Administering a retirement plan is a complicated task fraught with potential missteps. Fortunately, employers are now able to self-correct most errors and thereby avoid the considerable time and expense of filing an application with the Internal Revenue Service (IRS). However, this option is only possible if the employer has “established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance.” Because employers are now self-correcting more errors than ever, they should take time to review and establish practices and procedures to ensure they satisfy this requirement.

Where does the “practices and procedures” requirement come from?

The “practices and procedures” requirement is currently stated in Revenue Procedure 2021-30, which sets forth the IRS Employee Plans Compliance Resolution System (EPCRS), one component of which is the Self-Correction Program (SCP) under which retirement plan errors may be self-corrected. The requirement is also referenced by the IRS in Notice 2023-43, which provides interim guidance relating to the expansion of SCP under SECURE 2.0.

What exactly is required?

The IRS has not provided extensive guidance specifying how the “practices and procedures” requirement is met. What we do know comes from Revenue Procedure 2021-30. Specifically, for an error to be eligible for self-correction, the practices and procedures must be designed to facilitate compliance in both “form and operation.” They also must have been in place when the error occurred. Additionally, the error must have occurred either through an oversight or mistake in applying the practices and procedures or because the practices and procedures, while reasonable, were not sufficient to prevent the error. Notably, the IRS has stated that the existence of a plan document alone does not constitute evidence of the necessary practices and procedures.

What should employers do to ensure this requirement is met?

Employers should first review and compile any written procedures that are currently in place, including procedures that may have been prepared by the plan’s recordkeeper or third-party administrator. Many plans will already have written procedures governing loans, qualified domestic relations orders, and hardship distributions. Employers should then consider adopting a comprehensive written administration guide or similar policy document to address administrative practices that may not already be covered by existing written procedures, such as procedures for providing notices to participants or amending the plan document for changes in the law. It is possible for an employer to rely on “informal” practices and procedures, but it may be very difficult to prove to the IRS what it had in place. Furthermore, the process of establishing practices and procedures will help the employer identify matters that need to be covered. 

If a policy document is adopted, it should be implemented operationally, updated regularly, and utilized to conduct retrospective reviews of operations. The policy document should provide high-level guidelines and avoid being too specific or technical. Of course, no written document is going to prevent all errors. However, having such documentation in place is a straightforward and tangible step toward satisfying the “practices and procedures” requirement and helping ensure self-correction is available when errors inevitably occur.