Not Reading Plan Document Leads to Defects

February 13, 2001 ( - The easiest way for plan sponsors to stay out of trouble with the Internal Revenue Service is to read - and follow - the written plan document, according to a new report.

Topping the list of operational failures in 1999 was a failure to follow the plan’s written terms, reported in nearly a quarter (24.7%) of the situations, up more than 8% from the prior year.  Second were incorrect allocations, noted in 15.5% of the situations.  Incorrect allocations were the most commonly cited failure in last year’s report.

Other operational problems noted by respondents to Reish & Luftman’s 2nd Annual Survey of Self-Correction of Plan Defects Under APRSC (the IRS’ Administrative Policy Regarding Self-Correction) were:

  • 12.7% – failure to admit eligible employees
  • 10.6% – admission of ineligible employees
  • 10.0% – failures of the average deferral percentage (ADP) and average compensation (ACP) tests
  • 9.2% – top-heavy violations
  • 6.0% – incorrect distributions (6%).

Most problems were corrected “readministering the plan according to its terms,” or more simply putting the impacted participants in the position they would have been in had the violation not occurred.

In nearly a quarter of the cases, the correction required putting more money into the plan, or increasing benefits for rank-and-file employees.

Black and White

The survey authors note that failure to follow the plan’s written terms commonly include such things as:

  • participant loans where the plan documents do not permit participant loans
  • more outstanding loans to a participant than the plan document permits
  • hardship withdrawals where the plan document does not allow them
  • hardship withdrawals not administered according to the plan document
  • distributions in forms – or at times – not permitted by the plan document
  • admission of employees to participation before they are eligible
  • using compensation data different from the definition in the plan document
  • allowing deferrals in excess of the Code section 402(g) or plan document limits
  • failure to comply with the minimum required distribution rules
  • failure to comply with the plan’s requirements regarding matching contributions.

Most survey respondents were third-party administrators (TPAs) and actuaries (about 71%), with most of the remainder split roughly equally between consultants and attorneys.

Information in the survey suggests that operational non-compliance occurs in only a small percentage of plans, confirming indications from the 1998 report.


In a near mirror image of 1998’s findings, in nearly 76% of the cases, the service providers reported that the defects were insignificant, while just over 24% were reported as significant defects which were corrected within two plan years after discovery of the defect.

However, 1999’s performance was improved in other ways, with just 2% of the insignificant defects having been discovered by the IRS on audit, compared with 11% in 1998.  However, the survey’s authors also suggest that the lower rate might correspond with a lower number of IRS audits.

– Nevin Adams

A full summary of the survey is available at .