Employee Benefit Plans: Mistakes and Available Correction Programs

Employee Benefit Plans: Mistakes and Available Correction Programs

Employee benefit and retirement plans are required to comply with a number of complex laws and regulations, and failure to do so can result in significant penalties and/or disqualification of a plan. If a plan were to be disqualified by the IRS all amounts in each participant’s account would then become taxable. That of course would defeat the purpose of having a retirement account. Despite best intentions different plan errors can occur. The good news is that there are correction program options available for plan sponsors without sacrificing the qualified status of a plan.

The Department of Labor (DOL) and the Internal Revenue Service (IRS) have correction programs available to help plan sponsors correct plan defects and protect plan participants by maintaining the tax benefits for the plan and participants. The programs are structured to encourage plan sponsors to voluntarily keep their plans in compliance.

The Employee Plans Compliance Resolution System (“EPCRS”) is the IRS program that can be used to correct plan failures, including:

  • Plan document failure – failure to include required provisions, or the inclusion of a provision that violates qualification rules
  • Operational failure – failure to follow the terms of the plan, and
  • Demographic failure – failure to meet/correct coverage and nondiscrimination requirements

There are three methods under EPCRS for correcting plan errors. Under each of these methods, the plan sponsor agrees to make the correction of the error and the IRS agrees not to disqualify the plan because of the error.

Self-Correction Program (SCP) – Correction of Errors without IRS Involvement

SCP allows plan sponsors to self-correct many retirement plan errors without contacting the IRS or paying a fee. If an error is eligible for self-correction, there is no application, and the error is not reported to the IRS. However, the plan sponsor must maintain adequate records of the corrective actions taken.

To be eligible for SCP, the operational failure must be either (a) an insignificant failure, or (b) a significant failure that is corrected within two years of the year in which it occurred. The significance is determined based on the facts and circumstances. The following factors should be considered when determining significance:

  • Other failures in the same period (not how many people are affected)
  • Percentage of plan assets and contributions involved
  • Number of years it occurred
  • Participants affected relative to the total number in the plan
  • Participants affected relative to how many could have been affected
  • Whether correction was made soon after discovery
  • Reason for the failure

Voluntary Correction Program (VCP) – When Errors Cannot be Corrected via SCP

The VCP can be used to correct all types of qualification failures; plan document failures, operational failures, and demographic failures, To correct an error under VCP, the plan sponsor must mail the IRS a written submission and pay a compliance fee (fee can range from $750 for plans with 20 or fewer participants or not for profit plan sponsors to $25,000 for plans with over 10,000 participants) based on the total number of plan participants. Relief under VCP is in the form of a compliance statement from the IRS that addresses the failures identified during submission, the terms of correction, and the time period within which corrections must be made.

VCP may be used instead of SCP for the following reasons:

  • Some failures are not eligible for SCP, such as “significant” failures not corrected by the end of the second plan year after the operational failure occurred
  • Plan sponsors may prefer the comfort of a written IRS approval even for failures that are eligible for SCP
  • A VCP submission may ask the IRS to waive certain excise taxes or certain additional income taxes that a plan sponsor or participant would be liable for because of either a failure or a correction method being applied. This type of tax relief is not available under SCP

Under VCP, the plan sponsor generally must fully correct the failure for all years (not just the last three or four years). Usually, this means that the plan and the participants must be placed in the same position they would have been in if the failure had not occurred.

Audit Closing Agreement Program (Audit CAP) – When Plan is Under Audit

Audit CAP arises when qualification failures are found during an audit of the plan by the IRS. It is important to note that if the plan is under audit by the IRS both the SCP and VCP programs are not available to the sponsor. They must apply under the Audit Cap program.

Under this program, the plan sponsor agrees to the following:

  • Completes the correction prior to entering into the Closing Agreement
  • Pays a sanction negotiated with the IRS, and
  • Sign a closing agreement with the IRS

Delinquent Filer Voluntary Compliance Program (DFVCP)

The DOL sponsors the DFVCP to encourage plan sponsors to voluntarily comply with the annual reporting requirements under ERISA. The DFVCP is available for plan sponsors who have not been notified by the DOL of a failure to timely file an annual report and provides a way to avoid higher civil penalties assessed for late or missed filing of the Form 5500.

Participation in the program is a two part process. First, the plan sponsor files a complete Form 5500 with the DOL for each year relief is requested. In addition, a second copy of the Form 5500 is submitted to the DFVCP with the applicable penalty amounts.

Small plan (< 100 participants) penalty is $10 per day for each day the annual report is filed after the date on which the annual report was due, not to exceed $750. In the case of a DFVCP submission relating to more than one delinquent annual report filing for the same plan, the maximum penalty amount is $750 for each annual report, not to exceed $1,500 per plan.

Large plans (>100 participants) penalty is $10 per day for each day the annual report is filed after the date on which the annual report was due, not to exceed $2,000. In the case of a DFVCP submission relating to more than one delinquent filing for the same plan, the maximum penalty amount is $2,000 for each annual report, not to exceed $4,000 per plan.

Filings for multiple years MUST be included in a single submission for a plan in order for the penalty cap to apply. Also, it’s important to note that penalties under the DFVCP cannot be paid from plan assets.

In addition to the above DOL penalties, the IRS penalty for a plan sponsor who fails to file a complete or accurate Form 5500 report is $2,063 a day.


In conclusion, mistakes will happen and the ramifications can be costly to plan sponsors. It is important for plan sponsors to promptly utilize one of the above programs to correct the mistakes as soon as is the problems are discovered in order for qualified plans to maintain their qualified status. Withum has experts that have a great deal of expertise on helping plans maneuver these complex areas.

For additional information around your insurance coverage or if you have additional questions, fill in the form below and one of our experts will respond!

Author: Jennifer Keshwar, CPA | [email protected]

How Can We Help?

Previous Post

Next Post