IRS and DOL Employee Benefit Plan Correction Programs Guide

Employee benefit plans are vital for attracting and retaining top talent. However, they come with significant employee plans compliance responsibilities. Plan administrators must navigate complex regulations enforced by the Internal Revenue Service (IRS) and the Department of Labor (DOL).

Failure to comply can result in costly penalties and legal consequences, and loss of qualified status. Fortunately, both the IRS and DOL offer correction programs to help employers rectify errors and maintain compliance.

This guide provides an overview of correction programs and their benefits. You’ll also learn best practices for keeping your employee benefit plans compliant. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.

Common Employee Benefit Plan Compliance Issues

Maintaining compliance with employee benefit plans can be challenging because complex employee benefit plan regulations. Some of the most common issues plan administrators face include:

• Administrative Errors: These include mistakes such as missed employee deferrals and incorrect allocation of plan contributions. They also include failure to follow the plan’s terms. Errors can occur because administrative oversight or confusion about plan documents.
• Fiduciary Breaches: Fiduciaries manage plan assets in participants’ best interests. Common breaches include improper handling of plan assets and delayed contribution deposits. They also include making investment decisions that do not align with the plan’s objectives.

To help employers address these issues, the IRS and DOL offer several correction programs. Each program corrects specific types of errors and, in many cases, reduces or eliminates penalties.

IRS Employee Benefit Plan Correction Programs

The IRS offers the Employee Plans Compliance Resolution System (EPCRS). This system helps employers correct mistakes in their retirement plans and avoid severe consequences of losing qualified status.

Losing qualified status can result in the loss of a plan’s tax-favored status. This leads to significant tax liabilities for both the employer and employees. EPCRS includes three main correction programs:

Self-Correction Program (SCP)

The SCP allows employers to correct certain operation failures without IRS approval. This program proves particularly advantageous for correcting minor errors. It enables employers to make corrections quickly without formal submissions.

To qualify, the plan must generally have a compliance history. Employers must correct errors within a specified timeframe. SCP offers a cost-effective option that allows employers to maintain compliance without incurring penalties.

Voluntary Correction Program (VCP)

The VCP corrects more significant or complex errors that SCP cannot resolve. Employers submit a formal application to the IRS through VCP submission, detailing the errors and proposed corrections.

The IRS reviews the application. If the IRS approves the correction, the employer receives a compliance statement confirming resolution of the plan’s errors. This protects the plan from further IRS scrutiny regarding corrected issues. Although VCP involves fees, these typically remain lower than potential penalties for uncorrected errors discovered during an IRS audit.

Audit Closing Agreement Program (Audit CAP)

Audit CAP applies when the IRS identifies plan failures during an audit. Unlike SCP and VCP, which employers initiate, the IRS initiates Audit CAP.

The program allows employers to negotiate a closing agreement with the IRS. Employers correct errors and pay a sanction generally less than penalties imposed without the agreement. This program proves critical for resolving issues discovered during an audit while avoiding more severe penalties.

DOL Fiduciary Correction Programs: VFCP & DFVCP

The main difference between IRS and DOL correction programs lies in focus. IRS programs, under EPCRS, preserve the tax-qualified status of retirement plans by correcting administrative and documentation errors.

In contrast, DOL programs focus on fiduciary compliance under the Employee Retirement Income Security Act (ERISA). Programs like VFCP and DFVCP address issues such as fiduciary breaches and late filings. These programs protect plan participants.

Voluntary Fiduciary Correction Program (VFCP)

VFCP focuses on correcting breaches of fiduciary duties under ERISA. It covers various fiduciary breaches, including improper handling of plan assets, late deposits of employee contributions to the plan, and incorrect asset valuation.

Employers or fiduciaries who identify such breaches can fix them themselves under VFCP. They restore losses to the plan and ensure future compliance. Successfully completing VFCP protects the plan from DOL enforcement actions and civil penalties.

Delinquent Filer Voluntary Compliance Program (DFVCP)

DFVCP addresses failure to file required annual reports, such as the Form 5500 series, on time. Late filings can result in significant penalties. However, DFVCP allows plan administrators to file delinquent filer voluntary reports with reduced penalties.

To participate, administrators must file the missing reports and pay the applicable reduced penalty. By using DFVCP, employers can mitigate the risk of more substantial penalties and demonstrate a commitment to compliance.

Employee Benefit Plan Compliance Best Practices

Given the complexities of employee benefit plan regulations, employers can adopt proactive strategies to prevent errors and ensure compliance.

Regular Plan Audits and Reviews

Conduct routine internal audits and plan reviews. This proactive approach helps you identify potential issues before they become significant problems. This proactive approach allows for timely corrections under programs like SCP or VCP, minimizing the risk of penalties.

Documentation and Professional Guidance

Thorough documentation of plan operations and decisions is essential for compliance. Additionally, working with employee benefit plan audit professionals provides the expertise needed to navigate IRS and DOL regulations. This ensures prompt and correct error correction.

Correcting errors in employee benefit plans remains essential to avoid penalties and ensure ongoing compliance with regulations. The IRS and DOL update their correction programs, making it crucial to stay informed about these changes.

Contact Us

Maintaining compliance with the vast array of rules and regulations can be challenging for plan sponsors. If you have made an error in plan management, consult with a qualified advisor to correct the issue.

For questions about this information or assistance with your next plan audit, WhippleWood CPAs can help. For additional information call 303-989-7600. We look forward to speaking with you soon.

Related Resources:

• Employee Benefit Plan Changes for 2024: What Plan Sponsors Need to Know
• 401(k) Audit Services: Ensuring Compliance for Retirement Plans
• Understanding Fiduciary Responsibilities for Employee Benefit Plans