What Is Revenue Procedure 98-11 for Plan Correction?
Discover how the principles of Rev. Proc. 98-11 shaped the modern Self-Correction Program for correcting retirement plan errors without IRS sanctions.
Discover how the principles of Rev. Proc. 98-11 shaped the modern Self-Correction Program for correcting retirement plan errors without IRS sanctions.
The Employee Plans Compliance Resolution System (EPCRS) is the current IRS program for correcting retirement plan errors. A core component of this system is the Self-Correction Program (SCP), which allows plan sponsors to fix certain mistakes without facing IRS sanctions or needing formal approval. This approach encourages voluntary compliance by providing a less punitive path for sponsors. The principles of the SCP originated from a 1998 IRS policy and have been expanded over time, most recently by the SECURE 2.0 Act of 2022.
To utilize self-correction, a retirement plan must be intended to be qualified under the Internal Revenue Code. This includes common retirement plans like 401(k)s, profit-sharing plans, and 403(b) plans.
Eligibility requires the plan sponsor to have “established practices and procedures.” This means the sponsor must have routines, formal or informal, designed to promote and facilitate compliance with the law. A written plan document alone is not sufficient evidence. The IRS needs to see active engagement in administering the plan correctly, such as using checklists for eligibility, having a process for remitting deferrals, or conducting internal reviews. The absence of these procedures can make a plan ineligible for self-correction.
The program addresses any “eligible inadvertent failure,” which is a mistake that occurs despite the plan having established practices and procedures. Recent legislation broadened this category beyond just operational failures. It can now include certain plan document, demographic, and plan loan failures.
Under current rules, any eligible inadvertent failure can be self-corrected at any time. The correction must be completed within a reasonable period after the failure is identified.
There is no single, definitive test for what constitutes a “reasonable period,” as the determination is based on the specific facts and circumstances surrounding the error. However, if a failure is corrected by the end of the 18th month following the month in which it was identified, the correction is automatically treated as having been completed within a reasonable period. For failures that take longer to correct, plan sponsors may need to demonstrate why the additional time was necessary.
Several factors are relevant in assessing whether a correction was completed in a reasonable time, especially if it takes longer than 18 months. These include:
A complex failure affecting many participants might justify a longer correction period, but the sponsor should not delay taking action once the error is found.
The goal of the correction process is full restoration. The plan and its participants must be returned to the financial position they would have been in had the failure never occurred. This requires correcting the principal amount of the error and accounting for any lost earnings. The correction method must be reasonable for the specific failure, and the IRS provides guidance on acceptable methods.
A common failure is improperly excluding an eligible employee or failing to implement their deferral election. To correct this, the sponsor must contribute to the participant’s account to compensate for the missed opportunity. This includes a contribution for the missed deferrals plus any matching or employer contributions the employee would have received, all adjusted for lost earnings. Under certain safe harbor rules, the corrective contribution for the missed deferral may be reduced if correct deferrals begin promptly and the employee is notified.
Documentation is a vital part of the process. While self-correction does not require an IRS submission, the sponsor must keep a thorough record of the failure and the corrective actions. This file should detail the error, its discovery, affected participants, correction calculations, and proof of corrective contributions. If the plan is audited, an IRS agent will require this evidence to verify the correction.
A plan failure is ineligible for the SCP if it was not inadvertent, if the sponsor lacks established procedures, or if the error was not corrected within a reasonable period. In these cases, the sponsor must use other EPCRS programs that involve direct IRS interaction and fees.
The Voluntary Correction Program (VCP) is for failures ineligible for SCP. VCP allows a sponsor to report a failure to the IRS before an audit and propose a correction method. The process requires a formal electronic application and a user fee based on the plan’s total assets. Upon approval, the IRS issues a compliance statement ensuring the plan’s tax-qualified status is not revoked for the identified error.
If an uncorrected error is found by the IRS during an audit, it falls under the Audit Closing Agreement Program (Audit CAP). This is the most costly correction program. The sponsor must correct the failure and negotiate a monetary sanction with the IRS. This sanction is based on the potential tax liability from plan disqualification, making it much higher than the VCP user fee. Audit CAP highlights the benefit of proactively fixing errors through SCP or VCP.