IRS Corrections: Self-Correction vs. Voluntary Correction
By Luke Swanson, QPA, CIP
What IRS correction programs are available for retirement plan failures?
There are three main types of correction programs under the IRS, collectively referred to as the Employee Plans Compliance Resolution System (EPCRS). These include the Self-Correction Program (SCP), Voluntary Correction Program (VCP), and Correction on Audit Program (Audit CAP). If a qualified retirement plan is under audit or investigation from the IRS, the employer will have to work with the IRS to correct the failure under Audit CAP: the SCP and VCP options will not be available. If an employer is not under audit or investigation and discovers a failure, the employer can decide whether to correct plan failures under the SCP or VCP.
What is the SCP?
The SCP allows employers to correct most qualified retirement plan failures without notifying the IRS of the failure or its correction. It allows employers to correct insignificant operational failures at any point in time, and allows employers to correct significant operational failures by the last day of the third plan year following the plan year in which the failure occurred. Correcting under the SCP allows employers to avoid paying an IRS correction submission fee and having to notify the IRS of the failure. But correcting under SCP also means that an employer won’t have formal approval from the IRS that the failure was corrected in full.
What is the VCP?
The VCP allows employers to correct qualified retirement plan failures by formally requesting IRS approval on a proposed plan correction. It allows employers to correct significant operational failures that were not corrected by the SCP correction deadline or to correct SCP-eligible failures that the employer wants formal IRS approval on. Employers can also use the VCP to correct certain failures that are not eligible for the SCP—including nonamender failures, certain operational failures eligible for correction through a retroactive amendment, and RMD failures that the employer is taking responsibility for. The VCP allows an employer to rely on the IRS’ approval letter, known as an “IRS Compliance Statement.” But correcting under the VCP requires the employer to pay a submission fee and to officially inform the IRS of the plan failure. And there’s no guarantee that the IRS will accept the proposed correction.
How does an employer determine whether a failure is significant or insignificant?
There is no single factor that determines whether a failure is significant: it’s dependent on all facts and circumstances surrounding the failure. Factors reviewed include, but are not limited to, whether additional failures occurred at the same time, the percentage of plan assets affected by the failure, the percentage of participants affected, the number of highly compensated employees affected vs non-highly compensated employees affected, the number of years the failure spanned, and the reason that the failure occurred in the first place.
What failures cannot be corrected under SCP or VCP?
The SCP and VCP are available only to plans that are not under audit or investigation from the IRS. Additionally, some failures don’t fall under the IRS’s EPCRS, and therefore, cannot be corrected under the SCP or VCP. For example, failure to file a Form 5500 timely would be corrected under the Delinquent Filer Voluntary Compliance Program (DFVCP), and failure to deposit withheld deferral and loan payment assets to the trust timely (as well as 18 additional prohibited transactions) would be corrected under the Voluntary Fiduciary Correction Program (VFCP). These programs are offered and administered under the Department of Labor’s Employee Benefits Security Administration (EBSA).
NOTE: For assistance determining the type of failure a plan may have, whether a failure is significant or insignificant, and which corrective programs are available (i.e., the SCP, VCP, Audit Cap, DVFCP, or VFCP), please consult with an ERISA attorney.
