Correcting Errors with the Voluntary Correction Program
To err is human. This is an excerpt from an old English proverb which makes the point that no one is perfect. In fact, sooner or later everyone makes a mistake. Although they are often unexpected and unwanted, errors can serve as valuable teachers in our personal and professional lives. While the author of the proverb likely never heard of a 401k, retirement or pension plan, the point about mistakes being made applies to retirement plan administration as well. It’s a challenging task to manage a retirement plan especially considering the number of rules and regulations which must be followed. When an error is found there are many questions such as how to correct the issues and whether a submission to the IRS needs to be made. The good news is the IRS offers programs designed to help plan sponsors quickly resolve such issues. The Voluntary Correction Program (VCP) allows plans sponsors to submit corrections to the IRS. To help clients, prospects and others understand VCP and when it should be used, Hanson & Co. has provided a summary of key benefits below.
What is the VCP?
The VCP is a program designed to correct errors that can’t be resolved under the Self Correction Program (SCP). These are errors that are generally more significant in nature and were identified more than two years after their occurrence. The VCP is also used by plan sponsors who prefer to obtain written IRS approval before making any plan corrections. A key benefit to using the VCP is that participating plans can request the IRS not pursue certain excise or income taxes that a plan sponsor or participant would be liable for because of the error or correction method.
In the beginning of 2018, the fees for participating in the VCP changed. Any submission made after January 2, 2018, is subject to a three-tier fee system which is based on plan assets. Plans with between $0 and $500,000 in assets pay $1,500; plans with over $500,000 to $10,000,000 in assets pay $3,000; and plans with over $10,000,000 in assets pay $3,500. A plan’s assets are determined by information reported on the most recent Form 5500. There are some exceptions to the above outlined formula including orphan plans which may have their fees waived, group submissions and 457b plans.
Filing Under the VCP
There are four steps to take when filing under the VCP, including:
- Identify the Plan Error – Identify the plan error(s) that has occurred by reviewing plan documents and operations and determine if it is eligible for resolution under VCP. Pay special attention to the type of error, how long it has been since it occurred, and the number of participants impacted.
- Submit a Filing – Assuming the plan is not currently under audit, the plan administrator should voluntarily report the problem in a VCP submission. It’s important to remember to describe the issue, correction method, and the processes and procedures that will be implemented to ensure the same error does not happen again.
- Correct the Error – Since the VCP is a filing that asks the IRS to approve the correction method, it’s advised to wait until permission is received before making the corrections. Otherwise, the plan administrator may be required to make additional changes to the plan. The IRS approval will come in the form of a compliance statement which will give the plan administrator a 150-day deadline to implement corrective actions.
- Documentation – It’s important to retain all documentation received from the IRS including the compliance statement. Plan sponsors should also keep any records that demonstrate corrections that were made prior to the deadline. Be sure to keep all relevant documentation with the plan documents.
Regular reviews of plan operations will help to ensure that any errors are identified early and can be resolved quickly. The longer the error goes undetected, the more likely it is to impact participants which makes the resolution more complex and expensive. Before making any submissions it’s important to speak with a qualified professional who can review your situation to determine the best course of action. If you have questions about a plan error or need assistance with your next 401k or other retirement plan audit, Hanson & Co. can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.