Find it and Fix it: IRS Correction Programs
For the first time since 2006, the IRS has updated its Employee Plans Compliance Resolution System (EPCRS) which is the program instituted to encourage plan sponsors to identify and correct operational failures in plan administration and documentation. The purpose of this program is to incentivise employers to find and correct deficiencies and errors voluntary. There are three types of programs.
Self Correction Program (SCP) provides sponsors with the opportunity to correct operational failures or errors without making a formal request to the IRS. While the sponsor does not receive approval from the IRS for the correction, there is an assurance from the IRS that the plan will not be disqualified for an error that has been correct under SCP. Insignificant errors can be corrected at any time. Significant errors must be corrected by the last day of the second plan year following the plan year in which the error occurred.
Voluntary Correction Program (VCP) adds the component of receiving IRS approval of the correction action taken. In the VCP process, the plan sponsor submits a formal proposal of the correction method intended to be used and pays the required fee. Once the IRS and the sponsor agree as to the appropriate corrective mechanism, the IRS issues a Compliance Statement confirming its approval. This compliance statement is what makes the VCP preferable to sponsors concerned about errors.
The Audit Closing Agreement Program (Audit CAP) comes into play when an IRS audit reveals an operational error. Since the error is not voluntarily disclosed, there is a penalty that has to be paid, but Audit CAP provides for negotiation of the penalty. These three options apply to operational failures, such as failure to satisfy ADP or ACP tests, vesting errors annual limits errors and improper exclusion of an employee.
The Voluntary Fiduciary Correction Program (VFCP) is a little different and is not necessarily part of the EPCRS. It provides for a correction of fiduciary errors and non-operation deficiencies. These include things like making delinquent contributions, purchases of assets from parties in interest and benefit payments based on improper valuation of assets. Like the VCP, the VFCP requires payment of a fee and submission of a formal request for correction.
Finally, there is the Delinquent Filer Voluntary Correction Program (DFVC) that allows for the voluntary correction of late 5500s and other required filings. Under the DFVC, there is a filing fee that is capped and corrections can go back for multiple years under one DFVC application. Since the penalties for failing to make annual filings can be significant, the DFVC has the benefit or correcting the mistakes all at once, allowing the sponsor to avoid the penalty and bring the plan current to make sure the ticking time bomb of late fees is not out there.
Obviously there are details to each of these programs that take more than one entry to discuss. But the cumulative effect is to show that the IRS clearly favors self correction and self reporting whenever possible. Don't wait to have the IRS find your mistakes, particularly if you are already aware of them. Take advantage of these correction programs now to avoid the potential of high penalties if the IRS catches you. In the case of employee benefit plans, it is always better to confess your sins now and fix them.
