IRS Correction Programs for Plan Errors
November 1, 2024 | Authored by John F. Matte Jr. CPA
This article is an excerpt from Dopkins Employee Benefits Newsletter.
To read the complete content, please click here.For more information, please contact John Matte at jmatte@dopkins.com.
The American Institute of Certified Public Accountants (AICPA) recently gave a presentation entitled, “To Correct, or Not to Correct, That is Not Actually a Question.” The focus of the presentation was to discuss corrective actions for common issues that retirement plans encounter during their lifecycle. Retirement plans continue to have more and more complexities, which creates a lot of room for error. Acknowledging this, the Internal Revenue Service (IRS) and Department of Labor (DOL) have both established correction programs for plan sponsors to correct errors that are within the purview of either the IRS or the DOL. The title of the presentation gives insight into the position that each of these bodies has taken on the matter. If a plan error is discovered, regardless of significance, it is expected that plan sponsors will correct.
The IRS is concerned with operational failures, whereby a plan does something that is not in line with the plan document, which the IRS has deemed tax-exempt. Operational failures can jeopardize that tax-exempt status. The IRS is also responsible for employer eligibility failures (IE – a company sponsors a plan that it is not permitted to have) and demographic failures through non-discrimination testing. The IRS has established three correction programs, the use of which varies based on the discovery of the error and the magnitude. They are as follows:
1. Self-Correction Program (SCP)
This program is for insignificant errors which are caught and corrected in a timely manner (end of the third year following the year of failure, at the latest). Nothing is reported to the IRS, but the plan sponsor must have an established process to document conclusions reached with regard to the method and calculation of any correction, as it is later subject to audit.
2. Voluntary Correction Program (VCP)
This program is similar to the SCP. However, it is typically used for more significant errors. The plan sponsor is required to document procedures in the same fashion as the SCP, but file it via a submission to the IRS. The IRS issues a compliance statement upon review, which provides protection from audit.
3. Audit Closing Agreement Program (Audit CAP)
This is used for operational errors that are discovered through an IRS examination. Correction methods and procedures are the same as the SCP and VCP. Due to the fact that errors were discovered by the IRS, the plan sponsor pays a sanction and enters into an agreement with the IRS in order to close the matter. Plan sponsors are encouraged to self-correct or to use the VCP prior to an IRS examination in order to avoid Audit CAP corrections.
The AICPA identified some common areas where the industry has noted plan document failures in recent years:
| COMPENSATION ERRORS Definition of compensation errors, particularly as it relates to off-cycle/manual checks and unique payroll elements. |
DEFERRAL ELECTION ERRORS Deferral election errors, particularly when there are multiple ways that a participant can elect to change their election, resulting in a mismatch between the election per the recordkeeper and the withholdings in payroll. |
INCORRECT CALCULATIONS Incorrect calculation of employer contributions, both on individual pay periods and annual calculations. |
Further information on the above corrections and links to fix-it guides for specific corrections are available on the IRS website. When an error is discovered, it is encouraged that plan sponsors check the website for guidance.
The DOL is concerned with prohibited transactions and Form 5500 filings. The DOL has a correction program for each of these. The Voluntary Fiduciary Correction Program (VFCP) encourages self-correction of prohibited transactions with non-exempt parties. An application is filled out and filed with the DOL. There is no fee for filing. If approved, the DOL agrees to not investigate the breach of fiduciary responsibility that resulted in the VFCP filing. Common prohibited transactions include late contributions of employee contributions and improper payment of expenses by the plan. The Delinquent Filer Voluntary Compliance Program (DFVCP) is utilized for late 5500 filings. A late 5500 filing risks substantial penalties from both the IRS and DOL. Plans that are late are encouraged to file as soon as possible through the DFVCP, which is simple, easy to use and has a de minimis fee in comparison to the penalties.
TAKEAWAY
The authoritative bodies are clear that plan sponsors are required to correct any and all errors discovered while operating their plans.
About the Author
John F. Matte Jr. CPA
John serves as a leader in the Firm’s employee benefit plan audit practice, and concentrates his practice on audits on behalf of for-profit entities from a wide cross-section of industries. He also has significant experience consulting clients with respect to documentation and testing of internal controls, particularly entities subject to Sarbanes Oxley compliance.
