IRS Self-Correction Program (SCP) Under EPCRS: Deadlines and Fixes

The IRS Self-Correction Program, known as SCP, lets a retirement plan sponsor fix operational mistakes on its own without filing anything with the IRS and without paying a user fee. It is one of three correction tracks under the Employee Plans Compliance Resolution System (EPCRS), currently governed by Revenue Procedure 2021-30 and significantly expanded by Section 305 of the SECURE 2.0 Act of 2022.¹ Qualified plans such as 401(k) and profit-sharing arrangements, 403(b) plans, SEPs, and SIMPLE IRAs can all use it.² If you catch the mistake early and had reasonable compliance procedures in place, SCP is the fastest and cheapest way back into compliance.

What SCP Can Fix

SCP is built for operational failures, meaning mistakes in how the plan was run rather than how it was written. Typical examples include excluding an eligible employee from participating, failing to withhold deferrals a participant elected, not making a promised employer contribution, exceeding annual contribution limits, and loan administration errors.³

Plan document failures are a different category. If the plan document is out of date, missing a required amendment, or noncompliant with current tax law, SCP generally cannot fix it, and the sponsor has to use the Voluntary Correction Program instead. SECURE 2.0 may eventually open self-correction for certain document failures under interim guidance, but a failure to initially adopt a written plan can never be self-corrected.¹

Three types of failures are permanently off-limits for SCP no matter how the plan is otherwise doing: egregious failures, failures involving diversion or misuse of plan assets, and failures tied to abusive tax avoidance transactions.¹

Who Is Eligible to Self-Correct

The core requirement is that the plan had established practices and procedures reasonably designed to promote compliance before the failure occurred. Written administrative manuals, payroll system configurations, third-party administrator procedures, and checklists all count as evidence of that infrastructure.⁴

Under the pre-SECURE 2.0 rules that still govern failures which don’t qualify as “eligible inadvertent failures,” a significant operational failure also requires a favorable letter from the IRS: a determination letter for individually designed plans, or an opinion or advisory letter for pre-approved plans covering the most recently expired remedial amendment cycle.⁵ For eligible inadvertent failures under SECURE 2.0, the favorable letter requirement no longer applies.¹

How Long You Have to Correct

Deadlines depend on how the failure is classified. There are three tracks to know.

Insignificant Failures

Insignificant failures can be self-corrected at any time, with no deadline, and even if the plan is currently under IRS examination.² The IRS looks at several factors to decide whether a failure is insignificant: the number of affected participants relative to the plan population, the dollar impact as a percentage of plan assets, whether the failure lasted one plan year or several, and whether it grew out of a data or systems issue versus a procedural gap. A failure affecting a handful of participants out of hundreds, involving a small fraction of plan assets, almost always lands here.

Significant Failures

Significant failures have traditionally had a hard deadline: the correction must be completed by the end of the third plan year after the year the failure occurred, and substantially completed before the plan comes under examination. That three-year window still applies to any significant failure that doesn’t qualify as an eligible inadvertent failure, such as one where the plan lacked adequate compliance procedures.²

Eligible Inadvertent Failures (SECURE 2.0)

Section 305 of SECURE 2.0 created a much wider correction window. An eligible inadvertent failure is one that happened despite the plan having reasonable practices and procedures, and it can’t be egregious, involve misuse of plan assets, or relate to an abusive tax avoidance transaction. For these failures, the correction period is indefinite. Two things can shut the window: the IRS identifies the failure before the sponsor has started correcting it, or the sponsor fails to finish the correction within a reasonable period after discovering the error.¹

The IRS defines “reasonable period” as the last day of the 18th month after the sponsor identifies the failure. There is a tighter timeline for employer eligibility failures, where the plan accepted contributions from an ineligible employer: contributions have to stop as soon as reasonably practicable, and no later than the end of the sixth month after the failure is identified.¹

How an IRS Examination Cuts Off SCP

Losing SCP access almost always happens the same way: the IRS finds the problem first. A plan is treated as under examination not just during an active audit but also once the sponsor has received verbal or written notice of an upcoming exam, while the plan is in Appeals or litigation on issues from a prior exam, when a plan aggregated with yours for coverage or nondiscrimination testing is under examination (for the specific failures at issue), and when an IRS agent flags possible failures during a pending determination letter review.⁴

Insignificant failures survive all of that; they can be self-corrected regardless. For a significant failure, once the IRS has identified it, SCP is off the table and the plan moves into the Audit Closing Agreement Program (Audit CAP), where sanctions are set based on the nature, extent, and severity of the problem.⁶ Under SECURE 2.0, an eligible inadvertent failure can still be self-corrected after examination begins only if the sponsor had demonstrated a specific commitment to self-correct before the IRS identified the failure.¹

Correcting Common Errors

Missed Deferrals

When an employer fails to withhold elective deferrals a participant elected, the standard correction is a Qualified Non-Elective Contribution (QNEC) equal to 50% of the missed deferral, adjusted for earnings. The QNEC comes from the employer, since past wages can’t be retroactively docked.⁷

Two reductions can shrink that 50%. If the plan has an automatic contribution feature and the sponsor starts proper deferrals within 9½ months after the end of the plan year in which the failure began, the required QNEC drops to zero. The sponsor also has to send a notice to affected participants within 45 days of restarting correct deferrals.⁸ Outside the automatic contribution context, other approved methods under Rev. Proc. 2021-30 may produce a reduced 25% QNEC when the correction happens within specific timeframes.⁷

Loan Failures

Plan loan errors that SCP can fix include loans over the statutory dollar limit, loans with repayment schedules that run too long, and defaulted loans.⁹ Over-limit loans are corrected when the participant repays the excess. Over-length loans are reamortized over the remaining allowable period measured from the original loan date. Defaulted loans can be corrected by a lump-sum payment of missed amounts plus interest, by reamortizing the balance over the remaining original term, or a combination. Correction has to happen while the original maximum repayment period is still running, and a successful correction removes the deemed distribution tax reporting that would otherwise apply.

Excess Annual Additions

When total contributions for a participant exceed the Section 415 annual addition limits, the correction runs in priority order: unmatched elective deferrals go back to the participant first (adjusted for earnings); if excess remains, matched elective deferrals are distributed and the corresponding employer match is forfeited; if excess still remains, employer profit-sharing contributions are forfeited. Forfeited employer amounts go to an unallocated account and reduce future employer contributions.¹⁰

Overpayments

When the plan has overpaid a participant or beneficiary, the sponsor may seek to recoup the excess. If the individual doesn’t return it, the sponsor has to notify them that the unreturned amount isn’t eligible for tax-free rollover treatment. That notice can be combined with the recoupment request.¹¹

Adjusting for Lost Earnings

Every corrective contribution has to include an earnings adjustment reflecting what the money would have earned if the error had never happened. The IRS sets a hierarchy:

Use the participant’s actual investment returns for the period of the failure. This is the preferred method.
If actual returns aren’t practical to determine (records are unavailable, the employee never made investment elections) and the affected employee is non-highly compensated, use the return of the plan’s highest-earning fund.
If precise calculation would cost significantly more than the difference between the estimate and the exact figure, a reasonable estimate is acceptable.
If even an estimate isn’t feasible, use a recognized benchmark rate, such as the rate in the Department of Labor’s Voluntary Fiduciary Correction Program online calculator.

¹²

Losses can be applied as a negative adjustment, but that is optional. The sponsor cannot use investment losses to reduce a corrective contribution below the required principal.

Documentation Is the Whole File

Because SCP involves no IRS submission, the sponsor’s internal records are the only proof the correction was done right. A complete file should include a description of what went wrong, which plan years were affected, and how the error was discovered; the affected participants, amounts, and the split between principal and earnings; the methodology used to calculate the correction, including which earnings method was chosen and why; the date corrective contributions hit accounts or recoupments closed out; and the internal control changes made to prevent recurrence.

The IRS does not set a fixed retention period for these documents. Retirement plan records should be kept until all benefits have been paid and enough time has passed that audit is unlikely, which for an active plan can mean decades.¹³

When SCP Isn’t Available

If a failure doesn’t qualify for self-correction, whether because it’s a document failure that isn’t covered, an egregious error, a missed significant-failure deadline, or one the IRS found first, the next option is the Voluntary Correction Program. VCP requires a written submission to the IRS describing the failure and the proposed correction, plus a user fee that runs from $2,000 to $4,000 depending on plan assets. In return, the plan gets a written compliance statement confirming the failure was properly resolved.¹⁴

If the IRS finds the failure first during an examination and SCP is closed off, the plan lands in Audit CAP. Sanctions there are based on the nature, extent, and severity of the failures, the number of affected employees, how long the failure lasted, and what internal controls the sponsor had. The IRS says only that the sanction must exceed the VCP fee and will “bear a reasonable relationship” to the seriousness of the problem.⁶ The gap between free (SCP) and negotiated sanction (Audit CAP) is the practical case for finding errors and correcting them before the IRS does.

1
Internal Revenue Service. Guidance on Section 305 of the SECURE 2.0 Act of 2022 (Notice 2023-43)
2
Internal Revenue Service. Correcting Plan Errors: Self-Correction Program (SCP) General Description
3
Internal Revenue Service. Retirement Plan Errors Eligible for Self-Correction
4
Internal Revenue Service. Revenue Procedure 2021-30
5
Internal Revenue Service. Self-Correction Program (SCP) FAQs
6
Internal Revenue Service. Audit Closing Agreement Program (Audit CAP) – General Description
7
Internal Revenue Service. Fixing Common Plan Mistakes – Correcting a Failure to Effect Employee Deferral Elections
8
Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Weren’t Given the Opportunity to Make an Elective Deferral Election
9
Internal Revenue Service. Fixing Common Plan Mistakes – Plan Loan Failures and Deemed Distributions
10
Internal Revenue Service. Failure to Limit Contributions for a Participant
11
Internal Revenue Service. Guidance Under Sections 414(aa) and 402(c)(12) (Notice 2024-77)
12
Internal Revenue Service. Correction Methods for 401(k) Failures
13
Internal Revenue Service. Maintaining Your Retirement Plan Records
14
Internal Revenue Service. Voluntary Correction Program (VCP) – General Description