Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal

 The midpoint of the calendar year presents an ideal opportunity for retirement plan sponsors to assess their plan's compliance status. Conducting a mid-year review not only helps identify and correct administrative errors early, but it also leverages the expanded options available under the IRS's Employee Plans Compliance Resolution System (EPCRS), including the Self-Correction Program (SCP). These updates, outlined in IRS Revenue Procedure 2021-30, empower plan sponsors to fix a broader range of plan errors without the need for formal IRS approval.

 Why Conduct a Mid-Year Compliance Check?

• Early Detection of Errors: Addressing issues now can prevent more significant problems—and costly penalties—at year-end or during an audit.
• IRS Encouragement of Voluntary Compliance: The IRS encourages sponsors to proactively correct issues to maintain tax-qualified status.
• Expanded SCP Provisions: Recent updates allow for self-correction of more error types, thus reducing overall costs of correction if eligible.

Step-by-Step Guide to a Mid-Year Compliance Review

Step 1: Review Plan Operations vs. Plan Document

• Confirm that the plan is being administered according to its written terms.
• Check eligibility, contributions, distributions, and loan administration.
• Common issues include incorrect match formulas or missed contributions.

Step 2: Identify Operational Failures

• Compare actual administrative practices against the plan document and IRS requirements.
• Examples: failing to use correct definition of plan compensation, excluding eligible employees, not correcting failed non-discrimination testing, impermissible loans.
• Document each identified failure clearly.

Step 3: Determine Eligibility for Self-Correction (SCP)

• SCP is available for certain operational failures if:
  • The plan has a favorable IRS determination or opinion letter.
  • The failure is insignificant or corrected within a reasonable time.
• Some plan document and demographic failures may still require Voluntary Correction Program (VCP) filings.

Step 4: Implement Corrections

• Apply the appropriate correction method outlined in EPCRS.
• For missed contributions: calculate and deposit qualified nonelective contributions (QNECs), as well as lost earnings on those QNECs.
• For loan failures: re-amortize or report deemed distributions appropriately.
• Maintain evidence of the correction and rationale.

Step 5: Update Internal Processes

• Revise procedures and retrain staff to prevent future errors.
• Coordinate with third-party administrators and recordkeepers to align workflows.

Step 6: Document the Review and Corrections

• Keep detailed records of your mid-year review, including:
• Description of each error and its impact
• Steps taken to correct it
• Dates of discovery and resolution

Proactive Compliance = Peace of Mind

A mid-year compliance check is a cost-effective way to stay ahead of potential risks. With the IRS's expanded self-correction options, plan sponsors can correct many issues independently and avoid triggering audits or disqualification. For more complex situations, consulting with an experienced ERISA attorney ensures that corrections are done properly and in alignment with current guidance.

If you'd like assistance conducting a compliance review or determining the best correction pathway for your retirement plan, our firm is here to help. ERISA compliance is complex, but our experienced attorneys can help you navigate these rules and regulations to avoid costly penalties and participant complaints. Contact Schechter Benefits Law Group today to ensure your employee benefit plans meet all legal requirements and that you're doing all you can to fulfill your legal responsibilities.

*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.