Employee benefit plans are vital for attracting and retaining top talent, but they come with significant compliance responsibilities. Employers must navigate a complex landscape of 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 – including plan disqualification. Fortunately, both the IRS and DOL offer correction programs to help employers rectify errors and maintain compliance. This guide provides an overview of these correction programs, their benefits, and 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 Compliance Issues in Employee Benefit Plans
Maintaining compliance with employee benefit plans can be challenging due to the complexity of the rules involved. Some of the most common issues employers face include:
- Operational Errors: These include mistakes such as missed employee deferrals, incorrect allocation of plan contributions, or failure to follow the plan’s terms. Such errors can occur due to administrative oversight or misinterpretation of plan documents.
- Fiduciary Breaches: Fiduciaries are responsible for managing plan assets in participants’ best interests. Common breaches include improper handling of plan assets, delayed contribution deposits, or 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 designed to rectify specific types of errors and, in many cases, reduce or eliminate penalties.
IRS Correction Programs
The IRS offers the Employee Plans Compliance Resolution System (EPCRS), which helps employers correct mistakes in their retirement plans and avoid the severe consequences of plan disqualification. Disqualification can result in the loss of a plan’s tax-favored status, leading 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 operational failures without IRS approval. This program is particularly advantageous for correcting minor errors, as it enables employers to make corrections quickly and without the need for formal submissions. To qualify, the plan must generally have a compliance history, and the errors must be corrected within a specified timeframe. SCP is a cost-effective option that allows employers to maintain compliance without incurring penalties, as long as the corrections are completed within a reasonable timeframe.
- Voluntary Correction Program (VCP): The VCP is designed to correct more significant or complex errors that cannot be corrected under SCP. Employers submit a formal application to the IRS, detailing the errors and the proposed corrections. The IRS then reviews the application, and if the correction is approved, the employer receives a compliance statement. This statement confirms that the plan’s errors have been resolved, protecting the plan from further IRS scrutiny regarding the corrected issues. Although there are fees associated with the VCP, these are typically lower than the potential penalties for uncorrected errors discovered during an audit.
- Audit Closing Agreement Program (Audit CAP): Audit CAP is used when plan failures are identified during an IRS audit. Unlike SCP and VCP, which are initiated by the employer, Audit CAP is initiated by the IRS. The program allows employers to negotiate a closing agreement with the IRS to correct the errors and pay a sanction that is generally less than the penalties that would be imposed without the agreement. This program is critical for resolving issues discovered during an audit while avoiding more severe penalties.
DOL Correction Programs
The main difference between IRS and DOL correction programs is the focus: IRS programs, under EPCRS, aim to preserve the tax-qualified status of retirement plans by correcting operational and documentation errors. In contrast, DOL programs, like VFCP and DFVCP, focus on ensuring fiduciary compliance under the Employee Retirement Income Security Act (ERISA), addressing issues such as fiduciary breaches and late filings to protect plan participants.
- Voluntary Fiduciary Correction Program (VFCP): VFCP focuses on correcting breaches of fiduciary duties under ERISA. It covers a variety of fiduciary breaches, including improper handling of plan assets, late deposits of employee contributions, and incorrect asset valuation. Employers or fiduciaries who identify such breaches can voluntarily correct them under VFCP by restoring losses to the plan and ensuring future compliance. Completing the VFCP successfully corrects the breach and ensures that the DOL will not pursue enforcement actions or civil penalties related to the corrected issue.
- Delinquent Filer Voluntary Compliance Program (DFVCP): DFVCP addresses the failure to file required annual reports, such as the Form 5500 series, on time. Late filings can result in significant penalties, but DFVCP allows plan administrators to voluntarily file delinquent 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.
Best Practices for Compliance and Correction
Given the complexities of employee benefit plan regulations, employers can adopt proactive strategies to prevent errors and ensure compliance:
- Regular Plan Audits and Reviews: Conducting routine internal audits and plan reviews can help 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 can provide the expertise needed to navigate the intricacies of IRS and DOL regulations, ensuring that any errors are promptly and correctly addressed.
Correcting errors in employee benefit plans is essential to avoid penalties and ensure ongoing compliance with regulations. The IRS and DOL periodically 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, it’s important to consult with a qualified advisor to determine how to correct the issue. If you have questions about the information outlined above, or need assistance with your next plan audit, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.