In a recent blog post, we expounded upon how best to approach an IRS audit of a qualified retirement plan. But that’s all about playing defense when under attack. As the old saying goes, “The best defense is a good offense,” and that is certainly true when it comes to working with a qualified plan. Both the IRS and DOL have programs which will enable a plan sponsor to remediate a noncompliant plan. With these programs in place, there should be no incentive to ignore or attempt to cover up problems; in fact, because these opportunities to fix broken plans are on the books, the failure to do so may result in harsher penalties in the event of an audit.
There are four major avenues for voluntary correction, two sponsored by the Internal Revenue Service and two by the Department of Labor, each of which will be discussed briefly below:
Delinquent Filer Voluntary Compliance Program (DFVCP) – If a plan sponsor has failed to file a Form 5500, it risks significant penalties from both the IRS ($25 per day up to $15,000 per return) and DOL (up to $1,000 per day). Under this DOL program, any number of back unfiled returns may be filed with a modest fee (generally between $750 and $4,000, depending upon the size of the plan, the number of returns filed, and whether or not the sponsor is a not-for -profit entity). Even if the IRS has contacted the plan sponsor looking for a missing return, it is not too late to file under DFVCP to have all penalties abated. The one gap in this program is that non-ERISA plans (plans covering only owners, or owners and their spouses only) are not covered. Such plans must file back returns with the IRS and beg for an abatement of any applicable penalties for reasonable cause. The IRS has informally advised that a program analogous to DFVCP is in the works for these plans.
Self-Correction Program (SCP) – This program may be used to fix minor operational problems going as far back as necessary, and even major operational problems if they have occurred in the prior two plan years. Under this program, any such problem may be fixed retroactively by the plan sponsor without contacting the IRS, as long as the method of remediation is appropriately documented. Although what constitutes remediation will vary from case to case, generally the plan must be put back in the position it would have been had the errors not occurred. Self-correction is also available for a limited number of document failures, which otherwise would have to be more formally corrected under VCP.
Voluntary Compliance Program (VCP) – This IRS program is used to remediate serious operational and document failures which are not covered under SCP. By making a formal submission and paying a compliance fee (generally between $750 and $25,000, based on the number of participants in the plan), the plan sponsor can fully remediate almost any problem without fear of additional reprisal from the IRS. Our experience has been that the IRS is extremely flexible in allowing the plan sponsor to craft an appropriate remedy for operational failures, and that correction of document failures (untimely amendments or restatements) is routinely approved.
Voluntary Fiduciary Compliance Program – (VFCP) – This program enables a plan to correct fiduciary violations and receive a “no action” letter from the Department of Labor. Frankly, we have found this program to be of limited utility, even though there is no compliance fee (unlike VCP). If, for example, a plan sponsor has been delinquent in remitting 401(k) contributions, it can self-correct, including the payment of lost earnings to participants’ accounts and the filing of applicable excise tax returns. Even if a later DOL examination discovered these problems, complete remediation would have occurred already, leaving the DOL with little to pursue. However, if the excise tax arising out of these delinquent remittances is substantial, it will be waived by virtue of an appropriate VFCP filing.
It is critical that a qualified retirement plan be maintained properly, and not just out of fear of an audit. Accordingly, plan sponsors should always be monitoring their plan for compliance, both in its documentation and operation, and should enlist a competent ERISA attorney or third party administrator to assist in this review and to take the appropriate proactive measures to remediate all areas of noncompliance.
Kenneth Marblestone, Esquire