The IRS has released a revenue
procedure describing how plan sponsors can correct compliance problems in
qualified plans. The correction methods are especially useful for plan sponsors
who want to self-correct operational errors without requesting advance IRS
Many of the correction methods described in Revenue Procedure 99-31 are
already being applied by IRS reviewers in the Voluntary Compliance Resolution
(VCR) program (Wyatt Insider, November 1994). The VCR program is a
voluntary compliance program that allows plan sponsors to obtain advance
approval of proposed self-correction methods. Making official guidance on
correction methods available will likely result in fewer plan sponsor requests
for advance approval. In general, the deciding factor will be the degree of risk
to the plan.
The revenue procedure identifies ten types of qualification errors and
suggests specific correction methods (and in some cases, alternative correction
Of particular interest to 401(k) plan sponsors is the "one-to-one"
correction method for nondiscrimination test failures that are not corrected in
a timely fashion. Under the one-to-one method, the plan sponsor determines the
excess amounts contributed to the plan on behalf of highly compensated employees
(HCEs). The sponsor distributes those amounts to the affected HCEs, along with
an adjustment to reflect trust earnings attributable to the period over which
the improper contribution remained in the trust. At the same time the sponsor
distributes the excess contributions, it also contributes that same amount to
the plan. For many sponsors, this one-to-one correction will cost less than the
standard VCR correction procedure, which requires employer contributions for
non-HCEs in an amount necessary to bring the plan into compliance.
Other illustrated correction methods and examples deal with contributions in
excess of the Code §415 limits, improper exclusion of eligible employees from a
401(k) plan, vesting failures and overpayments. The revenue procedure also
provides guidance on the earnings adjustments that must accompany corrective
contributions or allocations that increase a participant’s account balance.
Finally, the revenue procedure includes guidance on corrections made via plan
amendments in certain situations, including plan amendments that retroactively
provide for hardship distributions. However, correction by plan amendment
continues to require formal IRS approval.