December 13, 2017
Many companies offer a retirement savings program as a benefit for existing employees and as an incentive to prospective employees. While these plans have become the standard for most companies, 401(k), 403(b) and pension plans can be difficult to manage. Many rules must be carefully followed to ensure compliance with IRS and Department of Labor (DOL) regulations. When an error in plan administration occurs, it may cause the plan to fall out of compliance and the plan sponsor must take corrective action or risk losing the tax-exempt plan status. To help resolve common errors, the IRS instituted the Voluntary Correction Program (VCP). Self-Correction Program (SCP) and Audit Closing Agreement Program (Audit CAP) to allow issues to be corrected. Which correction program the plan sponsor can use depends on the type of error, impact to participants and severity. To help clients, prospects and others understand when to use each program, Wilson Lewis has provided a brief summary below.
This program can only be used by plans that have a series of established compliance procedures designed to facilitate ongoing compliance. The program is limited to those who are experiencing operational issues in the plan only. Other issues may qualify to be resolved under other IRS programs. It’s important to note that corrections made under SCP can be implemented without contacting the IRS or paying any fees. However, proper documentation is required to demonstrate the corrective action for future reference. The types of issues that can be corrected using the SCP are classified as insignificant operational, significant operational, related to plans acquired in a merger or acquisition and Actual Contribution Percentage (ACP)/Actual Deferral Percentage (ADP) test violations. Egregious errors are not eligible for correction under this program. In addition, there are specific rules regarding the types of plans that can use SCP to correct these issues. For example, 401(k) and 403(b) plans are eligible to correct a significant operational error, but SIMPLE IRAs and Simplified Employee Pension Plans (SEP) are not.
The VCP program can be used by plans that have failed to maintain an up-to-date plan document, follow the terms of the plan document or comply with federal tax laws while operating the plans. Unlike the SCP, corrections made under the VCP require communication with the IRS about the failure and the proposed steps taken to resolve the problem. It’s important to note that failure to file IRS Form 5500 or 5500-SF, delinquent filing of Form 5500-EZ and fiduciary violations can be mitigated through VCP. Once an error has been identified, the plan sponsor needs to document the issue in a VCP submission, define how the issue will be corrected, pay associated fees and keep record of the IRS approved compliance statement once received. This confirms that the IRS has approved the correction and validates plan compliance if completed during the correction period.
Unlike the SCP there is a fee associated with VCP, known as a user fee. The fee is largely based on the number of plan participants. For plans with 20 or fewer participants, the average fee is $500. For plans with over 10,000 participants, the average fee is $15,000. The IRS does offer reduced fees depending on the type of failure and how many participants were impacted. For SEP and SIMPLE IRA plans there is a flat $250 fee.
The Audit CAP program is the least advantageous and is available to plan sponsors when the IRS has found an issue on a plan that is currently under audit or during the determination letter process. In this program, the plan sponsor pays a sanction amount, which is determined by the nature, extent, and severity of the issue uncovered. In addition, any corrective action taken by the company prior to issue discovery will also be considered. The process for using this program includes entering into a Closing Agreement, making corrections to resolve the issue, and then paying the sanctioned amount. Unlike the other programs, the Audit CAP is for those who didn’t proactively attempt to identify or resolve plan issues. Unfortunately, it’s also the costliest for resolution.
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Regularly reviewing plan operations and comparing them to your plan documents is essential to identifying and correcting errors before they become a serious issue. The IRS offers access to plan checklists to help identify common errors which can be used on a regular basis. If you have questions about a plan operations issue, how to use the highlighted programs or need assistance with your benefit plan audit, Wilson Lewis can help. For additional information please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.