What Is the Employee Plans Compliance Resolution System (EPCRS)?

Retirement plans must follow strict IRS rules, but mistakes can still happen. The Employee Plans Compliance Resolution System (EPCRS) helps employers fix errors and maintain tax benefits without severe penalties. This system provides a structured way to correct issues before or after an audit, ensuring compliance.

Understanding EPCRS is essential for plan sponsors looking to avoid costly consequences.

Eligibility Requirements

Employers sponsoring tax-favored retirement plans, such as 401(k), 403(b), SEP, and SIMPLE IRA plans, can use EPCRS to correct operational, document, demographic, and employer eligibility failures. However, not all plans or errors qualify for every correction method.

A key factor in eligibility is whether the plan falls under the Employee Retirement Income Security Act (ERISA) or is exempt, such as certain governmental and church plans. While most employer-sponsored plans qualify, restrictions apply to those that have been fully disqualified or terminated without proper correction. Timing also matters—some errors can only be fixed under certain programs if identified before an IRS audit begins.

The type of failure determines the correction options. Operational failures, where a plan is not administered according to its terms, are generally eligible for correction. Document failures, such as missing required amendments, often require formal IRS approval. Demographic failures, which involve nondiscrimination testing issues, and employer eligibility failures, where an ineligible employer sponsors a plan, have specific correction pathways.

Correction Programs

EPCRS offers three ways to correct retirement plan errors: independent correction, voluntary IRS approval, or resolution during an audit. Each option has different requirements, costs, and levels of IRS involvement.

Self-Correction Program (SCP)

SCP allows plan sponsors to fix certain operational errors without notifying the IRS or paying a fee. This option is available for mistakes that do not significantly affect the plan’s compliance and can be corrected within a reasonable time.

Errors are categorized as insignificant or significant. Insignificant errors can be corrected at any time, while significant errors must be fixed within three years. For example, if an employer miscalculates matching contributions in a 401(k) plan, they can correct it by making the missed contributions and adding lost earnings. The IRS provides guidelines for these calculations, often using the plan’s actual rate of return. Proper documentation is required.

Voluntary Correction Program (VCP)

VCP is used when an employer wants IRS approval for a correction before an audit. This program requires submitting a formal application detailing the error, correction method, and steps to prevent recurrence. A filing fee applies, based on the plan’s asset size. As of 2024, fees range from $1,500 for plans under $500,000 to $3,500 for plans exceeding $10 million.

VCP is often used for document failures, such as missing required plan amendments. For example, if a 403(b) plan failed to adopt a mandatory IRS update by the deadline, the employer could submit a VCP application to correct the issue and avoid plan disqualification. If approved, the IRS issues a compliance statement confirming the correction.

Audit Closing Agreement Program (Audit CAP)

Audit CAP applies when the IRS discovers a plan error during an audit. Unlike SCP and VCP, this program involves negotiating directly with the IRS to determine the correction and any associated penalties. The employer must propose a reasonable fix and pay a sanction, typically based on the tax the government would have collected if the plan lost its tax-favored status.

Sanctions vary based on factors such as the severity of the error, the number of affected participants, and the employer’s compliance history. For example, if a company repeatedly failed nondiscrimination testing, the IRS might require corrective contributions and impose a penalty based on the plan’s total assets. While costly, Audit CAP allows employers to resolve issues without full plan disqualification.

Common Mistakes and Corrections

A frequent mistake in retirement plans is exceeding IRS contribution limits. In 2024, the limits are $23,000 for 401(k) and 403(b) plans, with an additional $7,500 catch-up contribution for those aged 50 and older. If excess contributions are not corrected by April 15 of the following year, they become taxable twice—once in the year contributed and again when withdrawn. Employers can fix this by distributing the excess amount, along with any earnings, before the deadline.

Another common issue is failing to enforce required minimum distributions (RMDs). Participants in employer-sponsored plans must begin RMDs by April 1 of the year after they turn 73. Failure to take RMDs can result in penalties, though the SECURE 2.0 Act reduced the excise tax from 50% to 25%, and further to 10% if corrected within two years. Employers can fix this by distributing the missed RMD and informing participants of their tax obligations.

Plan loan errors are also frequent, particularly when loans exceed IRS limits or repayment terms are not followed. The maximum loan amount is the lesser of $50,000 or 50% of the participant’s vested balance, and repayment must typically occur within five years unless the loan is for a primary residence. If a participant defaults, the outstanding balance is treated as a taxable distribution. Employers can correct this by re-amortizing the loan or allowing a lump-sum repayment if caught early.

Required Paperwork and Recordkeeping

Accurate documentation is essential for maintaining compliance. Employers must retain all plan documents, including the original adoption agreement, amendments, summary plan descriptions (SPDs), and IRS determination or opinion letters. These records establish the legal framework of the plan and confirm adherence to IRS and ERISA requirements.

Administrative records, such as payroll data, participant election forms, contribution reports, and nondiscrimination testing results, are also necessary. These records verify that plan operations align with governing documents and regulatory mandates. For example, failure to maintain payroll records can make it difficult to confirm whether deferral percentages were applied correctly.

If errors are corrected through EPCRS, documentation of the issue, correction method, and supporting calculations must be retained. This includes correspondence with third-party administrators (TPAs), actuarial reports for defined benefit plans, and participant notices related to corrective distributions or contributions. Employers using VCP should keep copies of the IRS submission, compliance statement, and any related financial transactions. Maintaining these records for at least six years, or longer if required under ERISA, ensures the plan remains audit-ready.

Potential Enforcement Actions

Failing to correct retirement plan errors can lead to significant consequences, particularly if the IRS identifies issues during an audit. If a plan is found to be noncompliant, the IRS has several enforcement tools, ranging from monetary sanctions to full plan disqualification.

One of the most severe outcomes is the loss of a plan’s tax-favored status, which would result in immediate taxation of all plan assets for participants. Employees would owe income tax on their account balances, and employers could face penalties for failing to withhold and remit the appropriate taxes. In less extreme cases, the IRS may impose excise taxes, such as those applied to prohibited transactions or late contributions. If an employer fails to deposit employee deferrals on time, they may be subject to a 15% excise tax on the lost earnings. The Department of Labor (DOL) may also intervene if fiduciary breaches are involved, potentially leading to civil penalties or required corrective contributions.

Employers with repeated compliance failures may face increased scrutiny in future audits and be required to implement additional internal controls, such as independent plan audits or employee training. The IRS may negotiate a closing agreement under Audit CAP, where the employer agrees to corrective measures and pays a negotiated sanction. Addressing errors proactively through EPCRS helps avoid costly enforcement actions.

Submission Procedures

Correcting plan errors under EPCRS requires following specific submission procedures, particularly for VCP. Unlike SCP, which does not require IRS notification, VCP submissions must be formally documented and sent to the IRS for review.

A complete VCP submission includes Form 8950, which serves as the official request for IRS approval, and Form 8951, used to calculate and submit the applicable fee. Employers must provide a written explanation of the failure, how it was discovered, and the steps taken to prevent recurrence. Supporting documents, such as plan amendments, participant notices, and financial calculations, should be included to demonstrate the accuracy of the correction.

All VCP applications must be filed electronically through the Pay.gov system. Employers must ensure that documents are uploaded in the correct format and that payment is processed before submission. The IRS typically reviews applications within several months, though complex cases may take longer. If additional information is needed, the IRS may request clarification or modifications before granting final approval. Ensuring submissions are thorough and accurate from the outset can help expedite the process.