The administration of retirement plans is very complex and, even with best efforts, failures can occur. These failures often are unintentional and may seem minor, but they can have serious consequences (including plan disqualification), which can result in adverse tax consequences for the plan sponsor. Fortunately, the Department of Labor (DOL) and Internal Revenue Service (IRS) have established various programs intended to encourage sponsors to voluntarily correct plan failures before facing an audit.
Department of Labor Employee Benefits Security Administration
The DOL Employee Benefits Security Administration (EBSA) is responsible for administering and enforcing the fiduciary, reporting and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The DOL has two voluntary self-correction programs available to plan sponsors who need help meeting ERISA requirements.
1. Voluntary Fiduciary Correction Program
The Voluntary Fiduciary Correction Program (VFCP) allows anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, to voluntarily correct certain fiduciary violations and avoid certain penalties provided they comply with the criteria and satisfy the procedures outlined in the VFCP. The VFCP provides descriptions of 19 categories of violations, including delinquent participant contributions, defaulted participant loans, and benefit payments based on improper valuation of plan assets, and their methods of correction. The steps outlined below will assist in fully correcting violations.
Step 1: Identify any violations and determine whether they fall within the transactions covered by the VFCP.
Step 2: Follow the process for correcting specific violations (e.g., improper loans or incorrect valuation of plan assets).
Step 3: Calculate and restore any losses or profits with interest, if applicable, and distribute any supplemental benefits to participants.
Step 4: File an application with the appropriate EBSA regional office that includes documentation showing evidence of corrective action taken.
2. Delinquent Filer Voluntary Compliance Program
The Delinquent Filer Voluntary Compliance Program (DFVCP) provides benefit plan sponsors the opportunity to file overdue, incomplete or incorrect Form 5500 annual reports and pay reduced civil penalties. The DFVCP is only available to plan administrators with filing obligations under Title I of ERISA who comply with the provisions of the program and who have not been notified in writing by the DOL of a failure to file a timely form 5500. The basic penalty under the program is $10 per day for delinquent filings with a maximum penalty of $750 for a small plan and $2,000 for a large plan for a single late annual report. For plan administrators who have failed to file an annual report for a plan for multiple years, the maximum penalty is $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports filed for the plan at the same time.
Internal Revenue Service Employee Plans Compliance Resolution System
The IRS Employee Plans Compliance Resolution System (EPCRS) correction programs help plan sponsors of qualified retirement plans keep their plans in compliance with Internal Revenue Code requirements. The EPCRS offers three programs for correcting plan errors.
Self-Correction Program – The Self-Correction Program (SCP) allows a plan sponsor to correct insignificant operational errors at any time without contacting the IRS or paying any fee. Significant operational failures may still be corrected under this program if action is taken in a timely manner. An example of an operational error would be not following the written terms of the plan. Since nothing is filed with the IRS, the plan sponsor should maintain adequate records of the steps taken to correct the error in the event of a plan audit.
Voluntary Correction Program – Some failures are not eligible for SCP and some plan sponsors prefer a written IRS approval of the correction. In these instances, the failures may be corrected under the Voluntary Correction Program (VCP). This program permits a plan sponsor to, any time before an audit, pay a fee and receive IRS approval for correction of plan failures. To receive IRS approval, the plan sponsor should submit a user fee and a VCP submission, which describes the failure and the methods used to correct them and prevent them from happening again, to the IRS.
Audit Closing Agreement Program – The Audit Closing Agreement Program (ACP) can be used by plan sponsors that have significant issues discovered as a result of an IRS audit of the plan. The plan sponsor makes the appropriate corrections and then pays a sanction negotiated with the IRS.
When faced with fiduciary violations or operational errors, plan management should consult with their plan auditor and ERISA counsel to properly determine the overall impact of the deficiency and to assess the best available correction method.
More information on the DOL and IRS voluntary correction programs may be found by visiting the websites below.