What Is A Retirement Plan Qualification Failure, And Can You Provide An Example?
A retirement plan qualification failure occurs when a plan does not adhere to the rules that maintain its tax-qualified status. These failures can be operational, where the administration of the plan does not follow its terms, such as not offering eligible employees participation or using incorrect compensation definitions. Alternatively, they can be plan document failures, where required amendments or restatements are not adopted on time.
What Happens If A Qualification Failure Isn’t Corrected, And Can They Always Be Corrected?
Qualification failures can always be corrected in some form. However, if they are not addressed promptly, employers risk facing higher correction costs later, especially if discovered during an IRS audit. Uncorrected failures can lead to sanctions, excise taxes, and potentially losing the ability to self-correct. It is financially beneficial to address these issues as soon as they are identified.
What Are The Options For Fixing A Qualification Failure?
The IRS provides a correction program called the Employee Plans Compliance Resolution System (EPCRS), which includes three methods: self-correction (SCP), voluntary correction with IRS approval (VCP), and correction under audit. Self-correction allows employers to fix issues without IRS involvement, while VCP involves submitting a detailed correction proposal for IRS approval. Each method has specific guidelines and requirements.
What Does A Submission Require For The Voluntary Correction Program (VCP)?
A VCP submission must include a description of the failure, proposed correction methods, calculations for corrections, and justifications if using non-standard methods. It should also outline any changes to administrative procedures to prevent future issues and how affected participants will be located, especially those no longer employed. Negotiation with the IRS reviewer is often necessary to finalize approval.
What Are The Pros And Cons Of Self-correcting Versus Correcting Through VCP?
Self-correction is generally less expensive as it avoids the costs of preparing a VCP submission and the associated user fees. However, it requires adherence to pre-approved correction methods. VCP allows for more flexibility but involves higher costs, takes longer, and subjects the plan to IRS scrutiny. The choice between SCP and VCP depends on the complexity and timing of the failure.
What If An Employer Can’t Afford To Correct A Qualification Failure?
If an employer faces financial hardship, the IRS may reduce the correction amount, provided the hardship can be documented. Ultimately, it’s a business decision whether to correct immediately or risk higher costs if audited later. Best practices suggest correcting as soon as possible to minimize greater future liabilities.
What Happens If The Retirement Plan Is Audited By The IRS Before The Failure Is Fully Corrected?
If audited, insignificant failures can still be self-corrected. If a VCP has been filed, the plan gains audit protection for the issues addressed. Without these protections, the plan enters correction under audit, which usually involves mandatory corrections with limited negotiation and potential sanctions. Legal representation can help negotiate sanctions if necessary.
Do You Have Any Final Thoughts On Addressing Retirement Plan Qualification Failures?
Employers should address any known qualification failures promptly by collaborating with third-party administrators and legal counsel. Proper documentation of corrections is crucial for demonstrating good faith. Regular communication with third-party administrators is vital to identify and address issues early, avoiding complications during plan termination or audits.