Having conducted many plan audits, I can tell you one thing for sure—errors are inevitable. The most common errors typically relate to understanding plan provisions (e.g., correctly applying the definition of compensation) and the timely deposit of employee deferrals. For more information and tips on how to avoid these and other common errors, check out this article.
So, you've found yourself with an error—Don't panic
The DOL and IRS have provided many ways to correct errors. Finding and correcting it yourself is easier, and less expensive, than if it’s found by a regulatory body during an audit. The general principal with all correction methods is to restore plan participants to the same position they would have been had the error not occurred. This article will provide you with information on how to correct errors as provided by the IRS and DOL. However, as with everything, there are always exceptions to the general rule. Therefore, consulting an ERISA attorney, especially for significant errors, is always advisable.
- IRS Employee Plans Compliance Resolution System (EPCRS)
- DOL Voluntary Fiduciary Correction Program (VFCP)
- DOL Delinquent Filer Voluntary Compliance Program (DFVC)
EPCRS—This is the IRS method generally used for the correction of operational errors (e.g., correctly applying the definition of compensation). Correction methods are outlined specifically here—https://www.irs.gov/irb/2016-42_IRB/ar12.html, and ways to correct include:
- Self-Correction (SCP)—This is the easiest and least expensive method, and can be used for either insignificant errors or significant errors, which should be corrected by the last day of the second plan year following the plan year when the error occurred (e.g., 12/31/19 for 2017 plan year). There’s no application or user fee involved—just correct and move on!
- Voluntary Correction Program (VCP)—This involves filling out an application (Form 8950) and requires a user fee. It’s used for significant errors that don't fall under SCP. The advantage is audit protection, as the IRS issues a compliance statement related to this correction method.
VFCP—This is a U.S. Department of Labor method used to self-correct ERISA violations (prohibited transactions) (e.g., timely deposits of employee deferrals). Follow the correction methods provided here. It’s a free program with four steps: 1) Identify the violation; 2) Follow the correction process (see link above); 3) Calculate and restore earnings, then distribute any excess benefits; and 4) File an application with a regional office after corrective action is taken.
Why file the application? A No action letter gives you audit protection, and helps you avoid penalties and investigations. There is an excise tax (Form 5330, Return of Excise Taxes Related to Employee Benefit Plans), however, there are some exemptions to the excise tax.
DFVC—This brings you into compliance with annual reporting requirements (e.g., Form 5500) under ERISA. Under this method, you must electronically file all delinquent filings at once, or electronically submit the penalty payment (maximum penalties are from $750 to $4,000, depending on the size of the plan and how many delinquent filings).
For more on these error-correction methods, please consult your qualified CPA.
Nancy Cox is a partner based out of our Buffalo, NY office.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.