Fixing Operational Roadblocks In Your Retirement Plan

Recently, the regulatory environment for retirement plan sponsors has become increasingly complex.  Unfortunately, this complexity can lead to operational errors in qualified plans. Recognizing that even with the best intentions some plan sponsors encounter failures in the operation of their plan, the IRS has developed a program to help clients address those failures: the Employee Plans Compliance Resolution System or EPCRS for short.

EPCRS consists of three correction programs – Self Correction Program (SCP), Voluntary Compliance Program (VCP) and Audit CAP.  As you might suspect, time expended, cost of correction and penalty amounts increase at each program level.

Although officially rolled out by the IRS in Revenue Procedure 2008-50 (updated by 2013-12), I personally believe that programs are based on a prototype “correction program” that my mother developed during my teenage years.  Take, for example, when I was sixteen and able to drive.

My mother gave me access to the family car with the stipulation that I fill the gas tank when necessary.  Naturally, I became quite adept at returning the car with just enough gas to allow the next driver to make it to the gas station.

One day, I miscalculated and ran out of gas while running some personal errands.  I knew my mom’s “correction program” and pondered my options:

Self Correction

I could carry the empty gas can in the trunk of the car to the gas station, fill it up and walk back to the car..  With a small investment of time and money, I could self correct and I would not have to report the “failure” to my mom.

Voluntary Correction

In lieu of self correction, I could “report” the failure to my mom, who probably would have required I fill the car’s gas tank completely and probably lose my allowance for awhile.  My investment of time, cost of correction and additional penalties would have been much higher with this correction method.

Involuntary Correction (A.K.A. Audit Cap)

By far the most expensive correction methodology would be to push the car to my house and park it in the driveway, allowing my mom to discover the error the next morning.  Not only would pushing the car clearly tax me, but other sanctions would likely cause me to lose the use of the family car as well as my allowance for several years!

While tongue in cheek, this illustrates the general principles of the three EPCRS programs which are:

Self Correction Program

(SCP) is available to correct both insignificant and significant errors but significant errors must be corrected within two years after the end of the plan year in which the error occurred.  The program does not involve any type of reporting to the IRS.  Further guidance for correcting some common plan errors is outlined in the Revenue Procedure.

Voluntary Correction Program

(VCP) is available to correct plan errors that cannot be corrected under SCP or for corrections where the plan sponsor wants to propose a different correction methodology than that specified in the Revenue Procedure.  There is a compliance fee associated with a VCP filing that is based on the size of the plan.

Audit Cap

Audit Cap is reserved for errors that are not corrected by the plan sponsor and are discovered during an IRS audit.  Through the audit cap program, the plan sponsor enters into a closing agreement with the IRS.  As part of that agreement, the plan sponsor is required to correct the failure and pay a sanction to the IRS.  Although the Revenue Procedure requires that the sanction bear a reasonable relationship to the nature, extent and severity of the failure, plan sponsors correcting an error through Audit Cap should be prepared to pay a substantial fee.

Conclusion

Remember, the best and most efficient way to correct an error is to prevent it from occurring in the first place.  At BPAS, we assist our plan sponsors in avoiding plan failures by scrubbing each census file submitted to identify any common errors.  Our consulting and conversion staffs are trained to help detect plan errors, as well.  Remember that we only have half of the puzzle.

If you think your plan might have an error, contact your plan consultant and we will help you with the determination and ultimately, the correction.