Fixing Common Plan Mistakes

Updated by Richard Phillips, EA, AIFA, CPC, CPFA, QPA, QKA

There are two primary federal government agencies that provide programs for employers to correct plan mistakes - the Internal Revenue Service (IRS) and the US Department of Labor (DOL). Each agency has its own correction programs for different types of plan mistakes. In general, the DOL is mostly concerned with protecting the rights of plan participants under Title I of the Employee Retirement Income Security Act (ERISA). The IRS, however, provides corrective programs that help plan sponsor comply with the Internal Revenue Code requirements.

Choosing the proper correction program depends largely on the nature of the mistake. So, that's why we've created a general guide that can help you determine which program is most appropriate for your scenario.

IRS Employee Plans Compliance Resolution System (EPCRS)

The IRS has developed a system (EPCRS) that helps plan sponsors and service providers determine the best way to fix common plan mistakes. Some mistakes are more serious than others and that's why they've organized their system into different categories. They've also allowed sponsors to correct issues before they're discovered on an audit.

EPCRS consists of three programs...

  1. Self Correction Program (SCP) - IRS website page
  2. Voluntary Correction Program (VCP) - IRS website page
  3. Audit Closing Agreement Program (Audit CAP) - IRS website page

Self Correction Program (SCP) - SCP requires no special filings or fees. It's simply fixing an administrative clerical error. The IRS gives some latitude in the methods used to correct problems under SCP, but those correction methods should be documented in case they come up on audit later. The SCP does not give you any assurance that your correction will be accepted if you are audited by a regulator. So you could still be at risk even after you use SCP.

Voluntary Correction Program (VCP) - VCP on the other hand, does provide assurance that the issue is fully resolved and cannot introduce more problems later. VCP requires filings and fees and a lot more procedural documentation. This method is typically reserved for compliance failures that would be considered material because it impacts a significant portion of the participants or it's significant because of the dollar amount involved in the compliance failure.

VCP can only be used if the plan is not already under audit by a regulatory agency. Once under audit, VCP is no longer available unless you can produce documentation that the correction is already in progress before the audit started.

Audit Closing Agreement Program (Audit CAP) - Audit CAP is what the IRS will use when they have identified compliance failures or errors that require some correction that was not already made using VCP or the correction that was made was not satisfactory.

For example, if you used SCP to correct a failure but the correction method used did not satisfy the auditor. An example of this would be if you chose to use the actual trust account earnings instead of the DOL's VFCP online calculator because the actual trust earnings resulted in a lower correction amount than you would have otherwise paid if you had used the VFCP online calculator. You might have to argue that decision with the auditor.

Generally, under Audit CAP, the plan sponsor or the plan is under examination and the plan sponsor:

  • Enters into a Closing Agreement with the IRS,
  • must make the correction prior to entering into the Closing Agreement, and
  • pays a sanction with the IRS

The sanction paid under Audit CAP should be higher than the amount they would have paid under VCP. That's why it's advantageous to correct under VCP rather than through Audit CAP. Plus, the time involved in Audit CAP could be significantly more than VCP.

US Department of Labor Employee Benefits Security Administration (EBSA)

EBSA has two primary correction programs:

  1. The Delinquent Filer Voluntary Compliance Program (DFVCP) - This program is to correct late or missed Form 5500 filings.
  2. The Voluntary Fiduciary Correction Program (VFCP) - VFCP covers 19 specific transactions and provides immediate relief from payment of excise taxes under a class exemption which covers six transactions. Certain prohibited transactions can corrected through this program, which is a unique feature that the other correction programs do not have.

Examples of Common Retirement Plan Mistakes

Late Deposits of Employee Contributions and Loan Payments

Employee contributions and loan payments should be remitted to the plan as soon as reasonably possible and never beyond the 15th business day of the following month. Employee contributions and loan payments that are not remitted within this time frame are considered late and should be reported on the Form 5500 - even if you correct the issue.

The failure should continue to be reported on every 5500 until it is corrected. See Part V of the Form 5500-SF instructions and Part IV of the Form 5500 Instructions.

Missed Opportunity to Participate or Failure to Implement Employee Deferrals on Payroll

If the participant was not given the opportunity to participate or their deferral election was not properly implemented in the payroll system, there are correction procedures available.

How we advise clients

Treasury Department Circular No. 230 strictly prohibits us from making a recommendation to a client based on the likelihood that they will be audited or on the basis that the issue will not be discovered on an audit. So, we will always advise our clients on how to comply with laws and regulations in a way that is independent of the likelihood of an audit. We are professionally obligated to notify the plan sponsor when there has been a compliance failure, to layout correction method options, and to inform you of the potential consequences of not correcting the failure.

And ultimately, the plan sponsor would decide whether you wanted to correct the issue or not. If the plan sponsor decides to correct the mistake, they will need to direct us as to the method they would like to use for the correction.

Additional Resources -

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