her clients tried to replace her practice wisdom and expertise with ChatGPT.

Conclusion

AI is a fantastic tool when used properly, and can be easy to use, but you need to know that the information it gives will be flawed if you input incomplete or incorrect parameters or fail to interpret the output correctly. Using it for research may be a good first step, but it is important to make sure to check the citations and read the source material to which they refer and ensure that you’re doing things correctly. Retirement plan law is a particularly difficult area of practice, and a reputable source should be used for learning the rules, or, like our friend Diane, you may learn the hard way that easy is not synonymous with correct.