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Plan Sponsors, Did You Find an Error in Your Employee Benefit Plan? Here’s How to Correct It

April 11, 2024

Plan errors can hinder your employee benefit plan’s tax-favored status…here’s what to do when you find a plan participant error.

Attention plan sponsors…do you know the steps to follow when you identify an error in your plan? Mistakes in retirement plans are common…and many can be self-corrected. Let’s dive in.

How do you correct plan errors?

There are three programs for correcting plan errors under The Employee Plans Compliance Resolution System (EPCRS):

  1. Self-Correction Program (SCP): Unlike the other programs, SCP allows plan sponsors to self-correct certain plan failures without IRS supervision or paying a fee.
  2. Voluntary Correction Program (VCP): The Voluntary Correction Program (VCP) offers a way to rectify mistakes in retirement plans not currently under IRS audit, preserving their tax-favored status. A fee is required and the plan sponsor would receive an IRS approval for the correction(s).
  3. Audit Closing Agreement Program (Audit CAP): Plan sponsors with significant issues in their retirement plans, discovered by the IRS during examination or determination letter application, can rectify these through the Audit CAP process, preserving tax benefits in the process.

If your plan isn’t under IRS audit, SCP and VCP are viable options. Let’s explore each.

Self-Correction Program

Through the SCP, you can rectify numerous errors independently without needing to submit a form to notify the IRS or incur any fees. Significant failures require correction within a certain timeframe whereas insignificant failures do not. Insignificant operational failures include:

  • Deviating from the plan's terms, an operational failure.
  • Inadvertently excluding eligible participants.
  • Failing to fulfill promised contributions according to the plan's terms.
  • Issues with loans:
    • Defaulted loans not paid back in a timely manner.
    • Issued participants loans exceed allowed amounts under the plan’s loan policy.
    • Instances where a participant did not obtain spousal content as required by the plan’s written terms.

What mistakes are considered more “significant”?

While the above failures are considered “insignificant” and can be self-corrected at any time, some failures are considered “significant” and must be self-corrected within a specific timeframe. Generally, action is required before the end of the second plan year following the year in which the error occurred.

How is significance determined?

A variety of facts and circumstances determine significance. This includes:

  • Any failures in the same period
  • The number of years the failure has occurred
  • The percentage of plan contributions made during the period of the failure
  • The percentage of plan assets involved (as compared to total plan assets)
  • The number of participants impacted (relative to the total number of plan participants)
  • The number of participants the failure impacted (relative to the potential number of participants who could have been impacted)
  • If you self-corrected within a reasonable time after failure was discovered
  • The reason for the failure

Document failures, which occur when you don’t have your plan document up-to-date or if your plan document doesn’t fully comply with the tax law, are not eligible for the self-correction program.

Volunteer-Correction Program

You can apply to correct mistakes under the VCP for errors with either the language in the plan document or how you’ve run your plan. This requires you to submit an application and fee to the IRS. In return, the IRS reviews and approves your proposed correction methods for either the plan document or operational errors that, if not corrected, could result in the plan losing its tax-favored status.

Why use VCP?

Correcting errors through the VCP preserves your plan’s tax-favored status by bringing it back into compliance with federal tax law. Upon approval by the IRS, you will receive a compliance statement confirming the acceptance of your proposed correction method. Be sure to keep this statement for your records. Utilizing the VCP can potentially save you from larger fees that may result from IRS audits or determination letter application reviews uncovering failures.

It's important to note that not all failures are eligible for the SCP. However, some plan sponsors may still prefer to seek written IRS approval through the VCP even for failures eligible under SCP, as it provides extra documentation and assurance.

How do you self-correct?

Whether you plan to use the SCP or VCP, following these steps will get your plan back on track:

  1. Correct the positions of the participants to reflect where they would have been if the error had not occurred.
  2. Record the actions you took to rectify the mistake.
  3. Revise administrative procedures as needed to prevent recurrence of the error.

If you intend to utilize the VCP, ensure you complete the necessary application and submit it to the IRS.

Questions? Contact any member of our Employee Benefit Plan Audit Team.

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