No one wants to make mistakes in their 401(k) plan, but unfortunately mistakes do happen. The IRS knows this. For this reason the Employee Plans Compliance Resolution System (‘EPCRS’) has been created to provide business owners a mechanism to fix mistakes they have made.
EPCRS provides options for employers to fix qualification errors in their 401(k) plans without losing the plan’s tax benefits. The 401(k) Fix-It Guide starts with a description of EPCRS. Under the EPCRS umbrella, there are three different programs:
- Self Correction Program (‘SCP’) – SCP is the simplest of the three programs. SCP allows plan sponsors to self-correct certain (but not all) 401(k) plan mistakes without having to contact or involve the IRS. If an error is corrected via SCP, no IRS application, user fee or IRS penalty is required. In order to be eligible for SCP, the plan sponsor must have policies in place designed to ensure compliance with IRS qualification requirements. Additionally, SCP can only be used to correct operational (i.e. not following the terms of the plan) errors and not errors such as failing to amend a plan to keep current with changes in law. Both significant and insignificant operational errors can be corrected through SCP, but significant errors must be corrected within two years after the end of the plan year in which the error occurred. IRS Revenue Procedure 2008-50 provides information about how to use SCP for some specific errors. If particular guidance is not provided, general correction principles should be followed. Records should be kept to document how the error was corrected.
- Voluntary Correction Program (‘VCP’) – If an error does not qualify for SCP, the plan sponsor can file a VCP application with the IRS. Additionally, mistakes which could be corrected through SCP may be corrected through VCP if the plan sponsor wants the comfort of the IRS blessing the correction. Both operational and plan document issues may be corrected through VCP. To file under VCP, the plan sponsor usually works with an ERISA attorney who prepares an application describing the error and the correction. In the application, the plan sponsor must also propose changes to their administrative procedures to ensure that the mistakes do not happen again. There is a compliance fee to file under VCP. The amount of the compliance fee depends on the error and the size of the plan.
- Audit Closing Agreement Program (‘Audit CAP’) – If a mistake is not discovered until an IRS audit, it can be corrected through Audit CAP to prevent the plan from being disqualified and losing all tax benefits for the plan sponsor and participants. The plan sponsor enters into a Closing Agreement with the IRS, but before this happens the plan sponsor must make the necessary corrections and pay a sanction. The sanction is negotiated between the plan sponsor and the IRS, and the tax benefits that would be lost if the plan were disqualified are a consideration in the negotiation. The sanction will be higher than if the error had been corrected through SCP or VCP.
The correction of any 401(k) plan errors is crucial to ensure that the 401(k) plan is not disqualified.
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