Voluntary Correction Program (VCP) Considerations
By Luke Swanson, QPA, CIP
Given the complexity involved in operating a retirement plan, it’s not surprising that from time to time there may be miscues, such as operational, document, or even eligibility failures. Some can be resolved without the direct involvement of the IRS, under the agency’s Self-Correction Program within the broader Employee Plans Compliance Resolution System. Other failures must—or, if an employer chooses, can—be corrected under the IRS Voluntary Correction Program (VCP). Under this program a plan failure is identified and a correction proposed in an application submitted by the plan sponsor to the IRS. When a resolution of the failure is agreed upon, IRS compliance statement (approval) assures the plan sponsor that there will be no sanctions beyond the agreed-upon corrective measures. Following are some common questions about the IRS VCP.
Should plan sponsors complete their correction before submitting under VCP, or submit and receive their compliance statement approval first?
That decision is up to the plan sponsor and ultimately depends on the facts and circumstances surrounding the failure and the correction to be implemented.
For example, if a failure occurs involving excluded participants or missed contributions, corrective earnings should continue to accrue through the date of correction. To prevent a large amount of earnings from accruing, the plan sponsor may choose to correct the failure as soon as possible before receiving IRS approval. One possible drawback to this approach: if the calculations don’t meet IRS standards, then additional adjustments may be necessary.
Alternatively, the plan sponsor may want to propose the correction or calculation method to the IRS before taking the corrective action. This may be a good option if the plan sponsor isn’t sure how to correct the failure, has a failure that requires using a complex earnings calculation formula, or is proposing a retroactive plan amendment. As with the first option, there are some potential drawbacks: earnings generally continue to accrue while under IRS review; and after IRS approval, the plan sponsor must complete the correction within 150 days after the compliance statement’s signature date.
What if the IRS doesn’t approve a corrective action?
The plan sponsor will have to work with the IRS to determine an approved correction. The IRS will offer a conference call with the plan sponsor (to be held within 21 days of contact), where negotiations may take place to come to an agreement on the VCP submission and corrective action.
If the plan sponsor is not willing to accept the IRS negotiations or instructions, the VCP submission will be closed, the VCP fee will not be returned, and the plan sponsor may be turned over to the IRS Employee Plans Examination unit for audit or investigation. In this situation, the plan sponsor’s biggest fear may become a reality: the plan may become disqualified. This is typically used as a last resort by the IRS, one that is used only if a plan sponsor isn’t correcting a failure while under an IRS audit or investigation.
May a plan sponsor file under VCP anonymously?
No. As of January 1, 2022, new anonymous VCP submissions—formerly an option—are no longer permitted. But the IRS did implement an “anonymous VCP pre-submission conference”, which became effective on January 1, 2022. This option allows a plan sponsor to request a conference call with an IRS representative to discuss corrective actions for one or more plan failures that the sponsor intends to submit for under VCP.
Submission Considerations
All VCP submissions and fee payments must be completed electronically through Pay.gov (search “8950”).
Plan sponsors must combine all supporting calculations or documentation into one single file for upload (e.g., a PDF).
VCP user fees are generally based on the plan’s net assets that were reported on the most recently filed Form 5500. Plan sponsors should visit the IRS website for the most up to date VCP fee structure.
After completing the submission, plan sponsors should save the provided confirmation email containing payment receipt and tracking information. They may need to reference these later.
