An operational error is a plan qualification failure caused by not following the plan document provisions in the operation of the plan.  This type of qualification failure is referred to as an operational failure.

The IRS has established the Employee Plans Compliance Resolution System (EPCRS) to encourage plan sponsors to correct plan errors voluntarily.  EPCRS offers a Self-Correction Program (SCP) for more minor errors and a Voluntary Correction Program for more complex or more wide-spread errors.

The SCP allows plan sponsors to voluntarily correct certain operational errors without payment of a filing fee and without IRS notification or approval.  If the plan is later audited by the IRS, however, the IRS has the right to review whether the failure was actually eligible for correction under SCP and whether the correction method is acceptable.  If they don’t agree with the correction method or the use of SCP, the IRS can assess penalties.

Insignificant operational failures may be corrected under SCP at any time.  Plans with significant operational failures are only eligible for SCP if the problem is quickly identified and corrected, generally within 2 plan years of the year of failure.  Plans with significant operational failures must also have a favorable letter from the IRS and cannot be under IRS examination to be eligible for SCP.  The determination of whether an operational failure is significant looks at various facts and circumstances about the plan and the error. 

VCP requires filing with the IRS and paying a filing fee.  The plan sponsor discloses the error and proposes a correction to the IRS.  The IRS, sometimes after negotiation with the plan sponsor, will approve the correction which is then implemented by the plan sponsor.

For more information on operational errors and the Self-Correction or Voluntary Correction Programs, please contact your Nyhart consultant.

This article was last updated on December 27, 2011