Is there a way to correct a deficiency in an ESOP or other benefit plan under IRS rules once it has been discovered without jeopardizing the entire ESOP or other benefit plan?

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ANSWER  Plan qualifications issues are overseen by the IRS. These would include any plan actions that are in violation of basic plan rules, such as not making distributions in a timely manner, violation contribution limits, improper allocations or eligibility practices, etc. In 2022, SECURE 2.0 updated rules for correcting errors. The Administrative Procedure Regarding Self-Correction (APRSC) was created in January 1997 to provide a simpler procedure for correcting plan operation errors. The APRSC is meant to cover operational errors resulting from a failure to follow plan terms. The error must be one that would result in the disqualification of the plan under Section 401(a) of the Internal Revenue Code, the section governing ESOPs and other qualified plans. The APRSC is meant to cover operational errors resulting from a failure to follow plan terms. Operational errors would include such things as failing to cover an employee who met plan rules, not providing both of the 60-day put option periods for a departed employee, or failing to provide appropriate vesting to someone who was reemployed after a break in service. To qualify, the plan sponsor must be able to show that the proper procedures are normally followed but that an error occurred in this instance. Sponsors must also provide a plan to ensure future errors will not occur.The procedure does not cover issues that have to be resolved by changing the plan or from changes in the company or its workforce that alter the impact of the plan. Examples of errors not covered would include a company that failed to include participants of a new division it acquired or a violation of prohibited transaction rules, such as allocating stock to the account of a 25% owner that had been acquired by an ESOP in a Section 1042 “rollover” transaction. Finally, the use of plan assets for disallowed purposes, such as investing in real estate owned by a former seller, would not be covered. In other words, this procedure is meant for administrative errors, not for basic violations.The sponsor must correct the problem within one year of the end of the plan year it occurred. If the plan is being audited, the procedure does not apply. The sponsor must correct the problem for every year it occurred, restore appropriate benefits to employees, and restore the plan to what it should have been had the error not occurred. The sponsor does not have to submit anything to the IRS. Rather, it should fix the problem, keep records of what it does, and await an IRS audit, if that should occur.More significant plan errors must be corrected if: (1) the correction is completed or substantially completed by the last day of the third plan year following the plan year in which the failure began; (2) the plan or plan sponsor is not “under examination” by the IRS (unless the correction is substantially corrected at the time that the plan or plan sponsor is under examination); and (3) the plan is the subject of a favorable determination letter.SECURE 2.0 expanded this program to allow self-correction for any “eligible inadvertent failure” to comply with applicable requirements of the Internal Revenue Code. This includes failures where the company has policies and procedures in place that are designed to comply with the law but is inadvertently failing to follow them in a way that can be self-corrected by the company. More egregious failures, diverting or misusing assets, or tax-avoidance schemes are not included under the new requirements.