Suspect you made a misstep in your 401(k) administration? There’s now a greater chance you can correct that on your own, without ever having to get the Taxman involved.
IRS Revenue Procedure 2019-19 expands a key portion of its Employee Plans Compliance Resolution System.
Here’s what you need to know should you find yourself in this boat.
Expanding the Self-Correction Program
The fed system has three parts:
- Self-Correction Program (SCP) – which lets you correct certain plan failures without contacting the IRS or paying a user fee.
- Voluntary Correction Program (VCP) – which allows employers to correct failures not eligible for self-correction or get the IRS’s written agreement that specified failures were properly corrected.
- Audit CAP – which you’d use to resolve failures discovered during an IRS audit that you can’t self-correct.
Specifically IRS is expanding the SCP for certain 401(k) (or 403(b)) failures.
It looks like the Service is attempting to respond to some situations that are becoming more common – such as plan loans – where your peers may have experienced some missteps.
There are also provisions to help you make retroactive plan amendments.
IRS outlines everything in a clear chart to help you understand the failure, corrections and conditions permitted by the SCP now.
And you can start right away – the expanded program became effective April 19.
Avoid loans altogether – how one of your peers did it
Of course, there are circumstances when employees just need that money. But you know it’s better to not have employees borrowing from their nest eggs in the first place. It’s hard enough to get people to save enough as it is.
One of your peers was able to stop the practice completely.
In one year alone, around 14% of their employees had taken out a loan from their 403(b) plan. What’s worse, these loans were generally for a nominal amount, say $1,500 or less.
That meant people were paying high fees and, in some cases, penalties on very modest loans.
Because they were a nonprofit, bumping up pay really wasn’t an option. So they focused on alternatives to borrowing from their plan.
The key: financial wellness. They researched financial wellness initiatives that would not only address the loan problem but also offer in-person education for employees.
There were a number of companies that would offer low-cost loans but only offered an online-educational component. But this company was adamant about finding a vendor that provided in-person education, which they ultimately did.
In the end, they went with a company that offered employees 0% interest loans and in-person education sessions on personal finance issues.
The loan program was rolled out as an experiment, but it’s been so successful it’s been in place for several years now.
As for the borrowing problem, now no employees are taking loans out of their retirement plan.
Bonus: They’ve also seen their turnover rate drop by around 10% since the program’s inception.
