Sponsoring a tax-qualified retirement plan is a key component for an employer to attract and retain employees. Such employee plans are governed by the following Internal Revenue Code sections:

• IRC 401(a): e.g., defined benefit pension, defined contribution, and 401(k) plans;
• IRC 403(b): tax sheltered annuity plans of tax-exempt and governmental employers;
• IRC 408(p): SIMPLE plans; and
• IRC 408(k): Simplified Employee Pension plans (SEPs) and related code sections.

Plan, code, and regulatory requirements are complex. Sponsors and plan administrators strive to comply, but invariably one or more problems arise whether it’s late salary deferrals, improper exclusion of eligible employees, missed plan loan payments, benefit overpayments, or other issues. Understanding that most plan sponsors attempt to follow their plan document and the law, the complexities involved in doing so and knowing that revocation of a plan’s tax qualification is draconian and adversely impacts innocent plan participants, the IRS has instituted for plan sponsors a system of correction programs known as the Employee Plans Compliance Resolution System (EPCRS).¹

Best practices for correcting retirement plan tax qualification issues support using EPCRS, which allows for self-correction in numerous circumstances. Further, if a correction program is available but not used and the issue is discovered by the IRS on audit, it will usually seek full correction and a closing agreement as well as payment by the sponsor of a negotiated sanction at least equal to — but likely higher than — the fee payable in connection with an EPCRS voluntary compliance program (VCP) submission except when agreement is not reached or extreme abuses are involved; the IRS may still seek plan disqualification.² As to whether using VCP will trigger an audit, it is not impossible, but my experience is that the chances are remote. One stated goal of EPCRS is encouraging voluntary utilization and correction through the program. That goal would be seriously undercut if correction submissions triggered audits.

After a plan sponsor or administrator identifies a plan document failure (the plan document does not include required code provisions or was not timely amended for changes in the code); a plan operational failure (the plan has not been administered in accordance with the code or the plan’s terms); a plan demographic failure (the plan does not satisfy code coverage or participation requirements); or an employer eligibility failure (for example, if an ineligible entity adopts a 403(b) plan),³ analyzing whether an EPCRS program is available should occur by addressing the following questions.

WHAT TYPE OF RETIREMENT PLAN DOES THE EMPLOYER SPONSOR?

Identifying the type of tax-qualified retirement plan at issue is important; it dictates whether the plan may be corrected under EPCRS.⁴ For example, nonqualified 457(f) plans may not be corrected using EPCRS. Additionally, IRS correction options and guidance can be particular to a specific type of plan. For example, the EPCRS revenue procedure contains different provisions addressing the correction of 401(a) qualified retirement plans like pension plans and 401(k) plans, 403(b) plans, SIMPLE plans, and SEPs. Note that self-correction is not as universally available for SEPs and SIMPLEs.⁵

CAN THE ISSUE BE FIXED USING EPCRS?

Once the type of retirement plan is identified, the next question is which EPCRS correction program is available, if any. The two correction programs that may be voluntarily utilized by plan sponsors under EPCRS are the self-correction program (SCP) and VCP.⁶ Note, however, that EPCRS is not available to correct failures relating to diversion or misuse of plan assets and is only available in limited circumstances for what it defines as “abusive tax avoidance transactions.”⁷

CAN THE PLAN BE SELF-CORRECTED USING EPCRS?

SCP is available to correct insignificant and certain significant operational failures in many circumstances, even if the plan or its sponsor is under examination by the IRS.⁸ Insignificant operational failures may be corrected under SCP at any time. To use SCP to correct significant operational failures, if eligible, correction must occur by the end of the third plan year following the year of the failure. SCP may also be used to fix a limited number of plan document failures; if available, the failures must also be corrected by the end of the third plan year following the year the failure occurred. To be eligible for SCP, the plan must be subject to formal or informal procedures designed to promote compliance, and those procedures must be followed. The standard for such procedures is not high, but it behooves plan sponsors and administrators to have a general framework for overseeing compliance. Generally, a plan subject to Section 401(a) will receive a favorable IRS determination letter.

Note that SCP is not available for egregious failures as defined by EPCRS.⁹ If a safe harbor EPCRS correction method is not used, the sponsor must make sure it can support correction using EPCRS principles.¹⁰ Plan sponsors and administrators should keep records of any correction using SCP in the event of a subsequent audit.

IF THE PLAN CANNOT BE SELF-CORRECTED UNDER EPCRS, SHOULD THE SPONSOR FILE A VCP SUBMISSION WITH THE IRS?

Provided the plan and its sponsor are not under examination by the IRS, operational and document failures that cannot be corrected using SCP generally may be corrected using VCP; so too may be plan demographic failures and employer eligibility failures.¹¹ VCP involves submitting the issue and proposed correction methodology to the IRS using applicable forms (see IRS Form 8950, Form 14568 and related forms 14568 A through I) and any required

accompanying forms. The proper user fee must be paid via pay. gov. VCP filings are common, and the IRS has a team dedicated to addressing them.

The EPCRS revenue procedure sets forth several safe harbor correction methodologies, though plan sponsors are not bound to use them. A sponsor using VCP may offer and negotiate other correction methodologies with the IRS provided the proposal aligns with EPCRS correction principles¹² including but not limited to:

• The correction method should restore the plan to the position it would have been in if the failure had not occurred, including restoration of benefits for current and former participants and beneficiaries. Lost earnings, if any, must be calculated and credited.
• The correction should be reasonable and appropriate for the failure. To that point, the correction method should to the extent possible resemble one already provided for in the code, regulations, EPCRS, or other guidance of applicability.
• With limited exceptions, the correction method should keep plan assets in the plan.
• The correction method should not violate other applicable code requirements.
• Plan failures must be fully corrected (and the mere fact the correction is inconvenient or burdensome does not excuse plan sponsors from this requirement.) Importantly, however, EPCRS states that full correction may not be required in certain situations if it is unreasonable or not feasible. In such cases, the correction method adopted must not have significant adverse effects on participants and beneficiaries of the plan and must not discriminate in favor of highly compensated employees.¹³

In my experience, the IRS has been agreeable in negotiations involving reasonable correction proposals by plan sponsors.

IF THE PLAN SPONSOR CONSIDERING A VCP SUBMISSION IS UNCERTAIN ITS PROPOSED CORRECTION WILL BE ACCEPTED BY THE IRS, SHOULD A PRESUBMISSION CONFERENCE BE SCHEDULED?

The IRS offers anonymous, no-fee, VCP presubmission conference procedures for matters eligible for correction with respect to requested methods not described as safe harbor corrections in EPCRS, provided the plan sponsor is eligible and intends to submit to VCP. If there is uncertainty with a VCP submission and proposed correction, a presubmission conference is advisable.¹⁴

IF THE QUALIFICATION ISSUE IS NOT COVERED BY EPCRS AND HAS NOT BEEN DISCOVERED ON AUDIT, CAN A PLAN SPONSOR STILL GET A CLOSING LETTER FROM THE IRS?

In the event a qualified plan issue has been identified and cannot be addressed under EPCRS, the IRS has a voluntary closing agreement program (VCAP) for such situations. However, the agency will not consider a VCAP request if the plan or its sponsor is under IRS examination or investigation when the request is submitted or has any matters or appeals before the tax court. VCAP is not available for abusive tax avoidance transactions or willful tax evasion. See Employee Plans Voluntary Closing Agreements at <https://www.irs.gov/retirement-plans/employee-plans-voluntary-closing-agreements> [https://perma.cc/7TJZ-7P54] for more information.¹⁵

Code qualification problems may not be the only plan issues. Often, retirement plan fiduciaries may have violated their ERISA duties. The U.S. Department of Labor has a separate program by which fiduciaries can correct specific breaches (e.g., late contribution of participant salary deferrals) known as the Voluntary Fiduciary Correction Program. See Fact Sheet: Voluntary Fiduciary Correction Program, Employee Benefits Security Admin, US Dep’t of Labor (December 2018) [https://perma.cc/94DP-TNHF] for more information.

If available, plan sponsors and administrators should utilize EPCRS to address qualification issues. The EPCRS revenue procedure and related VCP submission forms are detailed and complex. Utilizing EPCRS should only be done with the help of an employee benefits attorney familiar with navigating and resolving plan issues via this method.