Rev Proc 2021-30: Correcting Retirement Plan Errors

The Internal Revenue Service (IRS) provides a pathway for sponsors of retirement plans to correct mistakes that could otherwise jeopardize a plan’s tax-favored status. This system is formally known as the Employee Plans Compliance Resolution System (EPCRS). While Revenue Procedure 2021-30 provides the framework for this system, it has been supplemented by the SECURE 2.0 Act of 2022, which expanded the scope of correctable errors.

The purpose of EPCRS is to encourage plan sponsors to voluntarily identify and fix errors. Without this system, mistakes could lead to plan disqualification, which has major tax implications for employers and employees. The EPCRS framework provides the exclusive methods for correcting plan errors and preserving the tax benefits associated with retirement plans like 401(k)s and 403(b)s.

Understanding Plan Failures

Retirement plan errors, referred to as “failures” by the IRS, fall into several distinct categories. Understanding which category an error belongs to is the first step for a plan sponsor in determining the appropriate corrective action.

Operational Failures

An operational failure is the most common type of plan error and occurs when the plan’s activities do not follow the written terms of its legal document. This is true even if the operation that deviates from the document otherwise complies with the Internal Revenue Code.

For instance, an operational failure occurs if an administrator calculates contributions based only on base salary when the plan document defines compensation as total pay including bonuses. Other examples include failing to enroll an eligible employee on time, miscalculating matching contributions, or failing to obtain spousal consent for a distribution.

Plan Document Failures

A plan document failure is a flaw in the plan document itself, where its provisions do not comply with the law. Tax laws governing retirement plans change, and if a plan sponsor does not amend their plan document by the required deadlines to reflect these changes, a plan document failure occurs.

An example is failing to formally restate a plan document by a required deadline. If a plan document contains a provision that is no longer permissible under a new law, such as an outdated definition of marriage or an incorrect vesting schedule, it constitutes a plan document failure.

Demographic Failures

Demographic failures relate to a plan’s inability to satisfy nondiscrimination tests required by the Internal Revenue Code. These tests are designed to ensure that a plan does not unfairly favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). The primary tests are the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test.

A demographic failure happens when the contribution rates of HCEs exceed those of NHCEs by more than the legally permitted amount. For example, if the ADP for the HCE group is 6% and the ADP for the NHCE group is 3%, the plan would fail the test. This failure must be corrected, often by distributing excess contributions to HCEs or by the employer making additional contributions for NHCEs.

Employer Eligibility Failures

An employer eligibility failure occurs when an employer adopts a type of retirement plan that it is not legally permitted to sponsor. The Internal Revenue Code specifies which types of entities can establish certain plans. For instance, 403(b) plans are restricted to public schools and certain non-profit organizations under section 501(c)(3).

If a for-profit corporation were to establish a 403(b) plan, this would be an employer eligibility failure. Correction for this failure is complex and falls under the VCP program, as the plan’s foundation is invalid.

Correction Programs Available

Revenue Procedure 2021-30 outlines three programs for correcting plan failures: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Each program applies to different circumstances and encourages proactive correction. Recent guidance has expanded opportunities for sponsors to fix mistakes without formal IRS involvement.

Self-Correction Program (SCP)

The Self-Correction Program (SCP) allows sponsors to correct certain failures without notifying the IRS or paying a fee. Recent guidance expanded the utility of SCP. The correction period for significant operational failures was extended to the end of the third plan year following the year the failure occurred.

Insignificant operational failures can be self-corrected at any time. Recent guidance also introduced the ability to self-correct certain plan document failures, which previously required a VCP submission. Another update involves overpayments, as the threshold for certain corrections increased to $250. This means if an overpayment or an excess contribution is $250 or less, the sponsor is not required to seek repayment or distribute the excess.

Voluntary Correction Program (VCP)

The Voluntary Correction Program (VCP) is available for failures not eligible for self-correction. VCP requires a formal, written submission to the IRS detailing the failure and the proposed correction method, along with the payment of a user fee. This program is used for significant failures discovered after the SCP deadline, certain plan document failures, and demographic or employer eligibility failures.

A major change was the elimination of the anonymous VCP submission procedure. In its place, the IRS introduced an anonymous, no-fee, pre-submission conference option for sponsors to consult on a correction method before filing. The VCP user fee is determined by the amount of assets in the plan and is preferable to the alternative of being discovered by the IRS.

• $1,500 for plans with assets up to $500,000
• $3,000 for plans with assets over $500,000 up to $10,000,000
• $3,500 for plans with assets over $10,000,000

Audit Closing Agreement Program (Audit CAP)

The Audit Closing Agreement Program (Audit CAP) is the correction path for failures discovered by the IRS during a plan audit and is the most expensive option. Unlike VCP’s fixed fees, the Audit CAP sanction is a negotiated amount based on the case’s facts and circumstances, including the failure’s severity and the sponsor’s cooperation.

The sanction is based on the potential tax liability from plan disqualification. While the final sanction is less than the maximum, it is always much higher than the VCP user fee. Audit CAP provides a strong incentive for sponsors to use SCP or VCP as soon as a failure is found.

Required Information for a VCP Submission

When using the Voluntary Correction Program (VCP), a plan sponsor must prepare a formal submission for the IRS.

Core Plan and Failure Details

The VCP submission must include a comprehensive description of the plan and the errors that occurred. Key information required includes:

• Basic identifying information, such as the plan name, Employer Identification Number (EIN), and plan number.
• The total number of plan participants and net assets, which determine the user fee.
• A detailed narrative of the failure, including the specific error, the period it occurred, and the number of participants affected.
• An explanation of how the failure was discovered.
• A description of procedural changes implemented to prevent future errors.

Correction Method and Calculations

The submission must include a detailed proposal for how the failure will be corrected. The proposed method should conform to the general correction principles provided by the IRS. For example, if employees were improperly excluded, the correction involves the employer making a Qualified Nonelective Contribution (QNEC) on their behalf.

This section must be supported by precise calculations. If corrective contributions are required, the sponsor must show how the amounts were determined, including the calculation of lost earnings. The IRS provides an online VCP Interest Calculation Tool for this purpose, and all supporting spreadsheets should be included.

Required Forms and Attachments

The official application is IRS Form 8950, Application for Voluntary Correction Program (VCP) Submission. This form must be completed and signed, and it summarizes key details of the submission. The most current version of the form should be used.

A narrative attachment must be included to elaborate on the information in Form 8950. Other attachments include relevant plan document provisions and a signed penalty of perjury statement.

The VCP Submission Process

Once all documents are prepared, the plan sponsor can begin the formal submission process. The IRS requires VCP submissions to be filed electronically through a specific government portal.

Assembling the Package

The first step is to consolidate the completed Form 8950, the narrative attachment, calculations, and other documents into a single PDF file. The final PDF must not be password-protected and must not exceed 15 MB.

Electronic Submission

All VCP submissions must be filed through the Pay.gov website. An account on the site is required. After logging in, search for “Form 8950” to find the submission portal.

The user will be prompted to upload the consolidated PDF. The system then guides the user through paying the user fee via a bank account withdrawal or credit/debit card.

Post-Submission Expectations

Upon successful submission and payment, the Pay.gov system generates an immediate confirmation with a tracking number. The sponsor should save this confirmation as proof of filing. An IRS reviewer is assigned to the case, often within several months.

The reviewer may contact the sponsor with questions or requests for more information. Once satisfied, the IRS issues a Compliance Statement, assuring the sponsor that the plan will not be disqualified for the corrected failures.