Errors in Employee Benefit Plans – What are Your Options?January 27, 2014
Jessie T. Kanter, CPA
No plan sponsor wants to find an error in their employee retirement plan, but mistakes happen and no plan is perfect. The key to avoiding severe penalties and tax qualification issues is to identify and correct mistakes in a timely manner. If plan sponsors roll the dice and hope for the best, corrections can get very expensive.
Both the Department of Labor (DOL) and the Internal Revenue Service (IRS) offer various correction programs to facilitate the correction of errors found in employee benefit plans.
DOL Correction Programs:
Voluntary Fiduciary Correction Program (VFCP) – When a fiduciary breach occurs (e.g., a prohibited transaction), the plan sponsor must use the VFCP to correct the prohibited transaction. This program allows the plan to correct the breach and restore any resulting losses to the plan.
Delinquent Filer Voluntary Correction Program (DFVCP) – Assists plan sponsors who either filed their Form 5500 late, or failed to file the Form 5500 at all. This program greatly reduces the imposed penalties related to delinquent filings.
IRS Correction Programs:
Self Correction Program (SCP) – This program is appropriate when correcting insignificant operational failures (at any time) or significant operational failures if they are corrected before the end of the plan year following the plan year when the failure occurred. An operational failure occurs when the written terms of the plan are not followed. No filings are submitted to the IRS (or the DOL) under the SCP but the plan sponsor should keep a record of any corrections made under this program.
Voluntary Correction Program (VCP) – This program is also appropriate for correcting operational failures of the plan. For plan sponsors who want a formal IRS approval of their correction, this program may be appropriate. The VCP results in a compliance statement issued by the IRS that formally approves the correction. The program also contains a “Protective Benefit” stating that the IRS will not audit the plan during the time the VCP application is being reviewed. A filing is required under the program and fees are assessed for the filing.
Audit Closing Agreement Program (Audit CAP) – The most costly of correction programs is entered into with the IRS in the event the operational error is not brought forward by the plan sponsor, but instead is discovered on audit by the IRS. The plan enters into a Closing Agreement with the IRS, corrects the error and pays a sanction negotiated with the IRS related to the error.
IRS Fix-It Guides
It is up to the plan sponsor to choose the most appropriate program in the circumstances. This can be a confusing task. To assist, the IRS has issued related guidance in their Fix-It-Guides, which have been issued for both 401(k) and 403(b) plans. These guides contain helpful information in determining which program to use to correct the error using real-world examples. See below for the related links to these guides. In addition, in the event of a plan error, plan sponsors should consult with their ERISA counsel or another employee benefit plan specialist to determine the best course of action.
IRS Guide to Fixing Common Plan Mistakes: http://www.irs.gov/Retirement-Plans/Plan-Sponsor/Fixing-Common-Plan-Mistakes