Scrivener's Error?

We have a client who has operated their plan  as a safe harbor using/with a QACA match since 2011.  At some point- when the     document was restated in 2016, the attorney doing the restatement checked  Sh 3% - maybe election as the option.  The SH notice from 2011-2016 stated QACA but the 2017 one had 3%...  As I said, the client has always calculated and funded the basic QACA match....How in the world can this be fixed?  Scriviner's error or major deal with IRS filings?

This is from ASPPA about 3 years ago, I don't know if things have changed in the last few years

https://www.asppa.org/Resources/Publications/Plan-Consultant-Online/PC-Mag-Article/ArticleID/5125

Quote

...The IRS doesn’t recognize scrivener’s errors. All too often, a document drafter makes mistakes when a plan is restated or amended (scrivener’s errors). After the restatement or amendment, the plan is administered in accordance with the intended provisions instead of the actual, incorrect plan terms, and the scrivener’s error is discovered later. ...

There is more in section 2 of the article that is worth reading through.

Not sure if anyone has any more recent experience with this issue and the IRS but this was last info I recall on the topic when doing a continuing ed through ASPPA webcast which agreed with the article as far as I recall.

This is one of the reasons why there is vcp.  IRS has been fairly generous in the few cases I've had like this.

The IRS says they don't allow fixes for scrivener's errors, but usually will accept a retroactive amendment "to conform to the plan's operation" under VCP.

My view generally is if the plan was operated more generously than the erroneous document (e.g., the document erroneously says last day and 1000 hours for a PS allocation, but intent and operation has always been last day with no hours requirement) I recommend the sponsor just adopt a retroactive amendment with the reasoning laid out in the board resolution.

In the opposite case (e.g., plan doc says 1000 hours for PS allocation, but sponsor intended and operated as 1000 hours and last day), I recommend VCP to retroactively amend to prior operation. 

We have seen the IRS be fairly generous i this area as well - BUT only when 1) the intent of hte plan sponsor is clear; 2) the actions of the plan sponsor are consistent with that intent; and 3) communications to employees are clear and consistent with the plan sponsor's intent.

It's #3 that is often the problem - with automated document systems churning out SPDs and notices consistent with the plan documents but inconsistent with the intent of the plan sponsor.

That a summary plan description produced using plan-documents software often doesn’t set up evidence of an intent or expectation different than the written plan was the subject of my article “ Should we write the summary plan description before we write the plan ” published in the July 2017 issue of 401(k) Advisor .

2017-06 Should we write the summary plan description before we write the plan.pdf

1 hour ago, Fiduciary Guidance Counsel said:

That a summary plan description produced using plan-documents software often doesn’t set up evidence of an intent or expectation different than the written plan was the subject of my article “ Should we write the summary plan description before we write the plan ” published in the July 2017 issue of 401(k) Advisor .

2017-06 Should we write the summary plan description before we write the plan.pdf

Agree completely. I tend to use actual practice rather than the SPD. For example, if a plan doc (erroneously) says no minimum eligibility requirements, and the SPD is consistent because the same software generated both, but in practice the plan sponsor has always used age 21 / 1 YOS, I think that shows the intent. I've also never had any plan sponsor pick up on a document error like this because a participant (or non-participant) read the SPD and brought it up. It's almost always raised by the plan's auditor. 

EDIT: I should note that I've usually seen this situation arise where a plan term got mixed up in a restatement or document migration. In other words, there was at one point correct plan language, but it got translated incorrectly for some reason. I'm not advocating for completely ignoring the plan's terms then going back and saying "but we've always ignored the plan's terms."

I have recently been involved with a similar issue regarding a defined benefit pension plan.  Same type of error--someone misinterpreted how a checklist should be prepared, resulting in different benefits.  Bad checkmark, bad result.  The IRS, through VCP, will allow a retroactive amendment (given proper proof)  that will solve the issue with IRS, however, other agencies are not bound to recognize it. 

The only way to properly retroactively reform the document is through Federal Court.  Depending upon which Circuit you are in, this could be difficult.  The 5th Circuit, for example, uses a contract theory (vs. trust theory), which would require participants to sign off.

Participants can be prickly if they think they can get more money.

As others have been saying if we can document intent via operation and communications we can get the VCP filing approved to fix it.  

I just wanted to update with a very recent experience with the IRS on a pending VCP filing seeking a retroactive amendment to deal with a "scrivener's error."

The initial response contains the following language  verbatim:

"1. Please revise your submission to remove the terms "scrivener's error" from all narative sections.  The Service does not recognize the use of the term.  (emphasis added)"

...

"5. In operation of the Plan the Applicant is to follow the written terms of the Plan.  The acceptable correction for your failure is to [make a corrective contribution]

In rare circumstances , your request to correct your "drafting" error by adopting a retroactive amendment to conform the terms of the Plan to the Plan's operation may be considered if there is clear and convincing evidence to support employee expectations in accordance with the Plan's operation .  Conflicting notices and communications were issued to the affected participants.  Please explain how it is then possible to support clear and convincing employee expectations in line with how the Plan was administered." (emphasis added)

I would suggest that to obtain IRS approval for a "scrivener's error" correction via a retroactive amendment when there have been auto-generated employee communications consistent with the error is no slam dunk - as some have suggested.  Again, a problem with auto-generated documents - but for large(r) service providers, three isn't much of an alternative.

Interesting, thanks for sharing MoJo. I'm putting together a submission right now with similar facts, so I'll be interested to see if I get the same language back. I don't typically use the phrase "scrivener's error" but I think that would only knock out paragraph 1, with the substantive paragraph 5 remaining. I usually try to front-load as many supporting facts as possible in the original submission. Maybe they've raised the bar.

EBECatty:  It is rather interesting that in the past we have gotten approval for the retro amendment.  This one is a little more complicated for a variety of reasons, and was filed as an anonymous VCP - because....  The problem with the communications is that "system generated" materials (SPDs, regulatory notices) all were produced with the plan language, and SOME of them were manually edited by a rogue plan manager to conform to actual operations.  If they had 1) raised their hand and said something isn't right here; or 2) made ALL of the communications conform, this wouldn't be an issue (and my preference would have been the former approach).  All of the "glossy" materials (education) and all of the employee meetings were consistent.  We'll see....

The lesson learned here is EVERYONE should be an issue spotter - and scream loud and long when something isn't right.

MoJo, thank you for sharing two helpful stories.

Agree with all of the above. Re the issue of SPD not helping the case as to what the employees understood, if the SPD is at least ambiguous and you have substantial other evidence to show that the employees understood the benefit to be what the employer thought it was (e.g., annual accrued benefit statements for a DB plan that reflect the employer's intended pension formula, or employee presentation materials for a 401(k) that accurately describe the employer's matching formula, etc.), you have a good chance, in my experience, of getting a retro amendment in VCP.

About an individual-account (defined-contribution) retirement plan, does anyone have an experience with using annual or quarterly participant account statements in an effort to persuade the Internal Revenue Service that participants' true expectation was what those statements showed, and was not what the written plan and the summary plan description stated?

If so, did it persuade the IRS?

I have a similar situation to these facts- prototype plan; mistake made in PPA restatement; the system-generated participant communications (including safe harbor notices since 2016) picked up the error.

For those who have successfully argued in VCP that a retroactive amendment is appropriate, what types of information have you included to show the plan sponsor's intent? Prior plan provisions? I am struggling with how to prove the negative (i.e., that the plan sponsor did NOT intend to revise the plan).  Thanks!

1 hour ago, kshawbenefits said:

I have a similar situation to these facts- prototype plan; mistake made in PPA restatement; the system-generated participant communications (including safe harbor notices since 2016) picked up the error.

For those who have successfully argued in VCP that a retroactive amendment is appropriate, what types of information have you included to show the plan sponsor's intent? Prior plan provisions? I am struggling with how to prove the negative (i.e., that the plan sponsor did NOT intend to revise the plan).  Thanks!

We just successfully concluded one - but it was not easy.  The IRS "standard" is that you must show by "clear and convincing" evidence that the participant knew what the plan provided (in operation).  We had the same issue with system generated documents (SPD, various notices and the like) perpetuating the error - but we had all of the educational materials consistent with practice (and not the document). 

The initial response was NOT favorable, so we went back and gathered more materials that were distributed to participants.  We put together a chart - showing what said what, when everything was delivered (including printing receipts and delivery tickets, and other ways of distribution for the various documents), and made the argument that the materials most likely to have been read, and most voluminous during the period were consistent with plan operation (and not the document error).  We had the advantage as well that the bulk of the affected population was Hispanic, and the ONLY documents translated into Spanish were the educational materials (not the system generated docs).

The end result was a demonstration that 3 times as much "stuff" was consistent with plan operations (and more likely to have been read) than consistent with the plan document (although all of the regulatory notices were "in error").  They bought it.

I would suggest being prepared for that level of detail, if it exists, to be successful.

We were successful recently in a VCP application dealing with definition of compensation. The SPD did not help, or hurt, because the language there was vague. (Hooray for vagueness!). We were able to show for almost all years using PowerPoints from employee meetings, as well as offer of employment letters, that the definition of compensation communicated to the employees was the definition that the employer had actually used in the plan's administration.the. We built a spreadsheet that showed each participant's "touches" by these materials in multiple years (was a fairly large plan, so not trivial). For the first years where the error had occurred, we had no materials, nothing (they probably just had not been preserved). The IRS did not give us those years. But the bulk of the money was in the years for which we did have very good evidence that employer's intent and understanding had been communicated.

Has anyone built a case on the sponsor/administrator's admission that the service provider's draft SPD dead-ended with the administrator, and never was delivered to any participant or employee?

12 hours ago, Fiduciary Guidance Counsel said:

Has anyone built a case on the sponsor/administrator's admission that the service provider's draft SPD dead-ended with the administrator, and never was delivered to any participant or employee?

We've thought about that - but that raises other issues that might bring the wrath of the DOL.  In our case, the SPD was "on-line" - but it required "employees" to actually sign up and the system "requires" an affirmative election (zero is permissible) to get through to where everything else is).  Since our issue involved an auto-enroll error, we ""danced" around the issue indicating that the plan administrator distributed the SPD to "store managers" who "probably" put them in a break room and we had evidence anyone clicked through to the on-line version.  "Delivered" under applicable rules, uh, we plead the fifth.  Effective as part of an argument for IRS purpose, yes (but as indicated above, we had lots of other materials "consistent" with plan operation).