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What happens if you fall out of compliance?

June 3, 2014

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As a plan sponsor, you place a significant emphasis on the tax-deferred status of your retirement plan – and your business’ financial health and fiduciary responsibilities weigh heavily on your mind all year. Without tax-qualification under the Internal Revenue Code (IRC), you could be at risk of monetary ramifications and other serious problems, both for yourself and all plan participants. This isn’t ideal, and if it does become the case, you’ll naturally want to correct these issues as quickly as possible.

While it is reasonable that these responsibilities appear daunting, a comprehensive review of your requirements, as well as the methods to fix any fall outside of compliance, will help you maintain a quality, fiscally sound benefits plan. Thankfully, if you do happen to see your plan become non-compliant, there are several options available to you that can rectify that situation quickly. As we previously noted, maintaining a tax-qualified plan has a number of benefits.

At Clark Schaefer Hackett, we have worked with plan sponsors such as you for more than 40 years. As a result, we’ve crafted a team of dedicated professionals with an in-depth and exceptional focus not found anywhere else in the industry. When it comes to administration, consulting and plan compliance services, we provide expedient, high-quality advice that will help you save time and reduce your fiduciary responsibilities. When contacted, we will form a close relationship with you so all of your benefits plan’s needs are addressed. This working partnership is especially important if your plan is no longer compliant. Together, we’ll take all the necessary steps to correct that course of action and work with you so your plan meets all of your compliance obligations.

Work with the IRS to correct mistakes
Even the best, most hands-on plan sponsors will run into problems with qualified plan rules and regulations. The IRS currently offers a way to correct many mistakes and help you avoid the consequences of non-compliance.

Called the IRS Employee Plans Compliance Resolution System, or EPRCS, this course of action will provide the guidance and directions to get everything back on track. Presently, there are three options available to you to correct plan errors and avoid an adverse impact on the tax-qualified status of your plan: Self-Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (Audit CAP).

Self-Correction Program
Sometimes things don’t go exactly as planned. If this is the case for you, the first step is often a self-correction program. Taking these steps will help ensure you maintain the tax-favored status of your plan and also provide you an opportunity to make organizational changes to avoid future problems.
Under this program, plan sponsors have the ability to correct minor mistakes and errors without first paying a fee, the IRS explained. Ability to utilize an SCP depends on timeliness, even if the error is significant. Self-correcting is not an option if the mistake is egregious. The SCP is intended for operational errors only, such as a failure to follow the terms of the plan. On the other hand, failure to maintain the plan document, thus leading to non-compliance, does not fall under an SCP.

Voluntary Correction Program
For operational compliance that lands outside the realm of self-correction, you’ll have to turn toward a voluntary compliance program. Plans cannot be currently under examination. Instead of fixing problems without IRS intervention, all files must be submitted to the IRS instead. As a result, a fee and IRS approval are required.
In addition, all of the plan compliance mistakes must be highlighted. Once these steps are complete, the IRS will issue a statement that details those errors, as well as all approved correction methods you may pursue. Once done, you have 150 days to make those changes. During the submission process, your plan cannot be audited, unless under very specific special circumstances.

Audit Closing Agreement Program
The third option you have if your plan is no longer compliant is an Audit Closing Agreement Program, or Audit CAP. This option is only available to you if your plan is currently being audited. Once again, you’ll be able to retain your tax-favorable status by paying a fee and fixing any mistakes that resulted in non-compliance. To begin this process, you must fix all errors found during the examination process and then enter an agreement with the IRS.
The IRS explained that all corrections must be made prior to entering the Closing Agreement. In addition, your sanctions will be higher than those paid under VCP, and is a negotiated percentage of the Maximum Payment Amount calculated using prior tax history. This is the final, and most severe, course of action if your plan is no longer compliant.

Work with experts to avoid complications
No plan sponsor wants to fall out of compliance, but correcting any mistakes isn’t a task you have to tackle alone. The process can get complicated, and in many cases sponsors attempt to take these steps with the IRS alone. Instead, a trusted advisor can help clear up any gray area, answer all of your questions and work with you so you can complete all required measures correctly.
Our experts at Clark Schaefer Hackett understand all of the details behind plan compliance, including the elements of EPRCS. If you happen to no longer have a plan that is compliant, make sure you work with a firm that has the dedicated professionals and years of experience in the industry. With Clark Schaefer Hackett, you’ll get a specialized knowledge of benefits plans and compliance, with a focus on audits, accounting and IRS regulations. Best of all, our staff is dedicated to your needs year round.

Further resources for understanding employee benefits:

 

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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