...from the HR Perspective

The Self-Correction Program (SCP) embodies the application of the IRS's belief that plan sponsors should be permitted to self-correct certain types of failures on a voluntary basis without any IRS approval and without any IRS generated fee or sanction beyond the cost of fully correcting the failures.
Individual cases that are self-corrected under the SCP are handled solely by the plan sponsor. There is no direct involvement of any IRS office. If a plan is "under examination" and can still be resolved under the SCP, it is handled exclusively by the Directors, EP or EO Examinations, whose offices have examination authority over qualified plans, 403(B) plans, SimplifiedEmployeePensions (SEPs), and SIMPLE IRAs.
There are no compliance fees or negotiated dollar sanctions imposed under the SCP. This includes a plan that can be resolved under the SCP even though it is "under examination." The only cost to the plan sponsor is the expense of restoring the plan, current and former employee/participants, and beneficiaries to the position they would have been in if the failures not occurred.
Eligibility for SCP
To be able to apply the SCP, the following criteria must be met:
1.   The plan must be either a qualified plan, 403(b) plan, Simplified Employee Pension (SEP) or a SIMPLE IRA.
2.   The failure must be operational.
3.   If the plan is a SEP or a SIMPLE IRA the operational failure must be "insignificant".
4.   The plan must have established practices and procedures.
5.   The plan, as appropriate, must have a favorable letter.
6.   The failures must be self-discovered and corrected pursuant to the appropriate SCP self-correction mechanism; or the failures, as permitted under the SCP, may be corrected on audit.
7.   Full correction is ultimately made for all eligible failures.
What is an Operational Failure?
An operational failure occurs when a properly drafted plan is not administered in accordance with its terms. This failure arises solely from the failure to follow plan provisions. For example, an operational failure occurs when a plan document is timely amended during a remedial amendment period but the plan is not administered according to the amended provisions. An operational failure also occurs if a plan adopted a good faith or interim amendment but the plan was not operated in accordance with the terms of the amendment. If a qualified plan may be amended retroactively pursuant to IRC §401(b) or another statutory provision to reflect its operations, it does not have an operational failure.
A plan sponsor may use SCP to correct an operational failure in a qualified plan by adopting a plan amendment to conform the terms of the plan to its prior operations, but only to correct those operational failures that are listed in Appendix A of IRS Rev. Proc. 2008-50. An operational failure may also occur when a plan's IRC §401(b) remedial amendment period has expired, and the plan contains a provision that does not satisfy the qualification requirements.
Who Determines Whether Failures Are "Insignificant"?
The plan sponsor makes the facts-and-circumstances determination of whether an operational failure is "insignificant". The following factors are to be considered in determining whether or not operational failures under a plan are "insignificant":
1.      Whether other failures occurred during the period being examined (for this purpose a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure.)
2.      The percentage of plan assets and contributions involved in the failure.
3.      The number of years the failure occurred.
4.      The number of participants affected relative to the total number of participants in the plan.
5.      The number of participants affected as a result of the failure relative to the number of participants that could have been affected by the failure.
6.      Whether correction was made within a reasonable time after discovery of the failure.
7.      The reason for the failure (e.g., data errors, i.e., transcription of data, the transposition of numbers, or minor arithmetic errors).
What are Established Practices and Procedures?
The plan sponsor or administrator of a qualified plan, 403(b) plan, SEP, or SIMPLE IRA must have established practices and procedures (formal or informal) that are reasonably designed to promote and facilitate overall compliance by the plan sponsors and their advisers, plan administrators, and recordkeepers with the requirements that are necessary to maintain a plan's tax-favored status. If, notwithstanding the fact that these practices and procedures are in place and routinely followed, an operational failure occurs due to (1) mistake, (2) oversight, (3) an inadequacy in the procedures, or (4) because the failure related to transferred assets and did not occur after the end of the second plan year that began after the corporate merger, acquisition, or similar transaction, then SCP is an appropriate remedy. Where a plan's administrative procedures are so inadequate that there is no meaningful mechanism for operating the plan properly, the IRS has determined that this eligibility requirement will not be satisfied.
What is a Favorable Letter?
In general, a "favorable letter" refers to the requirement that a plan must have a current determination, opinion, or notification letter, to apply the SCP. This requirement has a different meaning depending on the type of plan seeking relief under the SCP and the mechanism being applied.
1.      A qualified plan must have a "favorable letter" to be eligible for the SCP; but only with regard to correcting "significant operational failures".
2.      A SEP plan document must consist of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by the employer or (ii) a prototype SEP that has a current favorable opinion letter which has been amended in accordance with applicable procedures.
3.      A SIMPLE IRA must have a plan document consisting of either (1) a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer or (2) current favorable opinion letter for a plan sponsor that has adopted a prototype SIMPLE which has been amended in accordance with applicable procedures.
Correction Mechanisms
There are two separate correction mechanisms under SCP:
1.      The first correction mechanism for "significant operational failures" is satisfied if (1) any number of eligible operational failures are self-corrected by the plan sponsor and (2) the correction is either completed by the close of the second plan year after the plan year in which the failures occurred or substantially completed by the close of two alternative periods. There is no limit on the number of years that this mechanism can be used. This mechanism can also be used, under limited circumstances, for plans under "examination". There are three exceptions to the completion by the close of the second plan year rule:
i.       In the case of a failure to satisfy the requirements of IRC §§401(k)(3), 401(m)(2), or 401(m)(9), the correction period will not end until the last day of the second plan year following the plan year that includes the last day of the additional period for correction permitted under IRC §§401(k)(8) or 401(m)(6).
ii.       The IRS recognizes that, for any number of reasons, no matter how quickly the plan sponsor acts to begin correction after self-discovery of failures, it may take considerable time to complete the correction process. Therefore the IRS will, in certain limited circumstances, not require every aspect of correction to be completed by the end of the second plan year following the plan year that the violations occurred. In those cases where correction is not completed by the end of the second plan year following the plan year in which the failure occurred, correction of an operational failure will still be eligible for this mechanism if correction is "substantially completed" by the "last day of the correction period." An operational failure is "substantially completed" by the last day of the correction period if either (A) the 120-day test or (B) the 65% test is met.
(A)       120-day test is met if (a) during the correction period, the plan sponsor is reasonably prompt in (i) identifying the operational failure, (ii) formulating a correction method, and (iii) initiating correction in a manner that demonstrates a commitment to completing correction as expeditiously as practicable, and (b) within 120 days after the last day of the correction period, the plan sponsor completes correction of the operational failure.
(B)       65% test is met if (a) during the correction period, correction is completed with respect to 65 percent of all participants affected by the operational failure, and (b) thereafter, correction is completed with respect to the remaining affected participants in a diligent manner.
iii.      In the case of an operational failure that relates only to transferred assets, the correction period does not end until the last day of the first plan year that begins after the corporate merger, acquisition, or other similar employer transaction between the plan sponsor and the sponsor of the transferor plan.
2.       The second correction mechanism applies only to "insignificant" failures and provides a facts-and-circumstances test for all applicable plans. As a self-correction mechanism, the plan sponsor determines whether, under the facts-and-circumstances test, the failures are "insignificant." This mechanism can also be used if failures are discovered for the first time on audit.
IRS Challenge To Correction Method
There will be occasions where a plan sponsor self-corrects failures under either SCP mechanism and the plan is later audited. If the EP Agent agrees that all steps were handled properly under the SCP and no other failures are discovered on audit, the case will be closed favorably. However there will also be cases where the IRS concludes, for example, that: (1) the method of correction chosen by the plan sponsor did not comply with the requirements under the IRC; (2) correction was not substantially completed by the close of the correction period for "significant operational failures"; or (3) the plan did not have a "favorable letter" required for the "significant operational failures" mechanism.
SCP Not Available For Certain Failures
1.      SCP may not be used to correct a situation in which an employer that is not eligible to establish a 401(k) plan adopts a plan intended to include a 401(k) component;
2.      SCP may not be used to correct egregious operational failures. Examples of egregious failures include consistently covering only highly compensated employees and a significant violation of the Code Sec. 415 limits for defined contribution plans;
3.      SCP may not be used to correct failures relating to the diversion or other abuse of plan assets; and
4.      SCP may not be used to correct operational failures that relate to an abused tax avoidance transaction to which the plan or the plan sponsor is a party.
No Right To A Conference
Unlike some of the other available correction methods, the SCP does not provide a right to a conference to resolve differences between the EP Agent and plan sponsor when cases are being negotiated under the SCP. The Director, EP Examinations, may establish case processing procedures under which plan sponsors should be able to make their arguments to the EP Agent handling the audit in a more formal conference setting.