If your retirement plan isn’t currently being audited by the IRS, and you have mistakes with either the language in the plan document or how you’ve run your plan, you can apply to correct the mistakes under the Voluntary Correction Program (VCP):
- Mail the IRS a written submission and pay the user fee charged for VCP applications.
- The IRS reviews and approves your proposed correction methods for either the plan document or operational errors that, if not corrected, could result in the plan losing its tax-favored status.
The VCP is one of three correction programs you can use to correct errors under the Employee Plans Compliance Resolution System (EPCRS). The other two EPRCS programs are the
Why use VCP?
Correcting your plan mistakes through VCP preserves the plan’s tax-favored status. Retirement plans that are not tax-favored or “qualified” have significant costs that directly affect the plan, its participants and your business. See Tax Consequences of Plan Disqualification for the effects of having a nonqualified retirement plan.
A tax-favored retirement plan (401(k) or other qualified plan, 403(b), SEP or SIMPLE IRA) generally loses its tax-favored status if “failures” occur. Examples of failures are situations where the plan sponsor fails to take certain actions, which include:
- Maintaining a valid, up-to-date plan document.
- Following the terms of the plan document while operating the plan.
- Complying with federal tax law requirements while operating the plan.
VCP helps by allowing you to:
- Obtain a written agreement, called a compliance statement, showing that the IRS approved your proposed correction method.
- Bring your retirement plan back into compliance with federal tax law.
- Provide the benefits communicated to your employees in your written plan document.
- Protect your tax deductions.
- Ensure that participants’ retirement savings continue to accumulate tax-deferred.
- Avoid unfavorable tax consequences that would normally result from the disclosed failures (provided that you complete all corrective actions described in the compliance statement by the stated deadlines).
- Avoid paying the larger closing agreement sanctions that would apply if an IRS audit or determination letter application review discovers the failures.
- Request relief from certain federal income or excise taxes associated with certain plan errors.
Compared to the Self-Correction Program (SCP), reasons to use VCP include:
- Some failures are not eligible for SCP.
- Sponsors may prefer a written IRS approval even to correct failures that are eligible for SCP.
- Certain federal income and excise tax relief is available under VCP but not under the SCP.
How does VCP work?
- You mail a VCP submission to us.
- We review the failures and correction methods that you identify. We won’t look for failures not described in the VCP submission.
- If we need more information, we contact you, and if applicable, your representative.
- If your submission includes all of the necessary information and we approve the proposed correction: we send you a compliance statement in which we state that, if you complete the approved correction within 150 days, we will generally not seek to disqualify the plan because of the disclosed failures.
- If we do not approve the proposed correction method, we work with you and your representative to find an acceptable correction.
- If we can’t agree on a reasonable and appropriate correction, then we don't issue a compliance statement or refund any paid user fees.
- Except under unusual circumstances, we don’t audit your plan while considering your VCP submission.
Steps to using VCP
- Find the failures – review the plan document and your plan’s operations to determine what failures have occurred.
- Submit – voluntarily, and report the problem in a VCP submission. Describe the failures and the methods you’ll use to correct them and prevent them from happening again. Pay the user fee.
- Correct – the failures before or after you file the submission. The compliance statement includes a 150-day deadline by which you must complete all corrective actions. Note, that if you correct the failures before you submit, you may have to undo the correction if we don’t approve the method you used.
- Keep records – including your compliance statement and the documents that prove corrections were completed before the deadline. Store them with your plan document.
Find the failures
You may find plan mistakes via an internal audit, or when your adviser or a third-party administrator reviews the plan’s written document and its operations. See IRS Fix-It Guides for common failures and suggested ways to find and correct them for different types of plans.
Include in your submission:
- Forms 8950 and 8951
- A document that includes:
- A description of the failures to be corrected
- A description of the corrective actions that the sponsor proposes to do
- A description of the changes in its administrative procedures that the plan sponsor will adopt to prevent the failures from happening again
- A user fee
- Various other documents listed in the EPCRS Revenue Procedure which states what to submit, how to organize it, and where to mail it.
User fees for VCP
The VCP user fee is typically based on the number of participants in the plan, ranging from:
- $500 for plans with 20 or fewer participants to $15,000 for plans with over 10,000 participants.
- Reduced or alternative user fees, depending on: the type of submission, failures involved and how many participants were affected.
- SEP plans and SIMPLE IRA plans have a flat $250 user fee.
Help! Do I have to write all this out myself?
Some sponsors hire an attorney or accountant to prepare their submissions. However, that is not always necessary.
Model submission documents - We created model documents using special tax forms that prompt you for all the necessary information, including the descriptions of the failures, corrections, and changes in administrative procedures. We recommend that you use these model documents:
- Form 14568 Model VCP Compliance Statement - use to report any failure. Use attachments to the form to describe the failures and proposed methods of correction.
- Form 14568-A through I- Model VCP Compliance Statement Schedules – use to report and resolve some very specific common failures.
- Acknowledgement Letter (IRS Letter 5265) - if you include this with your submission, we’ll mail you an acknowledgement to inform you that we received your submission and give you the VCP case number assigned to it.
Certain tax relief and VCP
Some plan failures (and some appropriate corrections) cause a participant or the plan sponsor to be liable for an excise tax or additional income tax. In your VCP submission, you can ask that we not pursue certain excise taxes or certain additional income taxes that a plan sponsor or participant would be liable for because of either a failure or a correction.
To obtain our approval, the plan sponsor generally must fully correct the failure. Usually, this means that the plan and the participants must be placed in the same position they would’ve been in if the failure had not occurred.
Example: The plan sponsor didn’t make a contribution required by the plan document. Full correction would be to make the required contribution plus an additional amount to reflect the lost earnings during the period from the date the contribution should’ve been made through the date the corrective contribution is made.
Correction principles and methods
The EPCRS revenue procedure offers general guidance on how to correct failures and includes details on some correction methods that are acceptable.
- For general correction principles, see Revenue Procedure 2013-12, Section 6.
- For correction methods that we’ve already approved for many common failures, see Revenue Procedure 2013-12, Appendices A and B of (exclusion of eligible employees, missed contributions, failed ADP/ACP tests, etc.).
- For correction methods for excess contributions, loan failures, and RMD failures, and addresses recoupment of Overpayments, see New Revenue Procedure Updates EPCRS (Revenue Procedure 2015-27).
- For safe harbor correction methods for automatic contribution and other elective deferral failures, see New Methods for Correcting Elective Deferral Errors (Revenue Procedure 2015-28).
Proposing your own correction method
You may propose your preferred correction method for our consideration if either:
- The EPCRS Rev. Proc. doesn’t describe an approved correction method for your failure
- You prefer to use a different correction method that is reasonable and appropriate. Some sponsors in this situation choose to file a submission anonymously through their representative. We don’t ask for the identity of an anonymous submitter unless all parties agree that the correction is acceptable.
Your compliance statement:
- Is our agreement to not disqualify your retirement plan because of the failures you have reported and corrected.
- Doesn’t protect your plan from the effects of other failures that IRS may discover during an audit or a determination letter application review.
- Doesn’t affect participants’ or beneficiaries’ rights under the plan.
Keep the compliance statement and documents that prove corrections were completed before the deadline with your other plan-related records. We may ask for a copy if your plan is ever audited. Your financial institution and potential investors in your business may also want to see it.
What can't you fix under VCP?
Because VCP, SCP and Audit CAP can be used to correct failures that could result in a plan losing its tax-favored status, refer to these other programs for other retirement plan problems:
- Failures to file Form 5500 or 5500-SF: Department of Labor's Delinquent Filer Voluntary Compliance Program. See also IRS Penalty Relief for DOL DFVC Filers of Late Annual Reports.
- Form 5500-EZ delinquent filers: IRS Penalty Relief Program for Form 5500-EZ Late Filers.
- Fiduciary violations: Department of Labor's Voluntary Fiduciary Correction Program.
- Correcting Plan Errors home page
- Overview of the Employee Plans Compliance Resolution System (EPCRS)
- Tips to avoid processing delays with your VCP submission
- Common qualified plan requirements
- Fix-It Guides for 401(k), SEP, SIMPLE IRA, and 403(b) plans
- Tax consequences of plan disqualification