ABRC-ESOP

There is a famous old joke:

"The only mistake I ever made --- was when I thought I had made a mistake --- but, I really hadn't."

If you have an ESOP long enough, despite your best efforts, you will make a mistake in its operation. While the focus should always be on running your ESOP plan properly and trying to prevent mistakes, one should also try to rectify any mistakes as soon as possible.

Following is a recipe for resolving operational mistakes in your ESOP. It is important to understand that these are not mistakes in design, but in operations.

• 
  Anyone involved with ESOP Plans can attest to the fact that errors happen. They just do, no matter how good your service providers are. No matter how experienced your staff is; errors do happen. The bad news is that practically any error has the potential to cause a plan disqualification. Fortunately, the IRS has recognized this and established a group of formal programs under EPCRS for ESOP Companies to voluntarily correct their ESOP Plan failures and avoid disqualification.
• 
  One of the most beneficial of these programs for ESOP's is this self correction program (SCP). It allows the employer to fix the failures without involving the IRS. There are no fees or penalties, and you are not required to submit anything to the IRS. Only operational errors can be fixed under SCP. These are errors that happen because of how the Plan was run in its operation. In other words, the document itself meets all requirements; there was an error in the execution of the ESOP (i.e. operations inconsistent with the Plan terms).
• 
  Practices and procedures must have been established and followed and the failure occurred due to an oversight or a mistake in applying them, or due to an inadequacy in the procedures.
• 
  If the error is "significant" the ESOP Plan Sponsor must have received a favorable IRS determination letter with respect to the Plans “tax qualified status”. Significant operational errors must be fixed within two years after the end of the plan year in which the operational failure occurred.
  Insignificant operational errors can be fixed at any time, no matter how old. Insignificant operational errors can even be fixed during an IRS examination.
• 
  The IRS uses a list of factors to determine if an error is considered significant or insignificant (e.g. whether other errors have occurred, number of years involved, number of participants involved and percentage of plan assets involved, etc.).