What must pension administrators consider to correct plan errors?

In defined benefit (DB) plan administration, errors can occur in following the provisions of the plan document, applying regulatory guidelines, or processing plan data. DB plan administration errors, or failures, can have serious consequences, including disqualification. Fortunately, the Internal Revenue Service has established programs for correcting errors in a relatively easy manner.

Failure to administer a plan in accordance with the plan document and applicable regulations can result in severe tax consequences. If a plan is disqualified, the plan’s trust loses its tax-exempt status and this affects the plan sponsor’s ability to deduct plan contributions. Additionally, contributions are subject to Social Security, Medicare, and federal unemployment taxes and trust earnings are subject to income tax. Plan distributions are no longer eligible for rollover to another eligible retirement plan or IRA.

In order to correct plan failures completely, you must start with a plan. In this article, Milliman’s Mary Hart discusses several ways to correct plan errors.

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