Fixing Broken Plans: You Don’t Need to Cry Over Spilled Milk by Ilene Ferenczy
Retirement plans, such as 401(k) plans, are complex things, and it is easy to get hung up on all the aspects of correct plan administration. Having your plan run correctly is important, and your TPA and advisor should be first in line helping you with what you need to know and do to keep your plan operating smoothly. But stuff happens. And, when it does, don’t despair: there are solutions.
We have a saying in our firm: we are neither doctors nor clergy. No one is going to die or spend eternity in damnation because of a 401(k) plan. We can say that because both the IRS and the Department of Labor (DOL) have programs under which you can fix problems and retain all the positive attributes that you intended when you adopted the plan.
IRS Correction Program: EPCRS
The IRS Program is called the Employee Plans Compliance Resolution System or EPCRS (usually pronounced “EP-curs”). This is a comprehensive procedure under which errors in plan administration that threaten your plan’s tax-favored status can be repaired. (For those who like to read technical stuff, the current procedure can be found in Revenue Procedure 2018-52 at https://www.irs.gov/pub/irs-drop/rp-18-52.pdf.)
EPCRS has three parts to it:
- the Self-Correction Program (SCP), where sponsors and their advisors may fix certain plan errors without IRS involvement;
- the Voluntary Compliance Program (VCP), where plans may be voluntarily submitted to the IRS for a user fee that runs from $1,500 to $3,500 for relatively painless corrections; and
- the Audit Closing Agreement Program (CAP), where errors found in IRS audits may be corrected and under which the IRS charges a penalty or sanction that is much less than what would be paid if the plan were disqualified.
SCP is usually subject to a deadline; too late and you lose that option. So, finding and correcting errors faster is better. (This relates to having systems and checks and balances in your office for your plan, which is part of your responsibility for managing your plan.)
DOL Correction Programs: VFCP and DFCP
There are two ways you can run afoul of the DOL regarding retirement plans: breach your fiduciary duties, causing harm to the plan and its participants, or fail to file your annual return (Form 5500). Both problems can be more painlessly handled if you do so voluntarily through the two programs that the DOL makes available.
The Voluntary Fiduciary Correction Program (VFCP) allows those responsible for the plan to correct missteps (called prohibited transactions) regarding plan assets. These generally involve investments of plan monies in a way that personally benefits a related party, such as the plan sponsor, the owners of the sponsor, other participants, or a fiduciary (other than through earning benefits part of the plan). Examples of these types of issues are sales or purchases of assets between the plan and a related party, loans from the plan to a related party, or use of plan assets by a related party.
The Delinquent Filers Voluntary Compliance Program (DFVC) permits a plan sponsor to remedy late filings of Forms 5500 without paying the full penalties to both the IRS and the DOL (which can be tens of thousands of dollars). Under DFVC, the late returns for a plan are filed, a fee of $750 to $4,000 is paid (depending on the size of the plan and the number of years of late returns that are being submitted), and any additional penalties for the late filing are forgiven.
You can find out more about both programs at https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs.
Using the Programs
As with any government program, knowing how EPCRS, VFCP, and DFVC work is important. Therefore, we recommend that you talk with a benefits professional before wending your way through these procedures. But one thing to keep in mind: finding and fixing your problems before the IRS or DOL finds you is always better – easier and less expensive.
So, do your best to keep your plan operating properly, but if there is a problem, don’t despair. There is a solution out there for you.
Ilene is the Managing Partner of Ferenczy Benefits Law Center, an employee benefits law firm in Atlanta, Georgia. She advises clients on all types of employee benefit plans, particularly focusing her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues.