Fixing Mistakes with the IRS and DOL Correction Programs

When compliance errors happen in plan administration, there are ways to fix them. Speakers at an Oct. 19 ASPPA Annual conference workshop session explained some of those ways. 

“It’s telling how much time is spent in this area fixing errors,” remarked Robert M. Richter, Retirement Education Counsel, American Retirement Association. Richter was joined by Melissa Terito, a Partner at Sentinel Pension in Baton Rouge, LA.

Terito reported that one common error she and her firm see is plan sponsors not following the plan’s definition of compensation. Another, she said, is failure to include eligible employees in the plan and exclude those who are ineligible. 

The IRS, Terito and Richter says that plan loans which don’t comply with Code Section 72(p) and impermissible in-service withdrawals are common mistakes, as well as failure to: 

• amend the plan for tax law changes by the end of the period required by the law;
• follow the plan's definition of compensation for determining contributions; 
• include eligible employees in the plan or the failure to exclude ineligible employees from the plan; 
• satisfy Code Section 401(a)(9);
• provide top-heavy minimums; 
• satisfy Code Section 415 limits; 
• adopt a plan one can legally adopt; and 
• correct ADP/ACP testing mistakes in a timely manner. 

The most common mistakes the DOL sees include errors regarding: 

• timeliness of participant contributions;
• required plan document and disclosures;
• bonding errors;
• plan claims procedures;
• conflicts; and 
• fees.

Why Fix Them?

So why fix mistakes in the first place? For one thing, they can result in the disqualification of a plan. And that has far-reaching effects, Richter and Terito pointed out—for employers, trusts and, ultimately, employees. Those consequences include: 

• Trusts: the trust loses its tax-exempt status and taxes must be paid on the trust earnings, and a Form 1041, Income Tax Return for Estates and Trusts, must be filed.
• Employers: when a plan becomes disqualified, employers can only deduct the amount of vested contributions since the employee would now be picking this up as includible income.
• Employees: employer contributions made to an employee during the calendar years that the plan is disqualified become taxable to the employee to the extent that the employee is vested in those contributions. In addition, rolled over distributions are disallowed. 

Despite the ill effects of disqualification, said Richter, some people choose it. A situation in which that may be the case, he said, would be when an employer switches plan providers and the TPA discovers that it inherited a mess that is too hard to correct.

Legal liability is another issue when a plan fails, which Richter said “can get dicey.” When a failure occurs, he said, the first step is to determine who is responsible for it. That, in turn, determines who decides how to correct the failure. In addition, if one is a 3(16) administrator, then one represents plan participants.

Remedies

If one makes a mistake and would rather not suffer plan disqualification, there are mechanisms by which one can fix the error through the DOL and the IRS. Richter sounded a note of caution, however, observing that “sometimes one agency does not care what the other one does about a situation.” 

DOL. One of the methods the DOL provides by which one can fix errors is its Voluntary Fiduciary Correction Program (VFCP). It is designed to encourage fiduciaries to voluntarily comply with ERISA by self-correcting certain fiduciary violations. There is a limitation, however: Richter noted that one cannot use it the plan or applicant is under investigation. 

There are 19 transactions that qualify for the VFCP. The most common, the speakers said, include:

• delinquent participant contributions;
• participant loans failing to comply with plan provisions for amount, duration, or level amortization;
• improper expenses paid from the plan; and 
• prohibited transactions involving sale or purchase from non-parties in interest. 

Anyone who may be liable for fiduciary violations may correct any of the eligible transactions. The party filing the correction must include supporting documentation, such as:

• Copies of the relevant portions of the plan document.
• Documentation that:
  • supports the narrative description of the transaction and correction;
  • establishes lost earnings and restoration of profit amounts; and
  • relates to the specific transaction.
• A completed application checklist. 
• Proof of payment of the principal amount and lost earnings or restoration of profits. 

The DOL’s Employee Benefits Security Administration (EBSA) will issue a non-action letter if an eligible party documents the acceptable correction.

Another means the DOL provides by which errors can be fixed is the Delinquent Filer Voluntary Compliance Program (DFVC), which is used for delinquent Form 5500 series filings. There are limitations on its use, however: 

• an applicant must be subject to Title 1 of ERISA;
• it excludes one-participant plans even if Form 5500-SF filed; and 
• it cannot be used if the DOL has notified the plan administrator that an annual report has not been filed. 

IRS. The means that the IRS provides by which one can fix mistakes fall under its Employee Plans Compliance Resolution System (EPCRS), which consists of three correction programs: Self-Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Cap. 

The SCP is the “easiest to do, if you can,” remarked Terito. It can be used to correct: 

• operational errors (i.e., failure to follow the terms of the plan);
• certain plan document failures; and 
• certain demographic failures (e.g., failure of the ADP or ACP test).

The SCP also can be used to correct significant and insignificant errors within three years of when they took place; after three years, one can only use it to correct insignificant errors. 

But there is no guidance on what is significant or insignificant, Richter and Terito noted; that determination is based on facts and circumstances. And determining the significance of an error may not be easy. “There are times when it’s obvious, but it can be gray,” said Terito. “That’s the struggle,” agreed Richter. “Documentation is key,” Terito emphasized. 

The VCP, they said, helps preserve the tax-qualified status of the plan. The determining factor in deciding whether to use the SCP or the VCP, Richter said, is how far away one is from the correction methods outlined in Revenue Procedure 2021-30. The farther away one is, the more likely it is that one will want to use the VCP.