SOLUTIONS IN A FLASH – RETIREMENT PLAN CORRECTION SOLUTION:
SUIT’ABLE PRACTICES & PROCEDURES SAVE THE DAY

By: Carolyn M. Cumbee, Esq.

Harvey Specter is the managing partner of Specter Litt Wheeler Williams, a large New York law firm. The firm sponsors a 401(k) plan with generous Safe Harbor Matching contributions for eligible participants. A few years ago, Specter Litt Wheeler Williams expanded by adding a Los Angeles office. After one of the L.A.-based attorneys asks about the retirement plan, Harvey discovers that the L.A.-based staff was not given the opportunity to participate in the 401(k) plan. The H.R. folks in the N.Y. office all had thought that the L.A. office was excluded from participation in the Plan, considering it is so small. However, the Plan document does not have this exclusion. Harvey hands the problem off to Donna, his assistant, like he does with all his problems.

The firm’s third-party administrator, We Handle All Things (“WHAT”), informs them that this is a common mistake and can be fixed.  Before diving into the correction details, however, WHAT asks Donna about their Practices and Procedures (“P&Ps”). Donna says that H.R. sends enrollment materials directly to new employees when they are about to meet the eligibility requirements under the Plan. However, like the rest of the firm, H.R. is under the impression that all outside offices are not eligible for the Plan. WHAT explains that the presence of P&Ps could determine if this failure is correctable under the Self-Correction Program (“SCP”) of Revenue Procedure 2021-30 (“EPCRS”).

In order to be able to correct using SCP, EPCRS Section 4.04 states that a Plan Sponsor must have “practices and procedures reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements,” and they must be routinely followed. Additionally, SECURE 2.0 and Internal Revenue Service (“IRS”) Notice 2023-43 note the importance of P&Ps, which reflects the IRS’s emphasis on this requirement has continued in recent guidance. WHAT also highlights the practical importance of P&Ps. Donna, who has had to fill in at Human Resources since the prior head of H.R. left, is a perfect example of the value these P&Ps can provide. Employees come and go, and people take their knowledge with them. By having written P&Ps, that knowledge is passed on and not lost, and the company has a much better chance of avoiding plan compliance failures.

Donna asks WHAT what the P&Ps must entail. She learns that they may be formal or informal. Donna, like most people, wants to know if that means that their procedures can be verbal. WHAT notes that the Proposed Regulations regarding Roth catch-up contributions, released in early 2025, state that the P&Ps must be written. Those Proposed Regulations also indicate that the P&Ps must outline the procedures relating to Roth catch-ups to be able to self-correct that specific type of failure. This is a deviation from prior guidance, which indicated that the P&Ps are not required to cover a particular issue in order to use SCP to correct that specific failure.  (Commenters on the IRS’s Proposed Regulations, including FBLC, made note of this anomaly, and asked that the IRS change this requirement in the final rules.)

WHAT indicates that just having a third-party administrator is not sufficient as a P&P, and neither is simply having a plan document. Donna, as savvy as she is, uses ChatGPT to draft up some quick P&Ps for their file. However, WHAT informs her that P&Ps that aren’t accurate or followed by the Plan Sponsor aren’t going to be sufficient either.

WHAT sets up a meeting to review the complete drafting of P&Ps. This entails involvement from WHAT and Specter Litt Wheeler Williams so that everyone can be accurate and clear on the roles and responsibility.  WHAT gives them some key drafting tips:

1. There is balance between too much and not enough
2. Include some background information on the Plan, such as 401(k) deferral deposit dates, so everyone understands the Plan and the reasons for certain rules and procedures
3. Include accurate information as to how things actually operate
4. There should be three types of information:
   1. General plan information
   2. Specific procedures that are unique to each plan sponsor
   3. Information on service providers and the processes involving them, perhaps even contact information and login information

Although they need a little fine tuning, WHAT believes that the firm’s P&Ps are sufficient to support the use of SCP in this case. WHAT outlines the appropriate method to correct the failure of improperly excluding the L.A. office from the Plan. For an enrollment failure in a Safe Harbor Plan, EPCRS provides that we use 3% as the deferral percentage for excluded employees to determine the “Missed Deferral”.  Assuming a proper notice is provided to affected participants within 45 days of the correct deferrals beginning under the Plan, the appropriate corrective contribution that must be made by the plan sponsor is 25% of the Missed Deferral. The Plan Sponsor will also need to make the matching contribution on the full Missed Deferral for the period that eligible employees were excluded from the Plan. (For more information about correcting improper employee exclusions, see our Solution here.)  Finally, the Plan Sponsor must make a deposit equal to the earnings that the participants would have earned on these contributions had they been made timely.

Donna asks about the use of some online calculator that she heard about to calculate earnings. Contrary to popular practice, WHAT informs her that earnings must be applied as outlined in EPCRS, Appendix B, Section 3, not using the DOL calculator. EPCRS states that earnings may be calculated using the Plan’s weighted rate of return, since the excluded participants were not permitted to make their own investment elections.

WHAT decides to add a regular review of the firm’s P&Ps as part of their administrative services for the Plan. Doing so will not only allow self-correction to be used to fix future failures, but it will hopefully help prevent further failures. Additionally, it will ensure that all parties know their role in operating the Plan properly. That way if someone happens to leave the firm, the Plan can continue to operate smoothly.

If you want to make sure that your or your clients’ procedures are sufficient to qualify for self-correction, or if you have questions about correcting mistakes, give us a call.  After all, we are your ERISA solution!