Self-Correcting Plan Mistakes

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WOMAN: Well, last year, my client, an auto-body shop, kept several employees out of their 401(k) plan for six months longer than the plan allows.

The owner wants to make it right, and I want to make sure that the plan keeps its tax benefits.

Is this situation one that could use the Self-Correction Program I've read about?

MAN: I need a little more information.

The Self-Correction Program allows certain errors to be corrected without involving the IRS in the process.

One of the requirements for use of the Self-Correction Program is that the error be operational -- that is, it's a result of not following the terms of the plan.

Also, the plan sponsor has to have policies and procedures in place that are reasonably designed to promote the overall compliance with the code.

Does that sound like it fits your client's situation?

WOMAN: Yes, it does.

That's how we found the problem.

The business's accountant found it when his firm was retained to look over last year's retirement-plan operations.

Joe had a new office manager who didn't understand the policy for including new employees.

The rules were all there in the payroll handbook.

It was just a misunderstanding of when to include them.

The instructions for the payroll system and notifying the employees were correct.

MAN: It sounds like this may well meet the requirements for policies and procedures.

Is this the only time this error has occurred, or have there been problems with including the correct employees in other years?

WOMAN: No, just last year.

Joe keeps a pretty close eye on this part of his benefit package.

He plans to do a lot of fishing in a few years, so he wants to keep his retirement program as healthy as possible.

The plan is an important benefit for his employees, too.

They keep a close eye on it.

MAN: We have some detailed instructions for using the Self-Correction Programs, and here's how you can get a hold of them.