EP Examination Process Guide - Section 6 - Resolution of Issues and Closing the Examination - Technical Assistance & Advice - Qualification Issues
A qualification failure means any failure that adversely affects the qualification of a plan. A qualification failure (disqualification of a plan) can result in unfavorable consequences to the plan sponsor and the participants. The deductions taken on the return may not be allowed, trust earnings are taxable, some of the benefits for the participant become immediately taxable, and other favorable tax benefits such as rollover of distributions are not available.
Some examples of what will cause a plan disqualification are:
If the employer failed to timely amend the plan for a law change.
If the plan fails to satisfy the minimum coverage requirements.
If the contributions or benefits are determined to be discriminatory in favor of highly compensated employees or owners.
If the plan fails to satisfy the minimum vesting standards.
If the contribution or benefits for the benefit of one or more participants exceed the maximum permitted levels.
The manager or EP agent may suggest correcting the violation or operational failure using the Employee Plans Compliance Resolution System (EPCRS) including the Self-Correction Program (SCP).
EPCRS allows plan errors to be corrected without disqualification of the plan. Two of the programs are the Self-Correction Program (SCP) and the Audit Closing Agreement Program (Audit CAP).
The SCP is a voluntary employer-initiated program that does not involve IRS approval. However, the EP agent can use this method to correct insignificant operational qualification errors found during an examination. The plan sponsor must correct the errors. There is no sanction or closing agreement involved. This method requires that the plan sponsor have established practices and procedures in place that ensure the plan operates properly and these practices and procedures must be routinely followed.
The Audit CAP is a method of correcting qualification errors discovered by an EP agent during an examination of a plan. This procedure requires the plan sponsor to correct the qualification error, pay a sanction to the U.S. Treasury and enter into a closing agreement with the IRS. Practices and procedures to assure that the plan operates properly are also considered during the Audit CAP.
For additional insight into EPCRS:
- the EPCRS Procedures.