The IRS developed the Employee Plans Compliance Resolution System (EPCRS) to help plan sponsors avoid plan disqualification by making it easier for them to correct a wide variety of retirement plan qualification failures. If plan sponsors follow the established guidelines, they may be able to bring their plans back into compliance without losing valuable tax benefits.

Types of Qualification Failures

Qualification failures may be of four types:

Plan document failures result from a plan provision (or its absence) that violates the requirements of Internal Revenue Code Section 401(a) or 403(a). A common cause of a plan document failure is not timely amending a plan to reflect required changes.

An operational failure is a qualification failure (other than an employer eligibility error) that occurs when a plan sponsor fails to follow terms stated in the plan document. An example of an operational failure would include improperly excluding eligible employees from plan participation.

Demographic failures are those related to failure to follow nondiscrimination, minimum participation, or minimum coverage requirements (other than operational failures or employer eligibility failures). The correction of a demographic failure generally requires a corrective amendment to the plan that adds benefits or increases existing benefits.

Employer eligibility failures occur when the employer sponsoring the plan is not eligible to do so. Such failures do not include plan document, operational, or demographic failures.

Self-Correction Program (SCP)

The IRS has three programs available for resolving qualification failures. One of them is the SCP. This program allows a plan sponsor to correct plan failures without the involvement of the IRS or without paying a fee. Only operational failures (failing to follow the terms of a plan) may be corrected using the SCP. To be eligible for the SCP, plan sponsors must be able to demonstrate that they have established practices and procedures that show compliance with the law. A plan document alone is not sufficient.

The plan sponsor will need to follow the general correction guidelines listed in Revenue Procedure 2016-51, Section 6. According to the IRS, a plan that corrects a mistake listed in Appendix A or Appendix B of Revenue Procedure 2016-51 may be certain that its correction method is reasonable and appropriate for the failure. In the event of an audit of the plan, a plan sponsor should maintain adequate records to show that the correction took place.

Voluntary Correction Program (VCP)

The VCP allows the plan sponsor to — at any time prior to an audit — pay a fee and receive IRS approval for the correction. All four types of qualification failures may be corrected with the VCP. When using this correction program, a plan sponsor identifies the mistakes to the IRS and suggests corrections using principles listed in Revenue Procedure 2016-51, Section 6.

Additionally, the plan sponsor pays a compliance fee and suggests changes it will make to its administrative procedures to avoid having the mistakes occur again. Subsequently, the IRS issues a Compliance Statement listing the plan sponsor’s mistakes and the methods acceptable to the IRS for correcting them. The plan sponsor has 150 days from issuance of the Compliance Statement to correct the mistakes.

Audit Closing Agreement Program (Audit CAP)

Under the Audit CAP, a plan sponsor may pay a fine and correct a plan failure while the plan is under audit. Before entering a Closing Agreement, the plan sponsor makes corrections and pays a fine that is negotiated with the IRS. Fine amounts are based on all the facts and circumstances.

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