Reforming Plan Documents to Correct Drafting Mistakes (Posted March 22, 2004) Technical Tip 117: The following question and answer were from the IRS Q&A Session at the 2002 ASPPA Annual Conference: Assume a profit sharing plan with one year of service eligibility and 2/20 graded vesting. The TRA 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 scheduled. 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? Response: 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. Comment by the RLR&C ERISA attorneys: The term "scrivener's error" describes the situation where a drafting mistake causes a document to read differently from what was intended by one or more of the parties governed by the document. When this type of mistake occurs in the context of a qualified plan, it results in the plan operating in a manner inconsistent with its written terms, which constitutes an "operational failure" under IRS rules and, as such, subjects the plan to disqualification. As might be expected, plan sponsors often desire to fix this type of error by retroactively amending the plan -- also known as "reforming" or "conforming" the plan document -- to match the plan sponsor's intent and the plan's actual operation. The IRS generally takes the position that a retroactive plan amendment is an inappropriate method for correcting an operational failure. Rather, the IRS preferred method of correction is for the plan to retroactively operate in accordance with its written terms, as required under Code section 401(a)(1) and related regulations. In this Q&A, the IRS acknowledges that a scrivener's errors presents a situation where the use of a reformative amendment to correct an operational failure may be warranted; however, such an amendment is permissible only if it is approved under the IRS' Voluntary Correction Program (VCP). In our experience with VCP, the more clearly the facts and circumstances establish that a scrivener's error occurred, the more likely the IRS will be to approve correction through a retroactive amendment -- and the key element is always the plan sponsor's intent. To this end, the plan sponsor's intent can be established by some or all of the following: (i) the plan's long-standing documentation and operation; (ii) the summary plan description and other participant communication; (iii) the forms completed and/or other writings used to generate the plan document; (iv) plan checksheets and worksheets; and (v) plan committee minutes. In making a determination, the IRS will also consider the extent to which the retroactive amendment adversely impacts plan participants and beneficiaries. If the adverse impact is significant, the VCP application must be carefully drafted to explain why this should not result in a rejection of the proposed method of correction. Since the IRS is generally opposed to correction of scrivener's errors through a retroactive amendment, it is our recommendation that any VCP applications in this regard be submitted on an anonymous basis. This will provide the plan sponsor with the opportunity to withdraw without identifying itself, in the event the IRS does not permit the retroactive amendment and the plan sponsor is unwilling to correct on any other basis. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.