Latest / The Exclusive Benefit - An ERISA Podcast / Self-Correct, VCP, or Audit CAP? Choosing the Right EPCRS Path

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Self-Correct, VCP, or Audit CAP? Choosing the Right EPCRS Path · The Exclusive Benefit - An ERISA Podcast

• 0:21
  SPEAKER_00: Picture this.
• 0:23
  SPEAKER_00: You run a 200-person company.
• 0:26
  SPEAKER_00: Two years ago, your payroll vendor switched systems, and nobody noticed that bonuses stopped counting toward anyone's 401k deferrals.
• 0:35
  SPEAKER_00: Today your auditor calls.
• 0:37
  SPEAKER_00: Your stomach drops, and your first thought is, is the IRS gonna shut down our plan?
• 0:43
  SPEAKER_00: Almost certainly not, because the IRS has a whole system built for exactly this moment, and most employers have never heard of it.
• 0:51
  SPEAKER_00: If they've heard of it, they may not know quite how to use it.
• 0:54
  SPEAKER_00: Hi and welcome to the very first episode of the Exclusive Benefit.
• 0:58
  SPEAKER_00: I'm Angela Stockbridge and I'm so glad you're here.
• 1:01
  SPEAKER_00: Let me start with a disclaimer.
• 1:03
  SPEAKER_00: All of this is for discussion purposes only and is not intended to be legal advice.
• 1:09
  SPEAKER_00: Your clients require specific advice tailored to their own circumstances, and every benefits plan is different.
• 1:17
  SPEAKER_00: This is not intended to be legal advice.
• 1:19
  SPEAKER_00: Let me start with the name because it's a bit of an inside joke for benefits people.
• 1:23
  SPEAKER_00: Under ERISA, that's the federal law that governs most workplace retirement plans.
• 1:29
  SPEAKER_00: Plan assets have to be held for the exclusive benefit of participants and their beneficiaries.
• 1:35
  SPEAKER_00: It is one of the oldest, most fundamental rules in the benefits world.
• 1:40
  SPEAKER_00: And every plan decision is supposed to come back to that one question.
• 1:45
  SPEAKER_00: Does this serve the people that the plan exists for?
• 1:48
  SPEAKER_00: That's the lens of this podcast.
• 1:51
  SPEAKER_00: Each episode, I'll take one piece of the retirement and benefits world, the stuff that usually lives in 80-page revenue procedures, and I'll turn it into something you can actually use.
• 2:01
  SPEAKER_00: Whether you're an HR or you run a small business, you're a CFO who inherited a 401, or you just administer a plan day to day, this podcast is for you.
• 2:12
  SPEAKER_00: For episode one, I picked a topic with a truly unfortunate name, EPCRS.
• 2:18
  SPEAKER_00: EPCRS.
• 2:20
  SPEAKER_00: Most people say it EPCERS.
• 2:22
  SPEAKER_00: It stands for the Employee Plans Compliance Resolution System.
• 2:28
  SPEAKER_00: I know how that sounds, but stick with me because EPCRS is basically the IRS saying, We know you're gonna make mistakes, so here's how to fix them without blowing everything up.
• 2:39
  SPEAKER_00: It's sort of like if your teenage daughter is driving your car and comes back and it has a dent.
• 2:48
  SPEAKER_00: If she tells you herself she's in a much better position than if you discover it, or if you find out from the neighbors, or if you find out from the police.
• 3:01
  SPEAKER_00: And that example is gonna make a lot more sense as we go through the different levels of Epcurs.
• 3:06
  SPEAKER_00: So it's more get well soon, or more thanks for telling me I'm glad you were honest, and less of a gotcha.
• 3:14
  SPEAKER_00: By the end of the next 20 minutes, you'll know what Epcurz is, the mistakes it covers, the three ways to use it, and what has changed recently.
• 3:22
  SPEAKER_00: So let's get into it.
• 3:23
  SPEAKER_00: Let's start with the basics.
• 3:25
  SPEAKER_00: Why does the IRS even care if your 401 has a mistake in it?
• 3:30
  SPEAKER_00: Because a 401k is a tax deal.
• 3:33
  SPEAKER_00: Employees defer taxes, employers get deductions.
• 3:38
  SPEAKER_00: The money grows tax deferred for decades.
• 3:42
  SPEAKER_00: In exchange, the plan has to follow a long list of rules in the tax code.
• 3:47
  SPEAKER_00: The plans that follow those rules are called qualified plans.
• 3:50
  SPEAKER_00: And technically, if a plan breaks the rules, it can lose that qualified status.
• 3:55
  SPEAKER_00: That's called disqualification.
• 3:57
  SPEAKER_00: And that is the nuclear option.
• 3:59
  SPEAKER_00: Here's what disqualification can mean.
• 4:01
  SPEAKER_00: The employer can lose deductions, employees owe tax on money that is vested in their accounts, the plan's trust can owe tax on its earnings.
• 4:12
  SPEAKER_00: And notice who gets hurt most.
• 4:14
  SPEAKER_00: Often it's the rank and file employees who did absolutely nothing wrong.
• 4:18
  SPEAKER_00: So that brings us back to the name of this show, the exclusive benefit.
• 4:23
  SPEAKER_00: Punishing the plan ends up punishing the very people the plan exists to benefit.
• 4:28
  SPEAKER_00: And the IRS figured that out decades ago.
• 4:31
  SPEAKER_00: Disqualifying plans over honest mistakes didn't serve anyone.
• 4:35
  SPEAKER_00: So starting in the early 1990s, the IRS built a series of correction programs, and over time those were combined into one framework, and that's EPCRS.
• 4:44
  SPEAKER_00: Today, the EPCRS rule book is a document that is called Revenue Procedure 2021-30.
• 4:51
  SPEAKER_00: The IRS updates it every few years, but 2021-30 is still the governing version as I record this.
• 4:58
  SPEAKER_00: Secure 2.0 layered some important new rules on top of it, and I'll get to those in a bit.
• 5:02
  SPEAKER_00: Who can use EPCRS?
• 5:04
  SPEAKER_00: Pretty much any employer that sponsors a retirement plan.
• 5:08
  SPEAKER_00: That includes 401ks, 403Bs for nonprofits and schools, traditional pension plans, and IRA-based plans like CEPs and simple IRAs.
• 5:18
  SPEAKER_00: Big company or small.
• 5:20
  SPEAKER_00: If I had to give you the whole philosophy in one sentence, it's this.
• 5:23
  SPEAKER_00: Put everyone back where they would have been if the mistake had never happened.
• 5:27
  SPEAKER_00: That's the North Star.
• 5:29
  SPEAKER_00: Every correction method in EPCRS traces back to that idea.
• 5:33
  SPEAKER_00: Here's the second half.
• 5:34
  SPEAKER_00: Fix the process so it doesn't happen again.
• 5:38
  SPEAKER_00: The IRS cares a lot about that part.
• 5:41
  SPEAKER_00: They want to see that you had procedures and that you tightened them.
• 5:45
  SPEAKER_00: So what kinds of mistakes are we actually talking about?
• 5:49
  SPEAKER_00: Epcurse sorts them into four buckets.
• 5:52
  SPEAKER_00: The first bucket, and by far the most common, is operational failures.
• 5:57
  SPEAKER_00: That's when the plan document says one thing but you did another.
• 6:00
  SPEAKER_00: So remember in the cold open, I talked about bonuses that count as compensation, but they were excluded from the 401k deferrals by payroll.
• 6:11
  SPEAKER_00: That is a classic operational failure.
• 6:13
  SPEAKER_00: Other examples in that bucket would be something like forgetting to enroll someone who became eligible, missing an automatic enrollment for an employee, maybe you deposited employee deferrals late, using the wrong vesting schedule when someone leaves the company, or letting someone contribute more than the annual limit that the IRS allows.
• 6:34
  SPEAKER_00: And botching participant loans is a big one.
• 6:37
  SPEAKER_00: Loans are also a sneaky one.
• 6:39
  SPEAKER_00: Someone takes a loan, the company changes payroll systems, and the repayments stop.
• 6:45
  SPEAKER_00: Nobody notices, and suddenly that loan turns into a taxable distribution for the employee who probably thought everything was fine.
• 6:54
  SPEAKER_00: The second bucket is plan document failures.
• 6:57
  SPEAKER_00: That's when the document itself is wrong or out of date.
• 7:01
  SPEAKER_00: Tax law changes constantly and plans have to be amended by specific deadlines.
• 7:06
  SPEAKER_00: If you miss a deadline, the document fails even if you operated the plan perfectly.
• 7:11
  SPEAKER_00: So your paperwork can be broken even when your behavior isn't.
• 7:15
  SPEAKER_00: The third bucket is demographic failures.
• 7:18
  SPEAKER_00: Those are the non-discrimination and coverage tests.
• 7:21
  SPEAKER_00: A plan cannot favor highly paid employees too much.
• 7:26
  SPEAKER_00: And it has to cover enough of the workforce.
• 7:30
  SPEAKER_00: And the fourth bucket is employer eligibility failures.
• 7:34
  SPEAKER_00: That's when the employer adopts a plan that it isn't allowed to have.
• 7:38
  SPEAKER_00: The textbook example of this is a for-profit company adopting a 403B plan, which is reserved for nonprofits in public schools.
• 7:47
  SPEAKER_00: You would think that one would be easy to avoid, but it does happen, and it's usually after a merger or a change in corporate status.
• 7:55
  SPEAKER_00: If there's one thread across all four of these, it's handoffs.
• 7:59
  SPEAKER_00: Almost every plan error happens where two parties meet, HR and payroll.
• 8:06
  SPEAKER_00: Payroll and the record keeper, the company and a new vendor.
• 8:10
  SPEAKER_00: The plan document says one thing, and nobody told the person pushing the buttons.
• 8:15
  SPEAKER_00: If you remember nothing else from this segment, remember that.
• 8:19
  SPEAKER_00: Watch the handoffs.
• 8:20
  SPEAKER_00: Okay, this is the heart of the episode.
• 8:22
  SPEAKER_00: Epcurse gives you three ways to fix a mistake.
• 8:25
  SPEAKER_00: I like to think of them as three doors, and which door you walk through depends mostly on timing and severity.
• 8:32
  SPEAKER_00: Door one is the self-correction program or SCP.
• 8:36
  SPEAKER_00: Door two is the voluntary correction program, VCP.
• 8:41
  SPEAKER_00: And door three is Audit CAP, the Audit Closing Agreement Program.
• 8:46
  SPEAKER_00: Let's start with door one because it is the best deal in town.
• 8:49
  SPEAKER_00: With SCP, you find the mistake, you fix it, you never contact the IRS.
• 8:55
  SPEAKER_00: No filing, no fee, you just fix it.
• 8:58
  SPEAKER_00: Now there are conditions with SCP.
• 9:01
  SPEAKER_00: You need to have established practices and procedures that are designed to follow the plan.
• 9:06
  SPEAKER_00: The mistake has to be something that you found and fixed on your own, and you need to document everything.
• 9:12
  SPEAKER_00: Because if the IRS audits you later, you will have to show your work.
• 9:16
  SPEAKER_00: What does show your work mean?
• 9:17
  SPEAKER_00: Well, in this case it means a file that describes the error and explains how it happened despite your procedures, shows your correction calculations and explains what you changed so it won't happen again.
• 9:28
  SPEAKER_00: You put that file somewhere where people will find it in five years.
• 9:33
  SPEAKER_00: Under the traditional rules, there were limits on timing.
• 9:36
  SPEAKER_00: Insignificant failures could be fixed anytime.
• 9:39
  SPEAKER_00: Significant failures had to be fixed by the end of the third plan year after the year the mistake happened.
• 9:45
  SPEAKER_00: Secure 2.0 loosened that a lot, which I'll cover in the next segment.
• 9:50
  SPEAKER_00: But how do you know if something is significant?
• 9:53
  SPEAKER_00: This is one of the questions that I can help answer.
• 9:56
  SPEAKER_00: The IRS looks at factors like how many participants were affected, how much money was involved compared to the size of the plan.
• 10:06
  SPEAKER_00: How many years did this go on?
• 10:08
  SPEAKER_00: Was this a one-off?
• 10:09
  SPEAKER_00: Did it keep happening over and over again?
• 10:11
  SPEAKER_00: It is a judgment call and experience helps.
• 10:14
  SPEAKER_00: Door two, VCP.
• 10:17
  SPEAKER_00: This is when you raise your hand and you tell the IRS that you made a mistake.
• 10:21
  SPEAKER_00: You file a submission that describes the mistake and your proposal for fixing it and you pay a user fee.
• 10:27
  SPEAKER_00: If the IRS agrees with your approach, it will issue a compliance statement.
• 10:31
  SPEAKER_00: So why would anyone pay for that when self-correction is free?
• 10:35
  SPEAKER_00: Two reasons.
• 10:36
  SPEAKER_00: First, some mistakes are not eligible for self-correction, so VCP is your only voluntary option.
• 10:42
  SPEAKER_00: Second, certainty.
• 10:44
  SPEAKER_00: A compliance statement is the IRS's written sign-off.
• 10:47
  SPEAKER_00: If you're selling the company or the error is really large, that sign-off can be worth a lot.
• 10:55
  SPEAKER_00: Buyers love certainty and due diligence teams often ask for it.
• 10:59
  SPEAKER_00: So again, if we compare these two SCP and VCP, SCP is your kid tells you that they put a dent in the car.
• 11:08
  SPEAKER_00: VCP, maybe they come clean, but only after you found it or the neighbor told you about it.
• 11:15
  SPEAKER_00: How much does VCP cost?
• 11:17
  SPEAKER_00: The fee is based on plan assets and it went up at the start of 2026.
• 11:22
  SPEAKER_00: For plans with$500,000 or less in assets, it is currently$2,000.
• 11:28
  SPEAKER_00: If the plan assets are between$500,000 and$10 million, the fee is$3,500.
• 11:36
  SPEAKER_00: And for plan assets over$10 million, the fee is$4,000.
• 11:40
  SPEAKER_00: But for a large plan, that is a bargain compared to the alternative.
• 11:45
  SPEAKER_00: And that brings us to door three, audit cap.
• 11:48
  SPEAKER_00: This is the door that you don't want.
• 11:50
  SPEAKER_00: Audit cap is what happens when the IRS finds your mistake for you during an audit, and it is not something that you have already fixed through self-correction.
• 11:58
  SPEAKER_00: You still have to correct the error using the same principles, so it's really the same fix, but instead of paying a set fee, now you have to negotiate your sanction with the IRS and sign a closing agreement.
• 12:11
  SPEAKER_00: The sanction is tied to what the IRS calls the maximum payment amount, and it's roughly the total tax that would be owed if the plan were disqualified.
• 12:20
  SPEAKER_00: The sanction under audit cap isn't supposed to be excessive, and the IRS weighs things like how serious the error was and how cooperative you've been, but it's almost always far more than a VCP fee.
• 12:32
  SPEAKER_00: So you can see the design, you can fix it yourself for free, you can tell the IRS for a modest fee, or the IRS can find it and give you a real penalty.
• 12:43
  SPEAKER_00: So the whole system rewards you for finding problems first.
• 12:47
  SPEAKER_00: Let me make this concrete with the most common example out there.
• 12:52
  SPEAKER_00: That is called a missed deferral.
• 12:54
  SPEAKER_00: The general fix is that the employer makes a corrective contribution for the employee's missed deferral opportunity plus any match they would have received plus earnings.
• 13:05
  SPEAKER_00: So how big is that corrective contribution?
• 13:08
  SPEAKER_00: It depends on how fast you catch it.
• 13:10
  SPEAKER_00: The standard is 50% of what the employee would have deferred.
• 13:15
  SPEAKER_00: But the rules are gentler for quicker fixes.
• 13:19
  SPEAKER_00: If you catch it within about three months and start deferrals promptly, you may not owe anything for the missed deferrals themselves, you just owe the lost match.
• 13:28
  SPEAKER_00: And there are special safe harbors if you have automatic enrollment for your plan.
• 13:32
  SPEAKER_00: So speed here literally saves money.
• 13:36
  SPEAKER_00: And one thing people forget, you have to notify the employee in writing.
• 13:41
  SPEAKER_00: I've mentioned Secure 2.0 a few times, so let me talk about it.
• 13:45
  SPEAKER_00: Secure 2.0 is a major retirement law that Congress passed at the end of 2022.
• 13:50
  SPEAKER_00: And for EPCERS the headline is simple.
• 13:52
  SPEAKER_00: It dramatically expanded self-correction.
• 13:55
  SPEAKER_00: Here's how.
• 13:56
  SPEAKER_00: The law created a category called eligible inadvertent failures.
• 14:02
  SPEAKER_00: If your mistake qualifies, you can self-correct it anytime as long as you fix it within a reasonable period after you discover it.
• 14:10
  SPEAKER_00: For those errors, the old three-year deadline for significant failures essentially goes away.
• 14:16
  SPEAKER_00: So what makes a failure eligible and inadvertent?
• 14:20
  SPEAKER_00: It has to be an honest mistake that happened despite having practices and procedures in place.
• 14:26
  SPEAKER_00: It can't be egregious, it can't involve diverting or misusing plan assets, and it can't be part of an abusive tax avoidance scheme.
• 14:36
  SPEAKER_00: There is one big catch and it's about timing.
• 14:39
  SPEAKER_00: The IRS can't have found it first.
• 14:41
  SPEAKER_00: If the IRS identifies the error before you've shown a specific commitment to fix it, self-correction is off the table.
• 14:47
  SPEAKER_00: This is another reason to go looking for problems before someone else does.
• 14:52
  SPEAKER_00: And what's a reasonable period?
• 14:53
  SPEAKER_00: The IRS's interim guidance is in Notice 2023-43.
• 14:59
  SPEAKER_00: It says that correcting within 18 months of identifying the failure generally counts.
• 15:06
  SPEAKER_00: A few other changes are worth knowing.
• 15:08
  SPEAKER_00: Loans got friendlier.
• 15:10
  SPEAKER_00: Many participant loans can now be self-corrected where before they usually offer whereas before they often required a VCP filing.
• 15:18
  SPEAKER_00: There's still fine print around tax reporting, but it is a big improvement.
• 15:22
  SPEAKER_00: A safe harbor for fixing automatic enrollment errors, which had been set to expire, was made permanent, and plans got more flexibility when someone is accidentally overpaid.
• 15:32
  SPEAKER_00: In some cases, a plan can now decide not to claw that money back.
• 15:36
  SPEAKER_00: So imagine being a retiree and getting a letter from your former employer demanding that you give back years of payments that you didn't know were incorrectly determined.
• 15:47
  SPEAKER_00: So this change recognizes that sometimes the smartest way to correct something is to let it go.
• 15:54
  SPEAKER_00: And it's a very exclusive benefit way of thinking.
• 15:57
  SPEAKER_00: So has the IRS rewritten the main EPCRS rule book yet?
• 16:01
  SPEAKER_00: Not fully.
• 16:02
  SPEAKER_00: Congress told IRS to update EPCRS for these changes, and as of now, the IRS still points to revenue procedure 2021-30 plus notice 2023-43 as interim guidance.
• 16:16
  SPEAKER_00: So practitioners are still watching for a new revenue procedure, and when it lands, I will cover it here.
• 16:22
  SPEAKER_00: One last update for your budget: VCP fees went down on January 1, 2026, which is where those new numbers that I mentioned came from.
• 16:32
  SPEAKER_00: The fee for group submissions where a provider files on behalf of a lot of plans at once also went up to$13,500 for the first 20 plans.
• 16:42
  SPEAKER_00: So let's land the plane.
• 16:43
  SPEAKER_00: If you sponsor a plan, there are four things that I recommend that you do on Monday morning.
• 16:49
  SPEAKER_00: Number one, actually read your plan document, or at least the summary.
• 16:53
  SPEAKER_00: Know your definition of compensation, your eligibility rules, and your vesting schedule, because most errors are going to come from someone assuming what those things are instead of checking them.
• 17:04
  SPEAKER_00: Number two, write down your procedures.
• 17:07
  SPEAKER_00: Self-correction depends on having established practices and procedures.
• 17:11
  SPEAKER_00: So if your process lives only in one person's head, that is a risk twice over.
• 17:16
  SPEAKER_00: Number three, do an annual checkup.
• 17:19
  SPEAKER_00: Compare a sample of payroll records against the plan terms and check that new hires are enrolled on time.
• 17:25
  SPEAKER_00: Check how quickly deferrals hit the trust.
• 17:28
  SPEAKER_00: The IRS publishes free fix-it guides for common plan types that walk through the usual mistakes, and I will link them in the show notes.
• 17:36
  SPEAKER_00: Number four, when you find something, move fast and document it.
• 17:41
  SPEAKER_00: Speed shrinks the correction cost, and documentation protects you if the IRS ever asks about it.
• 17:47
  SPEAKER_00: For anything that is big or unclear, bring in an ERISA attorney or a qualified plan consultant before you pick a correction method.
• 17:54
  SPEAKER_00: So let's go back to where we started.
• 17:55
  SPEAKER_00: The company whose payroll stopped counting bonuses.
• 17:58
  SPEAKER_00: What would I tell them?
• 18:00
  SPEAKER_00: Don't panic.
• 18:01
  SPEAKER_00: Figure out who was affected and for how long.
• 18:03
  SPEAKER_00: Calculate the missed deferrals and matches, and make corrective contributions with earnings and notify employee.
• 18:10
  SPEAKER_00: Fix the payroll mapping so that it can't happen again.
• 18:13
  SPEAKER_00: This is very likely an eligible inadvertent failure, so self-correction might be available.
• 18:18
  SPEAKER_00: And if the numbers are big or a sale is on the horizon, maybe consider a VCP for the IRS sign-off.
• 18:25
  SPEAKER_00: So it's not that scary when you lay it out in terms of how to correct it.
• 18:29
  SPEAKER_00: And that is the whole point of Epcurse.
• 18:31
  SPEAKER_00: Mistakes are normal.
• 18:33
  SPEAKER_00: Ignoring them is when it gets expensive.
• 18:35
  SPEAKER_00: And that is the wrap-up on the first episode of the exclusive benefit.
• 18:40
  SPEAKER_00: Thank you so much for spending 20 minutes with me.
• 18:42
  SPEAKER_00: If this was useful, the best thing you can do is share it with whoever owns the 401k responsibility at your company.
• 18:49
  SPEAKER_00: Subscribe wherever you're listening so you catch the next episode.
• 18:52
  SPEAKER_00: And I would love to hear from you.
• 18:53
  SPEAKER_00: What is the benefits question that keeps you up at night?
• 18:56
  SPEAKER_00: Send it my way because listener questions are going to shape how this show goes.
• 19:00
  SPEAKER_00: A quick reminder this episode again is general information, not legal or tax advice.
• 19:06
  SPEAKER_00: Every plan is different, so talk to a professional about yours.
• 19:09
  SPEAKER_00: I'm Angela Stockbridge, and thank you for listening to the exclusive benefit.
• 19:13
  SPEAKER_00: Talk soon.