Correcting employee plan errors outside EPCRS

By William P. O'Malley, CPA, J.D., Peoria, Ill.

Editors: Mindy Tyson Weber, CPA, and Trina Pinneau, J.D., LL.M.

Employers that sponsor retirement plans such as a Sec. 401(k) or Sec. 403(b) plan have a responsibility to operate those plans according to the terms of the plan document, and those plan documents must conform to all applicable statutes and regulations regarding retirement plans. Failure to administer a plan properly can lead to disqualification of the plan in the case of a 401(k) or to the loss of the plan's tax benefits for participants in a SEP-IRA, SIMPLE-IRA, or 403(b). However, even the best-intentioned employers make mistakes.

Acknowledging that mistakes do happen, the IRS established the Employee Plans Compliance Resolution System (EPCRS). This system provides a process for employers to correct administrative and other errors in a manner that avoids the tax costs associated with plan disqualification. In Rev. Proc. 2016-51, the IRS updated and consolidated its previous EPCRS guidance. This updated guidance supersedes Rev. Procs. 2013-12, 2015-27, and 2015-28 and was effective Jan. 1, 2017. For corrections made before Jan. 1, 2017, the guidance in Rev. Proc. 2013-12, as modified by Rev. Procs. 2015-27 and 2015-28, remains applicable.

EPCRS is a codification of three separate programs that the IRS makes available for correcting plan mistakes:

  • Self-Correction Program (SCP) for operational failures;
  • Voluntary Correction Program (VCP) with IRS approval; and
  • Audit Closing Agreement Program (Audit CAP).

However, not all employee plan mistakes are correctable through EPCRS. Compliance issues that are not correctable under Rev. Proc. 2016-51 include:

  • Failures related to a Sec. 457(b) plan (see Rev. Proc. 2016-51, §4.09);
  • Diversions or misuses of plan assets (see §4.11);
  • Abusive tax-avoidance transactions (see §4.12); and
  • Matters subject to excise or other taxes (see §6.09), for example:

    1. Funding deficiencies due to failures to make required contributions under Sec. 412.

    2. Prohibited transactions under Sec. 4975.

    3. Failure to file Forms 5500, Annual Return/Report of Employee Benefit Plan.

Outside the EPCRS process, the IRS maintains a non-VCP submission program for 457(b) plans, an Employee Plans Voluntary Closing Agreement request process for employee plan issues not covered under EPCRS, and a penalty relief program for late filers of Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan.

Non-VCP 457(b) submission

Sec. 457(b) controls the taxation of nonqualified deferred compensation plans sponsored by governmental entities and tax-exempt organizations. While not a part of EPCRS, Section 4.09 of Rev. Proc. 2016-51 permits sponsors of 457(b) plans, under limited circumstances, to submit requests to the IRS for voluntary correction of failures to comply with the requirements of Sec. 457(b). The IRS will consider these requests on a provisional basis outside EPCRS. The IRS retains complete discretion as to whether it will consider such requests. If the IRS does accept the request, it will issue a special closing agreement to the plan sponsor.

However, while it is not clear from the revenue procedure, the IRS has issued guidance on its website that:

  • It will not consider any issue relating to the form of a written 457(b) plan document; and
  • Governmental plan sponsors do not have to make a submission to fix problems with their 457(b) plans.

Although the IRS has discretion to accept these submissions, the IRS continues to indicate that it will generally not accept non-VCP submissions from tax-exempt organizations. Many tax-exempt plan sponsors had hoped that the latest update to the non-VCP 457(b) submission process would indicate a new willingness by the IRS to accept submissions from tax-exempt 457(b) plan sponsors. This unwillingness to accept applications from tax-exempt organizations is particularly disappointing, considering that the IRS's Employee Plans Compliance Unit (EPCU) is currently running a compliance check program on nongovernmental 457(b) plans. If the objective of the EPCU is to encourage compliance by plan sponsors, providing relief to plan sponsors who willingly come forward seeking IRS oversight of their plan correction efforts could further this goal. However, the IRS has yet to issue any guidance spurred by the compliance check program.

Employee plans voluntary closing agreements

The Employee Plans Voluntary Closing Agreements Program (VCAP) provides the Employee Plans Voluntary Compliance group with a uniform system for handling requests for relief issues that are not eligible for EPCRS relief. Unlike with EPCRS and other relief programs, the IRS did not set forth the terms of the VCAP in a revenue procedure or notice. Instead, the IRS announced the program in Employee Plans News, Issue 2013-10 (Dec. 19, 2013).

A closing agreement is a final agreement between the IRS and a taxpayer to resolve a tax issue authorized under Sec. 7121. The IRS enters into such agreements solely at its discretion, but once it is final, the IRS can change the agreement only due to fraud, malfeasance, or misrepresentation of material fact. The IRS will consider entering into a closing agreement with a taxpayer if the IRS considers it beneficial to have a permanent resolution to the case or if the taxpayer can provide good reason to demonstrate that the error is unintentional and that entering into the agreement is not detrimental to the interests of the United States.

Generally, the VCAP is an appropriate way to resolve income or excise tax issues related to qualified plans under Secs. 401(a) and 403(a), tax-sheltered annuity plans under Sec. 403(b), SEP-IRA plans under Sec. 408(k), or SIMPLE-IRA plans under Sec. 408(p). The IRS will not consider a closing agreement under VCAP with respect to 457(b) plans (the guidance directs sponsors of such plans to use the non-VCP process described in Rev. Proc. 2016-51 instead). The guidance also expressly excludes application for relief for 457(f) plans. Not mentioned are compliance failures associated with individual retirement accounts (IRAs) under Sec. 408 and Roth IRAs under Sec. 408A.

The program also has the usual restrictions on availability for plans that are under examination or investigation or that involve situations of willful or abusive tax avoidance.

In terms of the relief available, in most cases, the IRS will not negotiate over the amount of any applicable income or excise tax and any interest thereon but may discuss penalty abatement. In addition, in the case of plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), the plan sponsor must first correct any prohibited transactions under the Department of Labor's (DOL's) Voluntary Fiduciary Correction Program before proceeding to request a closing agreement under VCAP on the tax issues.

The advantage of a VCAP request is that it provides a means to resolve uncertain tax issues with the IRS outside the examination process. This voluntary disclosure may give the taxpayer its best opportunity to frame the issues and the computation of the tax liability to its advantage and increase the likelihood of penalty relief.

Penalty relief program for Form 5500-EZ late filers

In Rev. Proc. 2015-32, the IRS adopted a penalty relief program for employers that missed filing the required annual report. Only plans not subject to ERISA are eligible for this relief. The eligible plans are:

  • So-called one-participant plans that file Form 5500-EZ; and
  • Certain foreign plans that also file Form 5500-EZ.

A one-participant plan is a plan covering a 100% owner or the partners of a partnership (including their spouses) and no other participants. These are non-ERISA plans. Also not covered by ERISA are plans subject to IRS annual reporting that the employer maintains outside the United States primarily for nonresident aliens.

Both the one-participant plans and the specified foreign plans are required under Secs. 6047(e), 6058, and 6059 to file an annual report with the IRS. The IRS has issued Form 5500-EZ for that purpose. Any failure to file can subject the plan sponsor to penalties under Secs. 6652(e) and 6692. The Sec. 6652(e) penalty is $25 for each day during which the failure continues, with the total not to exceed $15,000 for each return, and the Sec. 6692 penalty is $1,000 for each failure. Secs. 6652(e) and 6692 both allow the IRS to reduce or waive the penalty upon a showing of reasonable cause.

Following the example set by the DOL with respect to ERISA plans, the IRS has established a program that permits a plan sponsor to prepare and submit delinquent Form 5500-EZ returns and pay a predetermined fee instead of requesting reasonable-cause relief. The fee is $500 per delinquent return, up to $1,500 per plan. For example, a plan sponsor that failed to file its 2012 Form 5500-EZ is potentially subject to a $15,000 late-filing penalty. Instead of filing the return late and hoping that the IRS will grant reasonable-cause relief and abate all or a part of the penalty, the taxpayer can instead file under the terms of the program and pay a $500 fee in lieu of the penalty.

As noted, plans subject to Title I of ERISA are not eligible for this relief program. Instead, those plans may use the DOL's Delinquent Filer Voluntary Compliance Program. That program, in return for payment of a fee, provides relief from both the potential DOL late-filing penalties and the applicable IRS late-filing penalties.

Correcting mistakes

The rules governing qualified retirement plans are so numerous that mistakes are almost inevitable. Generally, the IRS has issued guidance to help plan sponsors avoid the negative consequences of mistakes, but as can be seen, not all errors fit into the various guidance that the IRS has issued. Even when correction programs are available, time and, usually, money are required to fix the errors. Employers should implement processes to avoid mistakes where possible and should be aware of the correction programs available to get a better result when mistakes do happen.


Mindy Tyson Weber is a senior director, Washington National Tax for RSM US LLP. Trina Pinneau is a manager, Washington National Tax for RSM US LLP.

For additional information about this item, contact the author at

Unless otherwise noted, contributors are members of or associated with RSM US LLP.

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