Top 5 Corrections Under EPCRS That Every 401k Plan Sponsor Should Know

Managing a 401k plan involves many responsibilities, and ensuring compliance with IRS rules is one of the most critical. Mistakes happen, but the IRS offers a way to fix them through the Employee Plans Compliance Resolution System (EPCRS). Understanding the top corrections under EPCRS can save plan sponsors from costly penalties and protect participants’ retirement savings. This post breaks down the five most common corrections under EPCRS that every 401k plan sponsor should know.

What is EPCRS and Why It Matters

The Employee Plans Compliance Resolution System (EPCRS) is the IRS’s program to help retirement plan sponsors correct plan failures. These failures can range from missed contributions to operational errors. EPCRS allows sponsors to fix mistakes and keep their plans qualified, avoiding disqualification and penalties.

For 401k plans, EPCRS is especially important because these plans have strict rules about contributions, eligibility, and distributions. Failure to comply can lead to serious tax consequences for both the employer and participants.

1. Correcting Missed Employee Deferrals

One of the most common errors in 401k plans is failing to timely deposit employee deferrals. When employees contribute part of their salary to the plan, those amounts must be deposited as soon as they can be reasonably segregated from the employer’s general assets. The Department of Labor recommends depositing deferrals as soon as possible, generally within a few business days.

What happens if deposits are late?

Late deposits can cause the plan to fail the IRS’s operational tests. Under EPCRS, sponsors can correct this by:

• Calculating lost earnings on the late deposits.

• Making corrective contributions to the affected participants’ accounts.

• Documenting the correction and improving deposit procedures to prevent future delays.

  
  

For example, if a participant’s $500 deferral was deposited 30 days late, the plan sponsor must add earnings based on a reasonable interest rate from the date the deferral should have been deposited until the actual deposit date.

2. Fixing Excess Contributions

Excess contributions occur when an employee contributes more than the IRS annual limit or the plan’s limit. For 2024, the IRS limit for employee elective deferrals is $23,000 (including catch-up contributions for those 50 and older).

How to correct excess contributions?

• Identify the excess amount.

• Distribute the excess plus earnings to the participant by the tax filing deadline (including extensions) for the year the excess occurred.

• If the excess is not corrected timely, it can result in double taxation.

  
  

EPCRS allows plan sponsors to correct excess contributions even after the deadline by making a plan amendment and restoring the plan’s qualified status.

3. Addressing Eligibility and Coverage Failures

401k plans must meet certain eligibility and coverage rules to ensure fairness. For example, the plan must allow all employees who meet the criteria to participate and pass nondiscrimination tests.

Common issues include:

• Excluding eligible employees.

• Failing to offer the plan to certain employee groups.

• Not passing the actual deferral percentage (ADP) or actual contribution percentage (ACP) tests.

  
  

Correction methods:

• Make corrective contributions to non-discriminatory groups.

• Amend the plan to expand eligibility.

• Refund excess contributions to highly compensated employees.

  
  

For instance, if a plan fails the ADP test because highly compensated employees defer too much, the sponsor can refund the excess deferrals to those employees to fix the failure.

4. Correcting Plan Operational Failures

Operational failures happen when the plan is not operated according to its written terms. Examples include:

• Incorrect loan procedures.

• Improper hardship distributions.

• Failing to provide required notices.

  
  

EPCRS allows sponsors to correct these by:

• Amending the plan to reflect actual operations.

• Making any necessary corrective contributions.

• Documenting the correction process.

  
  

For example, if a plan allowed loans beyond the maximum limit, the sponsor can amend the plan to allow those loans retroactively and ensure proper documentation.

5. Fixing Late Required Minimum Distributions (RMDs)

Participants must begin taking required minimum distributions (RMDs) from their 401k accounts by April 1 of the year after they turn 73 (for those turning 72 after 2022). Missing RMD deadlines can cause a 50% excise tax on the amount that should have been withdrawn.

How to correct late RMDs?

• Distribute the missed RMD as soon as possible.

• File IRS Form 5329 with a request for a waiver of the excise tax, explaining the reasonable cause for the delay.

• Document the correction and notify the participant.

  
  

EPCRS helps sponsors avoid penalties by providing a clear correction path for late RMDs.

Final Thoughts on EPCRS Corrections for 401k Plans

Understanding and addressing common 401k plan errors through EPCRS is essential for plan sponsors. Timely corrections protect the plan’s qualified status and participants’ retirement savings. The five corrections covered here—late deferrals, excess contributions, eligibility failures, operational errors, and late RMDs—represent the most frequent issues sponsors face.

Plan sponsors should regularly review plan operations, maintain clear documentation, and consult with retirement plan professionals to catch and fix errors early. Taking these steps helps ensure the plan runs smoothly and participants receive the full benefits they deserve.

If you manage a 401k plan, start by reviewing your plan’s compliance status today. Early action can prevent costly problems down the road.