Compliance Correction Programs
In order for a retirement plan to maintain its qualified status, it must adhere to all compliance regulations as required by ERISA and IRC (Internal Revenue Code). Due to the large scope and complex nature of these regulations, it is not uncommon for errors to be made that could threaten a plan’s qualified status.
The IRS audits plans each year to ensure that plans comply with the law. In an effort to encourage plan sponsors and administrators to voluntarily keep plans in compliance, the IRS has developed compliance correction programs. These programs, which are part of the Employee Plans Compliance Resolution System (EPCRS), allow plan sponsors to correct plan errors and preserve the plan’s qualified status.
If a plan sponsor does not correct plan errors, the plan can face disqualification and severe tax consequences.
Types of Plan Failures
- Plan Document Failure
Plan document does not include required provisions, plan provisions violate qualification rules or sponsor fails to make required legislative amendments - Operational Failure
Failure to follow the terms of the plan - Demographic Failure
Plan fails to satisfy coverage, participation or nondiscrimination requirements - Employer Eligibility Failure
A company sponsors a type of plan which is not legally permitted for that particular employer
EPCRS Correction Programs
- Self‐Correction Program (SCP)
- Voluntary Correction with IRS Approval Program (VCP)
- Audit Closing Agreement Program (Audit CAP)
Plan Disqualification Consequences
If a plan is disqualified, there are several tax ramifications that would affect tax years from the first year that the disqualification is effective and all subsequent years.
- The employer can lose its deduction for nonvested contributions
- The employee’s vested contributions would be recognized as income
- The trust loses its tax exemption
- Distributions in nonqualified years are not eligible for rollovers