Correction Options for Retirement Plan Errors

Posted by Maria T. Hurd, CPA

In a highly regulated industry with complicated rules that always have exceptions (except when the exception does not apply) it is inevitable that sooner or later a failure to follow the plan document will take place. Such operational errors can be corrected through the IRS Employee Plan Compliance Resolution System (EPCRS) in one of three ways:




  1. Self-Correction Program (SCP) – Recognizing that certain errors are common, the EPCRS program offers pre-approved ways for plan sponsors to self-correct insignificant errors at any time, and significant errors by the last day of the second plan year after the error occurred, or by the last day of the third year in the case of ADP/ACP test violations.
  2. Voluntary Compliance Program (VCP) Submission to the IRS Requesting Approval for a Specific Correction Method – When a significant error is not timely corrected, the plan sponsor would like to deviate from a pre-approved correction method, or the error is not correctable under SCP (such as participant loan violations) the plan sponsor should submit a VCP application, which requires the payment of a fee. VCP applications can be done anonymously to avoid a commitment, but the IRS will not delay an audit if an anonymous VCP application is in progress, as opposed to a regular submission.
  3. Audit Closing Agreement Program (Audit CAP) – If the error is discovered during an IRS audit, the plan sponsor will pay a sanction greater than the VCP fee. Understandably, the goal of the IRS is to encourage self-correction and self-reporting under VCP, so the sanction amount is meant to dissuade taxpayers from taking a risk that the error may never be caught.
  4. Employee Plan Voluntary Closing Agreement Program – Plan sponsors seeking a closing agreement to resolve retirement plan errors that are not eligible for correction under EPCRS, such as excise tax, deductibility, or funding violations can make a request for approval of a correction that they suggest, and propose a sanction to the IRS through the Employee Plan Voluntary Closing Agreement for which there is more detail on the IRS website.

When a plan error is identified, the plan sponsor and its service providers must make several determinations:

Self-Correction vs. VCP

Is the error insignificant?

The first step is to determine whether the error is insignificant based on a number of subjective factors including:

  • The number of participants affected as a percentage of the plan
  • The correction amount per participant
  • The percentage of plan assets of the correction involved
  • The number of years that the error took place
  • The contribution amount as a percentage of annual contributions
  • The reason that the error occurred

If the error can be deemed to be insignificant, it is eligible for self-correction at any time if:

  • The plan has a favorable determination letter or equivalent
  • The plan sponsor has established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the law
  • The plan is not under examination by the IRS

The correction of significant errors not corrected by the last day of the second year after the error is made, correction methods that are not pre-approved by the EPCRS program, and errors not eligible for self-correction (such as loan violations) should be submitted for approval through a VCP application.

Self-correction does not involve a filing or a fee, but VCP submissions do.

Effective January 2, 2018, Rev. Proc. 2018-4, updated VCP fee schedule to use a fee structure based on assets rather than participants.  The minimum fee of $1,500 doubled or tripled what plans  would have paid even one day earlier.  A picture is worth 1,000 words, so the following chart summarizes the significant changes in the  VCP fee structure:

Previous Fee Fee Effective
February 1, 2016
Fee Effective
January 2, 2018
Number of Participants Fee Number of Participants Fee Total Assets Fee
20 or fewer $750 20 or fewer $500 $500,000 or less $1,500
21 to 50 $1,000 21 to 50 $750
51 to 100 $2,500 51 to 100 $1500
101 to 500 $5,000 101 to 1,000 $5,000 Over $500,000 – $10,000,000 $3,000
501 to 1,000 $8,000
1,001 to 5,000 $15,000 1,000 to 10,000 $10,000
5,001 to 10,000 $20,000

Over $10,000,000


More than 10,000 $25,000 More than 10,000 $15,000


As illustrated above, the largest plans benefitted from a fee reduction that over time, went from $25,000 to $15,000, to $3,500, whle plan sponsors with 20 or fewer participants now pay $1,500, which is triple the previously applicable fee of $500.  Similarly, reduced fees for loan and RMD errors were eliminated completely, as the following chart shows:

Loan Failure Fees
(thru January 2, 2018)
MRD Failure Fees
(thru January 2, 2018)
Loan Failure and MRD Failure Fees (effective January 2, 2018)
Number of Participants with Loan Failures Compliance Fee Number of Participants with RDM Failures Compliance Fee Number of Participants with Failures Compliance Fee
13 or fewer $300  

150 or fewer participants





No longer available

14 to 50 $600
51 to 100 $1,000
101 to 150 $2,000 151 – 300 participants $1,500
Over 150 $3,000


This means that a plan with $500,000 in assets and one single loan failure would pay $3,000 , while a plan with$300,000,000 in assets and 150 loan failures would pay $3,500.  The new schedule may result in smaller plans rolling the dice with their own self-corrections, rather than opting for the security of a VCP filing.

Making Participants Whole: Does Materiality Play a Role?

As one would expect, both the IRS and the DOL favor participants and expect corrections to put them in the position they would have been in had the error not taken place. However, the regulators recognize that there are practical aspects to plan corrections and that sometimes, there is a need to make estimates. As such, there are certain permitted exceptions to full correction of plan errors. For example:

  • Corrective distributions of $75 or less
  • Distributions for which the costs of delivery are higher than the distribution amount
  • Recovery of overpayments to participants of $100 or less

Note that the exceptions to full correction eliminate the need to make de minimis distributions or eliminate the requirement to recover funds from a participant who erroneously received an overpayment.   If the participant who is owed an omitted contribution is still employed by the company, the IRS would likely prefer that a restitution be deposited, even if an estimate has to be made to complete the correction in a cost-effective manner. For example, an employer that misses a series of elective deferral deposits into the plan can assume that all missed contributions would have been made on the midpoint of the plan year, or portion of the plan year in which the omission occurred. This method is a practical alternative to computing up to 52 separate interest calculations. In this case, the results of an exact calculation would not be significantly different than those of an estimated contribution date in the midpoint of the omission period. To make the participants whole, interest must generally be allocated to their accounts when a correction requires an additional deposit.

In the end, plan errors are likely to occur and the vast majority of plan sponsors  prefers to restore participant accounts to the position they would have been in had the mistake not been made. Administratively, the Self-Correction Program tends to be the favored method over a more costly and time consuming VCP application, but when the errors are significant, or stray from the pre-approved methods, the peace of mind of an official IRS approval can be what an employer needs. Careful consideration must be given to all the options.

Photo by: Clemens Koppensteiner (License)