During 2018 and 2019 the Internal Revenue Service (“IRS”) made changes to the Self Correction Program. The two most relevant programs that were affected were the self-correction program (“SCP”) and the voluntary correction program (“VCP”). There are a few expanded opportunities provided under SCP and some clarification that certain activity will require correction through a VCP processes. These changes are the result of revenue procedures 2018-52 and 2019-19. Some of the changes could potentially ease the pain of going through a VCP, which can be costly and more time consuming than SCP. The IRS has also issued clarification on some other items which, when corrected, should go through a VCP. The IRS has made accessing guidance on common failures, along with how to correct those failures very simple to find on their website. The following details some of the highlights on SCP, VCP, and where to locate the support you need.
Self Correction Program (SCP) – This method can be used for operational deficiencies that are less severe in nature in order to protect the tax status of the plan. In some cases even more significant errors can be corrected via SCP if they are handled in a timely manner.
Under the new correction rules from the latest IRS guidance, a plans operational failure(s) may be corrected through the use of a plan amendment under SCP if all the following conditions are met:
- the corrective amendment results in an increase of a participant’s benefit, right or feature.
- The increase in benefit, right or feature is provided to all employees eligible to participate in the plan.
- providing the increase in the benefit, right or feature is permitted under governing rules to maintain the plans favorable tax status.
If used, retroactive plan amendments must be non-discriminatory, and if it cannot be applied without discrimination you may still be able to seek correction under VCP.
Certain loan errors, which were previously only corrected using VCP, can now be corrected under SCP. In instances when a loan has defaulted and not been corrected, under SCP that loan may be deemed in the correction year and have a 1099-R issued, as opposed to reporting the default in the year of the failure. The IRS has highlighted that, in an instance where a plan has its number of allowable loans exceeded, plans may be able to retroactively amended (in line with IRC 72(p) and IRC 401(a)), to be brought back within compliance.
Voluntary Correction Program (VCP) –This method for correction is available for certain plan error that are typically more immoderate than the ones which are allowed under SCP. VCP is also available for plans that are not under IRS audit. Under VCP plans will make an online correction submission, pay a fee, and the IRS will review and may approve your correction method.
As of April 1, 2019 all VCP submissions must be made electronically using Pay.gov. The IRS has created an informative online submission video that detail the electronic submission process.
The IRS’s disclosed VCP fees are $1,500 – $3,500 per submission and based on plan assets.
Plan Assets Fee
$0 – $500,000 $1,500
$500,000 – $10,000,000 $3,000
Over $10,000,000 $3,500
Some specialized factors may result in a deviations from the schedule; in practice certain larger plans have experienced larger fees. Errors requiring a VCP may also have significant professional fees that add up as well.
Loan errors, that require correction due to a failure to obtain spousal consent must be corrected by obtaining the required consent or seek correction under VCP. Additionally, loans that exceeded the statutory limits may be corrected only through VCP.
Failures related to discriminatory contributions made to highly compensated employees (“HCE”) may be handled through VCP.
Under VCP, the IRS allows the plan to propose its own correction method.
Certain items cannot be fixed under SCP and VCP:
- Failure to file – requires the plan to utilize the DOL’s Delinquent Filers Compliance Program, and the IRS Relief for DFVC Filers. The DOL provides a handy calculator to estimate your penalty.
- Fiduciary violations – use the DOL’s Voluntary Fiduciary Correction Program. Note that the lockbox mailing address has changed effective May 15, 2019 to DFVCP P.O. Box 6200-35 Portland, OR 97228-6200. Additionally they began accepting overnight delivery submissions at U.S. Bank Attn: DFVC 6200-35 17650 NE Sandy Blvd. PD-OR-C1GL Portland, OR 97230.
Correction Guidance:
The IRS has multiple tools available to correction tools:
- Plan Fix-It Guides: 401(k) and 403(b)
- Fixing Common Mistakes
If you would like assistance or have additional benefit plan questions, see our site:
Author: William Kloppe, CPA, MSA, Employee Benefits Plan Services Group | [email protected]
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