Qualified retirement plans — including 401(k) plans — are required to comply with specific rules, which are enforced by the Internal Revenue Service. These rules include guidance on:
In addition, the Employee Retirement Income Security Act sets minimum standards for retirement plans and health and welfare benefit plans. The Department of Labor's Employee Benefits Security Administration enforces ERISA. Normally, plan sponsors who violate IRS and DOL/EBSA rules may face audits, penalties and even plan disqualification.
Recognizing that plan errors can happen unintentionally, the enforcement agencies created correction programs that plan sponsors can use to not only bring themselves into compliance but also prevent or reduce penalties. Below is a list of these voluntary programs.
IRS Self-Correction Program
The SCP permits retirement-plan sponsors to fix significant and insignificant operational mistakes without jeopardizing the plan's tax-favored status. For instance, you can correct errors caused by failure to follow the written plan document. However, you cannot use the SCP to correct egregious or intentional errors.
You do not have to contact the IRS or pay any fees to use the SCP.
IRS Voluntary Correction Program
If a retirement-plan error is not eligible for self-correction under the SCP, you might be able to rectify it via the VCP. In this case, you must send a written submission to the IRS and pay an application fee. If the IRS approves your proposed correction methods, the plan will retain its tax-favored status.
IRS Audit Closing Agreement Program
If the IRS discovers a major problem with your retirement plan during an audit, you can correct the issue via the Audit CAP. To correct the error and preserve the plan's tax-favored status, you must pay a negotiated penalty — which is typically a lot higher than the VCP application fee.
DOL Delinquent Filer Voluntary Compliance Program
The DFVCP enables late Form 5500 filers to regain compliance by correcting the error voluntarily and paying a decreased penalty to the EBSA. If you are an eligible late filer, you can use the EBSA's online DFVCP penalty calculator to determine your reduced penalty amount. You must also file the required Form 5500 within a specific time frame.
DOL Voluntary Fiduciary Correction Program
Under the VFCP, plan sponsors can fix certain fiduciary violations involving their retirement plan or health and welfare benefit plan. Corrections can be made for delinquent participant contributions, improper loans, prohibited purchases, improper plan expenses and more.
You do not need to contact or negotiate with the EBSA to utilize the VFCP. But you must follow EBSA's notice procedures published in the Federal Register on April 19, 2006.
Of course, few issues you face are likely to be as complex as benefit plan regulations, so be sure to consult legal and financial professionals.
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