Self-Correction Program (SCP)
SCP, a part of the Employee Plans Compliance Resolution System (EPCRS), is a correction program for resolving operational failures without any disclosure or payment of fees to the Service. If an operational failure does not meet the eligibility requirements of SCP, then the Voluntary Correction Program (VCP) is the only other option to use EPCRS. The VCP program requires full disclosure of the error, correction, and payment of a compliance fee to the Service. SCP can be used to resolve significant and insignificant violations and can even be used to resolve insignificant operational failures discovered during an audit by the Service. It is important to note that, for SEPs and SIMPLE-IRA plans, SCP is available only to insignificant failures.
Eligibility Requirements for Using SCP
Correction under SCP to fix a significant violation is available for only a limited period of time. Generally, this period is two plan years following the plan year in which the operational failure occurred. For example, if a plan’s vesting requirements were violated in a plan year ending December 31, 2004, the self-correction period for significant violations would end on December 31, 2006.
There are two exceptions to the above rule. The first applies to significant failures related to transferred assets from another plan or the assumption of a plan due to a corporate merger, acquisition, or similar business transaction. SCP allows such failure to be corrected up to the last day of the plan year that begins after the corporate merger, acquisition, or similar business transaction, even if the failure occurred more than two plan years earlier. The second exception deals with the correction of the ADP test and ACP test. The two-year period for correcting ADP or ACP test violations runs after the close of the 12-month correction period that is provided by the 401(k) and (m) regulations. For example, suppose the ADP test is failed for the plan year ending December 31, 2004. The regulatory correction period ends December 31, 2005. The SCP correction period would run for two plan years beyond that, ending on December 31, 2007.
Determining if the Violation is Insignificant
Whether a violation is insignificant is determined on the basis of all the facts and circumstances. The following factors are considered in determining whether a violation is insignificant:
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Whether other failures occurred during the period being examined. A particular type of operational failure affecting more than one participant is treated as one failure.
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The percentage of plan assets and contributions involved in the failure. The lower the percentage, the more likely the violation is insignificant. The Service will not emphasize this factor to exclude small businesses.
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The number of years the failure occurred. The fewer the number of years involved, the more likely the violation is insignificant.
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The number of participants affected relative to the total number of participants in the plan. The lesser the percentage of participants affected; the more likely the violation is insignificant. Again, the Service will not interpret this factor in a manner that would exclude small businesses.
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The number of participants affected as a result of the operational failure relative to the number of participants who could have been affected by the failure. For example, the number of participants who received improper vesting upon distribution would be compared to the total number of participants who received distributions in the relevant period.
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Whether correction was made within a reasonable time after discovery of the failure.
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Why the failure occurred. Data errors, such as errors in the transcription of data, the transposition of numbers or minor arithmetic errors are more likely to be deemed insignificant.
Correction Must be Timely
Correction of significant errors should be completed within a reasonable time after discovery of the failure and, generally, no later than two years after the year in which the error occurred. SCP can also be used for significant violations if the error is “substantially corrected” by the end of the two-year period. The Service recognizes that sometimes complete correction of the failure is not possible within the two-year period and SCP relief should be available if correction is completed within a reasonable period of time thereafter. Rev. Proc. 2006-27 defines “substantially corrected” and requires that the correction meets one of the following tests:
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During the correction period, the plan sponsor is reasonably prompt in identifying the operational failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment of completing correction of the operational failure as expeditiously as practicable. The correction must be completed within 90 days after the last day of the correction period.
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During the correction period, correction is completed for at least 85 percent of all participants affected by the operational failure and thereafter, the plan sponsor completes correction of the operational failure with respect to the remaining affected participants in a diligent manner.
If correction of a significant operational failure is not corrected timely, then SCP is not available to correct the failure, but VCP is. Remember that insignificant errors can be corrected at any time.
Availability of Correction by Plan Amendment in SCP
A plan sponsor may use SCP to correct an operational failure by a plan amendment to conform the terms of the plan to the plan’s prior operations only to correct operational failures listed in Appendix B to Rev. Proc. 2006-27. These relate to violations of the compensation dollar limit, the making of hardship distributions without authorizing plan language, and the inclusion of an ineligible employee.
In the case of any correction of an operational failure through plan amendment under SCP, a plan sponsor must submit a determination letter application, identifying the amendment under SCP in the cover letter. The determination letter application must be submitted before the end of the plan’s applicable remedial amendment period described in Rev. Proc. 2007-44.
Diligent Plan Administration and Prompt Correction is the Best Policy
This web page highlights the importance of conducting periodic reviews of the plan’s operation and promptly fixing operational failures after they are discovered. This can reduce the cost of correction and may allow the use of the SCP to correct errors. If SCP is used, all steps taken to complete the process should be documented and retained with plan records. Keep in mind that, despite all of your good efforts, mistakes can happen. In that case, the Service can help you correct the problem and retain the benefits of your qualified plan.
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