Everyone knows mistakes happen, but what should you do when your employee plan is the guilty party? Chances are the fix lies within the IRS Employee Plan Compliance Resolution System, or EPCRS, a way to repair plan mistakes and avoid potential disqualification. There are three correction methods available under the system.
The Self-Correction Program (SCP) method allows a plan sponsor correct a mistake without having to contact the IRS or pay a fee. SCP is used to correct operational errors. If the error is insignificant, the correction can be completed at any time. If the error is deemed significant, however, the correction needs to be completed before the end of the second plan year following when the failure occurred.
The Voluntary Correction Program (VCP) method allows a plan sponsor to pay a fee and receive IRS approval for correction of a failure. Different from SCP, this method can be done at any time before a plan is audited by the IRS. VCP is used to correct egregious errors. When a failure is found, a report must be submitted to the IRS through VCP. The submission should include a description of the error and what will be done to correct it. Once the IRS reviews and approves the correction process, the plan sponsor needs to maintain all records of the correction being completed.
The Audit Closing Agreement Program (Audit CAP) method allows a plan sponsor to pay a sanction and correct plan failures while a plan is being audited. The plan sponsor enters into a closing agreement with the IRS, then pays a sanction that has been negotiated and is not less than the fee the plan sponsor would have paid under the VCP correction method.
With most mistakes, it’s easy to determine which correction method to use, but if you’re unsure you should discuss the procedure and mistakes with your TPA.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.