Like an ink stain on otherwise clean white carpet, a scrivener's error is a problem, an embarrassment, begging for attention. The current dilemma facing plan sponsors and their advisers is what to do with them? Should, or must, they be professionally cleaned (that is, corrected with considerable effort and expense under the IRS's Voluntary Correction Program - VCP) or is it okay to just cover them up (by retroactively "correcting" the errors on an "informal" basis)? In light of the IRS's current position - essentially, that there are no such things as scriveners' errors - the resolution of this dilemma can be very tricky and sometimes costly. This article focuses exclusively on the tax qualification aspects of scriveners' errors. Sponsors and practitioners must always remember that changes in plan documents, including scrivener's errors, will also have important implications for purposes of Title I or ERISA. The Title I issues are not addressed here. What is a "scrivener's error?" For our purposes, a scrivener's error is an unintentional mistake in the drafting of the plan. Scriveners' errors occur for many reasons; however, two of the most important factors contributing to an increase in scriveners' errors are:
- The increase in the number and frequency of plan amendments and restatements either to comply with law changes or as part of a move from one plan document provider to another.
- The failure or inability of plan sponsors to recognize the subtle (and not so subtle) differences between the sixty page plan document they were using and the seventy-five page plan document they have just switched to.
In our employee benefits law practice, we have seen hundreds of these mistakes; and, as far as we are concerned, that is exactly what they are - mistakes. Typically, due to a combination of sloppy document drafting and less than careful document review, plan provisions are changed without any intent or request by the sponsor to make such changes. As part of the recent GUST restatement process, we have observed accidental changes in: definitions of compensation; requirements for receiving an allocation; forms of distribution; exclusions from eligibility; and basic plan eligibility. We also have seen numerous mistakes in the proper boxes on the Adoption Agreement being marked.
Many readers certainly must be thinking,"Well, if an honest mistake was made, why don't you just fix it?"
Fixing the scrivener's error or mistake is not as easy or as simple as it might seem. The reason for this is the IRS's current position that scriveners' errors do not happen. Essentially, the Service takes the position that if the terms of a plan change, the plan's sponsor is responsible for the change, whether or not it was intended. There are at least two fairly sound policy reasons for the Service's position. First, there is the fundamental, and extremely important, qualification requirement that each plan be a "definite written program" [Treas. Reg. 1.401-1(a)(2)]. That is, at any given time the parties to the plan, sponsor and participants, as well as those regulating the plan (IRS and DOL) must be able to read the plan document and determine what benefits, rights and restrictions are contained in it. If a plan sponsor is allowed to ignore various plan provisions by claiming they are mistakes, scriveners' errors, the basic integrity of the plan will be undermined. Second, because the determination of a plan sponsor's intent with respect to a particular plan provisions is inherently factual (and may boil down to the word of a business owner or executive), the Service is concerned about the potential for abuse in this area - the potential for plan sponsors or plan advisers to make retroactive plan changes under the false pretense of correcting a scrivener's error.
Due to these and similar concerns, the Service appears to have adopted the position that any so-called scrivener's error, the correction of which would require a reformative amendment, must be corrected on a supervised basis under VCP. Furthermore, reformative amendments under VCP generally will be allowed only upon proper substantiation that:
- The plan sponsor did not intend the provision that is the subject of the error.
- The plan has been operated in accordance with the sponsor's intention.
- No participant relied, or reasonably would have relied, on the mistaken provision to their detriment.
For the reasons mentioned earlier, the IRS does not view scriveners' errors as innocent mistakes that can and should be corrected as quickly as they are discovered. Instead, the IRS views such mistakes as changes in the plan document giving rise to an operational failure - the failure to operate the plan in accordance with its terms. Therefore, the IRS believes these errors can only be corrected voluntarily under VCP or involuntarily under audit CAP.
The problem with this approach is that it attempts to force the correction of what may be thousands (perhaps tens of thousands) of such mistakes in VCP. This is both unrealistic and naive. It is unrealistic for the Service to expect plan sponsors to spend thousands of dollars in VCP sanctions, thousands of dollars in attorney or adviser fees, and sometimes more than a year of time trying to correct what is in their view, a "stupid" or "harmless" error that no one intended. Since many of these errors are blamed on the pension consultant, attorney, investment provider, or other adviser who prepared the document, it will be difficult to get the culpable party to take responsibility if that means paying all these sanctions and fees. Instead, many plan consultants and advisers, when faced with this situation, are simply "correcting" the scrivener's error (in some cases without even telling the plan sponsor that a scrivener's error was made). Obviously, the problem with this approach is that it may involve the back dating of plan documents or the substitution of plan pages - both things that could conceivably constitute illegal or possibly criminal acts.
From a policy standpoint, the IRS should want plan sponsors and their advisers to correct these problems in a manner that is open, honest and which would permit the Service to verify that the correction of the scrivener's error was not an abuse. For this to happen, we believe that the IRS needs to:
- Recognize the reality of plan documentation - that is, honest and innocent mistakes - scriveners' errors - sometimes happen.
- Make it both easier and less expensive to correct scriveners' errors.
Two possible solutions have occurred to us. First, the IRS could expand its current determination letter program to allow plan sponsors, upon the submission of adequate substantiation, to correct their scriveners' errors. This approach would have the added advantage of encouraging the review of more plan documents by the IRS. Arguments that reviewing agents are not capable of considering such situations are, in our view, misplaced. After all, the Service still gives plan reviewers the responsibility and training to review and make determinations with respect to controlled group, affiliated service group and leased employee issues.
Second, the IRS could allow plan sponsors to self-correct their scriveners' errors under an expanded version of its self-correction program (SCP). In order to preserve its right to monitor or review such corrections, to prevent abuses, the IRS could require a simple notice of filing by the plan sponsor describing the scrivener's error, substantiating the sponsor's original intent with respect to the terms of the plan, and indicating how the error was corrected.
Either or both of these approaches will encourage honest sponsors and advisers to correct such errors in an open, transparent manner. As long as the IRS continues to adhere to its current, more hard-line approach, it will "force" many, many sponsors and advisers to do something that just isn't right.
This article was republished with permission from the Journal of Pension Benefits, Spring 2004, Vol. 11, Number 3, ©2004, Aspen Publishers, Inc. All rights reserved.