Retirement Plan Issue Resolution: Know Your Options

Managing an employer-sponsored retirement plan can be a challenging task, especially for small companies. No shortage of regulations must be followed, including those in the Employee Income Retirement Security Act (ERISA) and mandated by the IRS. Matters become more complicated when a large plan status is reached because of increased scrutiny and compliance requirements such as an annual plan audit. In addition, updates such as those outlined in the SECURE Act 2.0 make it easy to see how unintentional mistakes can be easily made. While specific serious errors require the assistance of the IRS to remedy, most errors can be corrected through the Employee Plan Compliance Resolution System (EPCRS). Plan sponsors must seek resolution through one of three programs, depending on the issue type. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key correction programs below.

Self-Correction Program (SCP)

Many retirement plan errors can be self-corrected without incurring fees or being subject to reporting or application requirements. Insignificant operational errors can also be self-corrected at any time without losing a plan’s tax benefits.

Operational failures that can be self-corrected include:

• Exclusion of eligible participants
• Failure to make payments as outlined in the terms of the plan
• Loan failures
• Other failures regarding following plan terms.

Document failures are not included in self-correction eligibility. Plan documents must be up-to-date, fully compliant with tax law, and cannot be corrected under the SCP.

What is seen as significant or insignificant doesn’t follow one hard and fast rule. Significance is determined by factors such as the number of years a failure occurred, the percentage of participants who were impacted, the number of other failures that happened in the same time span, how quickly a correction was made after spotting the issue, why the failure occurred, and so on.

To be eligible for self-correction, plan sponsors must also have operated plans with established procedures in a compliant manner. Just because organizations have plan documents doesn’t mean that internal procedures have been sufficiently implemented or followed. Thus, a failure that is eligible for self-correction needs to arise from “an oversight or mistake” made when carrying out plan procedures or as a result of insufficient procedures that were unable to prevent the failure from happening.

Voluntary Correction Program (VCP)

Plan failures that need to be fixed are subject to the Voluntary Correction Program (VCP), as long as the IRS isn’t currently auditing the retirement plan. These changes would apply to failures in plan document language or how the plan is being run. Like SCP, VCP can allow administrators to make timely changes while maintaining a tax-favored status.

Without a correction, tax-favored retirement plans, such as a 401(k), 403(b), SEP-IRA, or SIMPLE IRA, can lose this important designation. Errors that were remedied through the VCP include:

• Failure to keep plan documents updated
• Lack of compliance with federal law requirements
• Neglecting to follow outlined terms in the plan document while operating the plan

If these conditions apply, plan administrators and sponsors can submit a written letter to the IRS with the correction method used and pay a VCP application user fee. The IRS will review documented failures and correction methods and reach out if they need more information. Once approved, plan administrators will receive a compliance statement and approval with the condition that the correction must occur within 150 days to avoid disqualification.

However, lack of approval isn’t the end of the line. The IRS will work with plan sponsors to find an alternative, acceptable correction. Both parties must agree on what’s reasonable and appropriate to proceed with a compliance statement.

Barring unusual circumstances, the IRS will not audit a plan during this submission and approval process.

Audit Closing Agreement Program (Audit CAP)

For plan sponsors, it pays to be proactive. Fixing mistakes through the SCP and VCP can help retain tax benefits and avoid further penalties. If plan sponsors have retirement plans with significant problems and don’t come forward to the IRS, they are subject to more stringent measures. Suppose the IRS discovers significant issues during a determination letter process or on examination. In that case, errors must be corrected under the Audit CAP.

The plan sponsor will be required to correct significant mistakes found in the plan, get into a closing agreement, and pay a sanction outlined by the IRS. The closing agreement indicates that an audit process has been completed with the IRS. The IRS will set sanction amounts and are generally larger than user fees under the VCP. The exact amount will depend on the “nature, extent, and severity of the failures,” according to the IRS, and not be excessive.

Contact Us

While managing an employer-sponsored retirement plan can be challenging, the resolution process does not have to be. Take advantage of the various resolution programs to ensure your plan is in compliance with regulations. If you have questions about the information outlined above or need assistance with your next retirement plan audit, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.