Retirement plans are complicated beasts. The Pension Protection Act of 2006 was more than 1,000 pages long; one of the main reference books that retirement plan professionals use is more than 7,000 pages long; and there are countless other sets of rules and regulations that add tens of thousands more pages. All those pages mean a lot of moving parts, and all those moving parts mean that sooner or later, something is going to fall through the cracks no matter how much attention to detail is paid.
Fortunately, the IRS recognizes that honest mistakes sometimes happen, and they have established a program that allows for correction of those mistakes. It is called the Employee Plans Compliance Resolution System or EPCRS.
The IRS established the first correction program back in 1991. Over the next several years, it created several other programs for different types of plans and errors. Finally in 1998, all of the various programs were consolidated into EPCRS. Since then, the IRS has updated the program nine times, adding new corrections and adjusting methodologies along the way. Not only does this 20+ year history show the IRS commitment to voluntary correction, but it has also resulted in a mature program that provides many practical solutions.
The program is divided into three main parts—the Self Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). SCP allows plan sponsors to correct certain types of mistakes on their own without seeking formal approval from the IRS, while VCP requires other types of corrections to be submitted to the IRS for its review and approval. In other words, these first two components are focused on helping plan sponsors identify and fix errors before the IRS gets involved.
Audit CAP, on the other hand, deals with the correction of mistakes once the plan is under IRS audit. Since it is preferable to address any issues before the IRS comes knocking, the remainder of this article will focus on SCP and VCP.
Before getting into some of the specifics of how SCP and VCP work, it is helpful to understand some of the general principals of EPCRS. Essentially, the program is designed to place plan participants in the position they would have been in had the error in question not occurred in the first place. This may involve making additional contributions, revising compliance testing or reversing improper payouts.
EPCRS does include a number of sample corrections; however, it also offers the flexibility to craft custom fixes in unique situations or when one of the samples is not practical. One question that comes up from time to time is what to do about errors that go back multiple years. Although it can be inconvenient, EPCRS does require that full correction be made, including errors that may go back multiple years.
EPCRS defines the following four broad categories of failures:
Operational Failures: By far the most common category, an operational failure is simply a failure to follow the terms specified in the plan documents. In other words, it is an error to operate the plan in a manner that is in any way inconsistent with its provisions, even if you are being more generous.
Plan Document Failures: This type of failure occurs when a plan document does not include certain mandatory language and often arises when a plan sponsor does not timely update its plan document after a law change.
Employer Eligibility Failures: When a company sponsors a type of plan it is not permitted to have, an employer eligibility failure occurs. An example of this would be a for-profit company sponsoring a 403(b) plan since those plans can only be sponsored by certain tax exempt organizations and public schools.
Demographic Failures: Last but not least is the failure to satisfy certain nondiscrimination tests such as the minimum coverage test.
The type of failure is an important factor in determining which part of EPCRS can be used. For example, SCP only allows for the correction of operational failures. All other failures must be corrected using VCP.
As discussed above, SCP allows plan sponsors to correct certain operational failures on their own, without submitting anything to the IRS for approval. For operational failures that are insignificant, there is an unlimited time frame for using SCP, even if the plan is being audited.
Significant failures, however, can only be corrected via SCP within two years following the year of the failure. In other words, a significant operational failure that occurs in 2013 would have to be corrected no later than December 31, 2015. If not corrected by that date, SCP is no longer available, leaving VCP as the only option. There are also limitations on when SCP can be used to correct significant failures once the plan is under IRS audit.
You are probably wondering who gets to make the call on significance. The answer is the IRS; however, they do provide some factors to consider. These include such items as the number of participants affected by the failure, the amount of plan assets/contributions involved relative to total plan assets and whether other failures occurred.
Although there is no formal approval process, it is strongly recommended that any SCP corrections be well-documented so there is clear proof in the event of a subsequent IRS audit.
VCP allows for the correction of all types of errors at any time but, as we will discuss in this section, it includes a formal process for requesting IRS approval. One advantage is that while there is a properly submitted request pending, the failure in question becomes off limits if the plan is selected for audit. However, if the IRS audits the plan before the request is submitted, the plan can no longer use VCP.
Although the VCP process is usually straightforward, it can be a lengthy process and there are some traps for the inexperienced. Even the streamlined version of VCP requires a great deal of supporting documentation. Basically, the VCP package must include several IRS forms that require a narrative description of the failure(s) that occurred as well as the steps that have been taken to correct them.
If the correction requires calculations, the package should include, at a minimum, a description of the calculations, and sometimes the IRS will request a detailed participant-by-participant breakdown to confirm that all have been made whole.
Other items that must generally be included are copies of the plan document, any amendments, applicable nondiscrimination test results and the most recently filed Form 5500.
The IRS charges a fee to review the VCP application, based on the number of participants reported on Form 5500.
| Number of Participants | Fee |
|---|---|
| 20 or fewer | $750 |
| 21 – 50 | $1,000 |
| 51 – 100 | $2,500 |
| 101 – 500 | $5,000 |
| 501 – 1,000 | $8,000 |
| 1,001 – 5,000 | $15,000 |
| 5,001 – 10,000 | $20,000 |
| Over 10,000 | $25,000 |
On receipt of the application, fee payment and supporting documentation, the proposed correction is assigned to an agent for review, which may include requests for clarification or additional information. Once the review is complete, the IRS issues a compliance statement indicating its acceptance of the correction. Sometimes, the review process is as short as three or four months but, other times, it can take a year or more, depending on the complexity of the situation and IRS workload.
Sample Corrections for Common Failures
Exclusion of Eligible Employee from making 401(k) Contributions
Every now and then, a plan sponsor may overlook an employee who has met plan eligibility requirements or may forget to implement a deferral election. The correction is for the employer to make a contribution on the employee’s behalf to compensate him or her for the missed deferral opportunity. To the extent there was a matching contribution, that amount must be made up as well.
The first step is to determine the missed deferral opportunity based on the type of plan and the circumstances involved.
| Description | Missed Deferral Opportunity (MDO) |
|---|---|
| Election not implemented | Actual amount of election |
| Traditional 401(k) Plan | Average of group, i.e., HCE or NHCE* |
| 403(b) Plan | 3% or amount subject to 100% match |
| Catch-Up | 50% of limit |
| Safe Harbor Match | 3% or amount subject to 100% match |
| Safe Harbor Nonelective | 3% |
| Qualified Automatic Contribution Arrangement | Based on escalation schedule |
| *Highly Compensated Employee or Non-Highly Compensated Employee | |
The second step is to calculate the corrective contribution based on the missed deferral opportunity from step #1 and the type of deferrals in question.
| Contribution | Formula | Form |
|---|---|---|
| Pre-Tax Deferral | 50% of MDO | QNEC* |
| Roth Deferral | 50% of MDO | QNEC* |
| After-Tax Contribution | 40% of MDO | QNEC* |
| Match | Match formula x MDO | Nonelective |
| *Qualified Nonelective Contribution | ||
The contribution along with an additional amount to compensate for lost investment gains are then deposited into the participant’s account in the plan.
If the error is insignificant or is discovered and corrected within two years, the correction can be made using SCP. On the other hand, if the error is significant and is beyond the two-year correction window, the details of the correction should be submitted to the IRS for approval under VCP.
Failure to Timely Update Plan Document for Law Changes
When Congress passes new laws that impact the retirement plan rules or the IRS/DOL update regulations, it is usually necessary to amend plan documents to reflect those changes, and there are specific time frames in which those amendments must be adopted. Occasionally, a plan will miss the deadline, causing a plan document failure.
Since SCP can only be used to correct operational failures, this failure must be corrected via VCP. The plan sponsor simply adopts the required amendment and submits it to the IRS along with copies of any related plan documents. Depending on the nature of the missed amendment(s), the plan sponsor may be eligible for a reduced user fee of $375 rather than the fee based on the number of plan participants.
Conclusion
EPCRS is an invaluable tool for correcting plan failures before the IRS finds them. Although many plan corrections appear straightforward, it is important to work with an experienced professional when going through the plan correction process to make sure that fixing one error doesn’t accidentally create another. With more than 20 years and 33,000 corrections under its belt, EPCRS will continue to evolve to allow plan sponsors to bring their plans back into compliance.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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