How to fix 401(k) plan mistakes before you sell

The short answer

To fix a 401(k) plan mistake, an employer uses the IRS Employee Plans Compliance Resolution System (EPCRS): self-correct with no IRS fee if qualifying procedures were in place, or file under the Voluntary Correction Program for a $2,000 to $4,000 user fee. Revenue Procedure 2026-34, effective October 22, 2026, now sets the rules.

If a sale is coming, it usually pays to find and fix errors before a buyer's diligence team does.

What did the IRS change this week?

On October 22, 2026, Treasury and the IRS announced two revenue procedures in news release IR-2026-126. The one that matters most to employers is Revenue Procedure 2026-34. It modifies and supersedes Rev. Proc. 2021-30, which had been the consolidated EPCRS rulebook since 2021, and it folds in the SECURE 2.0 Act changes that the IRS had been handling through interim notices.

The main changes for a company that sponsors a 401(k):

• Self-correction covers more mistakes. SECURE 2.0 expanded self-correction to "Eligible Inadvertent Failures," including certain plan loan failures, and the new procedure no longer requires a favorable IRS determination letter to self-correct.
• A clearer deadline. A self-correction completed by the later of the last day of the third plan year after the year of the error, or 18 months after the employer identifies it, is deemed to be within a reasonable period.
• Missed deferrals in auto-enrollment plans can cost less to fix. The no-QNEC safe harbor for missed deferrals in plans with an automatic enrollment or escalation feature no longer sunsets, now reaches SEP and SIMPLE IRA plans and terminated employees, and treats a corrective match made by the end of the twelfth month after correct deferrals begin as timely.
• Overpayments. For many inadvertent benefit overpayments, the employer no longer has to make the plan whole, with exceptions for certain limit failures.

The second procedure, Revenue Procedure 2026-33, creates a new correction system for IRAs, effective May 1, 2027. Treasury and the IRS are taking comments on Rev. Proc. 2026-34 through January 20, 2027.

What are the three ways to fix a plan mistake?

EPCRS gives an employer three paths, and the cost rises the later the mistake is found.

All three paths still require the actual correction, which usually means putting affected employees where they would have been without the mistake, with earnings. The fee is on top of that.

The VCP fee depends on net plan assets: $2,000 up to $500,000, $3,500 over $500,000 up to $10 million, and $4,000 above $10 million, for submissions made on or after January 1, 2026.

Which 401(k) mistakes can an owner self-correct?

Self-correction is available for an "Eligible Inadvertent Failure," which Rev. Proc. 2026-34 defines as a failure that happens despite practices and procedures that meet the IRS standard. Egregious failures, diversion or misuse of plan assets, and abusive tax avoidance transactions are excluded.

The procedures requirement is the part owners tend to miss. The IRS says the procedures can be formal or informal, but they must have been in place and routinely followed, and a plan document alone is not evidence of them. A written annual step, such as checking whether the plan is top heavy, is the kind of example the IRS gives.

Some failures cannot be self-corrected at all, including:

1. Never adopting a written plan document in the first place.
2. Certain SEP and SIMPLE IRA failures when the plan was not set up on a valid IRS model form or an approved prototype.
3. A significant operational failure, plan document failure, employer eligibility failure or demographic failure in a plan that has already been terminated.

The IRS fix-it guide lists the mistakes it sees most in 401(k) plans. They include not following the plan's own terms, using the wrong definition of compensation, missing eligible employees, exceeding the deferral limit, late deposits of employee deferrals and missed top-heavy contributions.

What does a fix cost? (hypothetical example)

Meet Dana, a hypothetical example. She is 58, owns a company with 35 employees, and its 401(k) holds about $3,000,000. She expects to sell in 2028. In October 2026, her plan administrator finds that since a payroll provider switch in May, the deferral elections of five employees have not been put into effect, about six months of missed deferrals in 2026. Correct deferrals start with the first November paycheck. Each of the five earned $60,000 a year and had elected to defer 6 percent. The plan matches 100 percent of deferrals up to 4 percent of pay. The numbers below are round figures for illustration, not a typical result.

The standard method for a missed election is a qualified nonelective contribution of 50 percent of the missed deferral, plus the missed match, adjusted for earnings. Because Dana's failure lasted more than three months but is being fixed well within three years after the plan year it happened, Rev. Proc. 2026-34 allows a 25 percent contribution instead, as long as correct deferrals begin by the required date, each affected employee gets a written notice within 45 days after correct deferrals begin, and the corrective contributions are made within a reasonable period. A corrective match made by the end of the twelfth month after correct deferrals begin is deemed reasonable.

The timing works in Dana's favor in this example. The failure happened in the 2026 plan year, so on a calendar plan year a self-correction finished by December 31, 2029 is deemed reasonable, which is later than 18 months after an October 2026 discovery. She has room to finish well before a 2028 closing. If her procedures did not qualify for self-correction, a VCP filing would add a $3,500 user fee, since the plan is between $500,000 and $10 million.

Why fix it before you sell?

The deal structure decides who inherits the problem. In a stock sale, the buyer acquires the company that sponsors the plan, so the plan and any uncorrected errors generally come with it. Our article on asset sales versus stock sales covers how the two structures differ on tax. Either way, a buyer's diligence team may ask for the plan document, recent Form 5500 filings and nondiscrimination testing results, and an open error becomes a negotiating point. If you are weighing which kind of plan to run once the fix is done, the free owner retirement plan calculator compares a 2026 solo 401(k), SEP and SIMPLE with your own numbers.

Three rules in the new procedure bear directly on a sale:

1. Terminated plans lose options. If the buyer asks you to end the 401(k) before closing, significant operational failures and plan document failures in a terminated plan can no longer be self-corrected and must go through VCP or Audit CAP. Fixing first, then terminating, keeps the cheaper path open.
2. An audit narrows the path. Once the plan or the company is under IRS examination, self-correction generally ends except for insignificant operational failures or fixes the employer had already demonstrably committed to.
3. Buyers get a grace period. For assets or plans picked up in a merger or acquisition, the buyer is treated as having procedures in place if they are in effect by the end of the first plan year after the deal.

Plan fixes belong on the same calendar as the rest of the exit. Our exit planning timeline shows when those reviews usually start, and what to do after selling a business covers the first months once the deal closes.

The bottom line

Revenue Procedure 2026-34, effective October 22, 2026, is now the rulebook for fixing mistakes in a company 401(k). Self-correction has no IRS fee and covers more errors than before, but it depends on having procedures in place and on fixing the problem within a reasonable period. In our hypothetical, a six month payroll error for five employees could cost $8,250 to fix under the safe harbor method before earnings, versus $10,500 under the standard method. Errors found after a plan is terminated or during an audit cost more and leave fewer choices. Consult your plan's ERISA attorney or third-party administrator about how these rules apply to your plan.

When did someone last compare how your 401(k) actually runs with what the plan document says?

Next steps if you own a business

• Get the next one by email. The Liquidity Letter covers exits, cash and taxes for owners with millions on the line. Sign up in the box at the bottom of this page.
• See where you stand. The free Exit Readiness Scorecard walks through the parts of a business that buyers look at, so plan cleanup can go on the same list.
• Talk it through. If you want to see how your plan fits your exit timeline, book a free call.

Questions people ask next

What is EPCRS?

EPCRS, the Employee Plans Compliance Resolution System, is the IRS program that lets an employer fix mistakes in a 401(k), 403(b), SEP or SIMPLE IRA plan and keep the plan's tax-favored status. It has three parts: the Self-Correction Program, the Voluntary Correction Program and the Audit Closing Agreement Program.

How much does the IRS charge to fix a 401(k) mistake?

Self-correction has no IRS fee, though the employer still pays the corrective contributions and any adviser costs. A Voluntary Correction Program filing made on or after January 1, 2026 has a user fee of $2,000 for plans with up to $500,000 of assets, $3,500 for plans over $500,000 up to $10 million, and $4,000 above $10 million.

Do I need the IRS to approve a self-correction?

No. Under the Self-Correction Program there is no filing. The employer must have had practices and procedures in place when the error happened, and it should keep documentation of the error, the fix and the changes made so it does not recur, because the IRS can ask for it on audit.

Is a late deposit of employee deferrals an IRS problem or a Department of Labor problem?

Often both. The IRS fix-it guide says late deposits are usually corrected through the Department of Labor's Voluntary Fiduciary Correction Program, and an IRS correction may also be needed. Your plan's ERISA counsel can sort out which applies.

What changed for IRAs?

Revenue Procedure 2026-33 creates a separate IRA Compliance Resolution System, effective May 1, 2027, for certain IRA errors caused by service providers. It will also take over requests to waive the 60-day rollover deadline, which today require a private letter ruling unless the IRS automatic waiver or self-certification applies, during 2027 and 2028.