Scrivener's error

[rlb64]

Prior plan document (non-standard prototype) preserved the old matching vesting schedule of 5 year cliff for pre-2002 money. This provision was never added in the new document restatement (volume submitter).

I'd like to do an amendment retroactive to 1/1/02 and submit to the IRS since such change will remove reliance on the volume submitter opinion letter.

Any thoughts?

[BeckyMiller]

See Gerlib v. R.R. Donnelley & Sons Co., N.D. Ill., No. 95 C 7401, 6/11/02. I have historically had good success with this argument where you have clear evidence that it was, in fact, a mistake. Amend the plan and ask for the specific effective date based upon the scrivener's error argument. Include the evidence that the change was unintended.

[KJohnson]

Becky,

I assume you mean asking through VCP?

[QDROphile]

Tell us more about the successes. Gerlib describes a very high barrier to use of scrivener's error as a means to correct unintended terms. Since ERISA puts so much weight on written plan document terms, it seems that it would be even tougher under ERISA. Before EPCRS we often relied on scrivener's error because we had no viable alternative, but now EPCRS speaks to reforming the document to match what the plan did (or intended?). Does that mean EPCRS is the final word and the only means for dealing with a document mistake that is not plainly erroneous on its face? If EPCRS is the only means, it does not seem that restoring less favorable terms will be treated kindly.

[austin3515]

I never read EPCRS to abolish the concept of scrivener's error. The scriverners error is just that - it is not an operational defect. To the extent that one existed, I see no barrier to arguing so.

[KJohnson]

The IRS's opinion is, I believe, that it is a factor that they will consider if you submit through VCP. If they discover it on an audit, I believe that you will have problems with the IRS although you might be succesful in the Courts. This is from the 2002 ASPA Q&A'

40. Assume a profit sharing plan with a one-year of service eligibility and 2/20 graded vesting. The TDR restatement of the plan in 1986 (for which there is a favorable determination letter) reflects 2/20 vesting in the adoption agreement, the SPD, and plan administration. Everything was fine until it is discovered in 2001 that the TRA ‘86 restatement (signed in 1992, and has a favorable determination letter on top of the 1986 letter) erroneously has the 100% vesting box checked on the adoption agreement instead of the 2/20 box. The SPD and the plan administration continue to show and apply the 2/20 vesting schedule.

Will the Service approve a scrivener's error amendment to correct the vesting schedule election on the TRA ‘86 adoption agreement to the one that has been used for the last 18 years of plan operation or must we retroactively fully vest everyone in the plan during the TRA ‘86 restatement?

A. Fact and circumstances will determine the results, but the employer’s only legitimate choice is to come in to the Service through VCP in order to resolve this one way or the other.

[E as in ERISA]

Does it go into EPCRS as a plan document error or operational error? The EPCRS Rev. Proc. says plan document errors don't go into the program until the remedial amendment period is over. And this Rev. Proc. extends the remedial amendment period for post-2001 amendments: http://benefitslink.com/IRS/revproc2004-25.pdf

[KJohnson]

I think it is an operational failure, like early participation, allowing hardships (wher the plan has no harship provision) etc where the correction is a plan amendment to conform to the operation of the plan. However, this retroactive amendment cannot be done through SCP but must go through VCP.

[E as in ERISA]

But in 1999 at ASPA the IRS said: "This example would NOT be an operational error, but a scrivener's error, which is not available to be corrected in the self correction program. This would require a Walk In CAP filing for relief" when asked how a typographical error was treated (assuming the plan was administered according to the way it was intended -- not in the way it was incorrectly drafted). We need the IRS to clarify where "scrivener's errors" fit.

[KJohnson]

The guidance has been substantially revised since 1999. A plan document failure is defined as: "The term "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or § 403(a)." Unless you had a vesting schedule which was contrary to the Code, I don't think you would have a plan document failure in the instance described above. I think it is pretty clearly an operational failure in the IRS' view.

[E as in ERISA]

But first of all, EPCRS says "A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively pursuant to § 401(b) or another statutory provision to reflect the plan's operations." So if we're still in remedial amendment for post-2001 amendments, do we have an operational failure yet in all cases?

And then a strictly legal argument....an operational failure is a failure to follow the plan's terms. And legally speaking the plan's terms are what it was intended to say, not necessarily what the scrivener (or his law clerk) wrote. Which is why you can be sucessful in court if you can prove intent. And that is all the IRS is really saying too. That they want you to prove intent to them.

[austin3515]

But in all cases throught the VCP program? It sounds like the scriveners error argument is tossed out the window with IRS involvement?

[KJohnson]

As to the RAP, I don't know of anything that would allow such an amendment "pursuant to § 401(b) or another statutory provision." Further my understanding that generally a RAP for "other" amendments covers two kinds of failures:

(1) A provision of a new plan, the absence of a provision from a new

plan, or an amendment to an existing plan, which causes such plan to

fail to satisfy the requirements of the Code applicable to qualification

of such plan as of the date such plan or amendment is first made

effective.

(2) A plan provision which results in the failure of the plan to

satisfy the qualification requirements of the Code by reason of a change

in such requirements--

As long as the "incorrect" vesting that is in the plan meets stautory minimums, I am not sure if it si something that can be corrected in a retroactive amendment through a RAP.

I think the second point (and Austin's) is well taken Really a scrivener's error argument means there is no operational failure at all. Therefore, if there is no error there no need for VCP. I don't think the IRS considers the factors that you would use to establish scriviner's to determine that there has not been a failure but rather for the notion that your correction--a retroactive amendment--is reasonable.

[E as in ERISA]

They should recognize scrivener's error in VCP -- they want to be the ones to determine if the facts support the stated intent.

Are you asking whether they will refuse to recognize it on audit? I think that's what they imply.

But what's the basis for that distinction? A scrivener's error doesn't really fit precisely into an EPCRS category. So there's no reason the facts and circumstances decision can only be made there.

[KJohnson]

I think the point is that the IRS does not recognize scrivener's error as such. With scriveer's error you "pretend" like the plan has always been written in accordance with its intent and operation.

The IRS says that the plan is what the plan is and you have an operational failure because you did not abide by its terms. Now, under VCP what is the proper correction for this operational failure? I think in determining whether it will allow you to adopt a retoractive amendment to conform to the plan's operation the IRS considers (among other factors) the same factors that you would need to establish scrivener's error. But the factors to establish scrivener's error will not get you all the way there. Thus for example if you have a claim of scrivener's error, no matter how well supported, but the "amendment" benefits only HCE's to the detriment of NHCE's my guess is that they are not going to buy-off.

If you did not go through VCP, the IRS's position would be that you had a disqualifying operational defect. Then, whether they would be successful would be for the court to decide when you proffer a scrivener's error defense.

[E as in ERISA]

1. Is there anything that very clearly specifies whether it is categorized as a document error or operational error for EPCRS?

2. Even if it is operational, what about the rule that you can fix document outside EPCRS if you are in remedial amendment period. How does that apply for purposes of the fairly open remedial amendment period we are in for post-2001 amendments?

[KJohnson]

As to the first point I think EPCRS is pretty clear that an amendment to conform to operation is the correction of an operational failure:.

(1) Availability of correction by plan amendment in VCP. A Plan Sponsor may use VCP for a Qualified Plan to correct an Operational Failure by a plan amendment to conform the terms of the plan to the plan's prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).

As to the second point, 2004-25 applies to: "disqualifying provisions

described in § 1.401(b)-1(b)(1) that are put into effect (in the case of new plans)

or adopted (in the case of existing plans) after December 31, 2001," "

The applicable reg then states:

(1) A provision of a new plan, the absence of a provision from a new plan, or an amendment to an existing plan, which causes such plan to

fail to satisfy the requirements of the Code applicable to qualification

of such plan as of the date such plan or amendment is first made

effective.

I have never thought the amendment contemplated would be the kind that would fall under the RAP, but maybe I am wrong.

[E as in ERISA]

Well, we may have to agree to disagree on that. I think that it's a stretch to say the fact that some operational errors can be corrected by plan amendment makes scrivener's errors operational errors. Document errors and demographic errors can be corrected by plan amendment.

And the discussion of plan terms not being the same as plan operations is just a basic definition of operational errors. Example: A plan document doesn't allow loans, but the plan makes loans then that is an operational error. It can be corrected by a plan amendment to make the plan terms the same as plan operations.

[austin3515]

Unless the previous plan document, the SPD, and the past 20 years of administration say differently, in my humble opinion... I mean attorney's do make mistakes after all.

Of course, it seems that you take this position with the understanding that the IRS may take issue with it. Does everyone agree that this is essentially the moral of the story?

[g8r]

Austin,

I think you stated it accurately. The IRS doesn't recognize them. It doesn't mean they aren't allowed - it just means that you may need to go to court to prove that you're right.

I should add that there is a possibility they may change their position on this. Essentially the concern is whether you can prove it was an error and that fixing it doesn't result in a reduction of benefits that are due under the plan as written.

While not what we normally think of as a scrivener's error, dhow about the memo stating that if you updated for EGTRRA prior to GUST and didn't re-execute the EGTRRA amendment when the plan was restated, that the IRS would deem it as though you "meant" for the EGTRRA amendment to remain in effect. Sounds like a scrivener error...

[401 Chaos]

I heard one high-ranking EPCRS individual informally comment a couple of years ago that you should really assume there is no such thing as a scrivener's error doctrine. That said, the individual did note that if you have ample proof that it was a clear scrivener's error, the IRS might be willing to examine that. Although not expressly stated, I believe it was assumed that any such scrivener's error argument would have to be made through EPCRS. It seems to me the problem with correcting by plan amendment in having the erroneous vesting schedule checked as compared to correcting by plan amendment for allowing loans or hardship withdrawals when the plan document didn't allow them is that those amendments are in participants' favor so it's no big deal to allow retroactive amendments. If there was 100% vesting under the Plan but the document was erroneously drafted to indicate that a 2/20 schedule applied, I doubt the IRS would have a problem with the plan correcting even if proof of the error was slim. Going in the other direction, however, is a different story and a much harder burden to meet. My point is simply that correction by retroactive plan amendment is obviously very fact-specific.