Plan document compliance, operational failures and the correction programs

In this lesson you will

Distinguish plan document failures from operational failures
Identify the three IRS EPCRS programs and when each applies
Apply the DOL VFCP and its self-correction component to late deferrals
Evaluate the audit effect of a qualification failure

Why tax status is an audit matter

A qualified plan's trust is tax-exempt, and its financial statements assume it stays that way. If the plan loses qualification, the trust's income is taxable and participants can be taxed on vested amounts. AU-C 703 requires procedures related to the plan instrument, the auditor considers tax status as part of the work on compliance with laws and regulations, and management acknowledges responsibility for maintaining a current plan instrument and administering the plan in conformity with it.

Plan document and operational failures

Plan document failures are problems with the written plan: a provision that violates the Code, or a failure to adopt a required amendment on time. Test by obtaining the current plan document and all amendments, the latest IRS determination or opinion letter, and checking that required amendments were adopted.

Operational failures happen when the plan is not run according to its terms. Auditors find these through the contribution, participant data, distribution and loan tests already covered:

using the wrong definition of compensation;
late enrollment or missed automatic enrollment;
vesting errors on terminations or rehires;
loans exceeding Code section 72(p) limits; and
failed nondiscrimination tests (such as the ADP and ACP tests for 401(k) plans) not corrected on time.

The operational compliance guide and the ADP/ACP test workbook support these tests.

IRS correction: EPCRS

The IRS Employee Plans Compliance Resolution System, governed by Rev. Proc. 2021-30, has three programs:

Self-Correction Program (SCP): the sponsor corrects certain failures without contacting the IRS or paying a fee. It requires established practices and procedures; a plan document alone does not count.
Voluntary Correction Program (VCP): before audit, the sponsor pays a fee and gets IRS approval of the correction through a compliance statement. Corrections must be completed within 150 days of the compliance statement.
Audit Closing Agreement Program (Audit CAP): while the plan is under IRS audit, the sponsor corrects and pays a sanction under a closing agreement.

DOL correction: VFCP

The DOL's Voluntary Fiduciary Correction Program, updated effective March 17, 2025, lets plan officials correct listed fiduciary breaches, including delinquent participant contributions and loan repayments. Correction means restoring principal plus lost earnings, which can be computed with EBSA's online calculator. An applicant who meets the program's terms receives a no-action letter, and the related class exemption, PTE 2002-51, provides conditional excise tax relief.

The 2025 update added a self-correction component (SCC) for delinquent participant contributions and loan repayments when lost earnings are $1,000 or less and the amounts were remitted within 180 calendar days from withholding or receipt. The self-corrector files a notice through EBSA's web tool and does not receive a no-action letter, but compliance avoids civil penalties and enforcement action for the corrected transaction. Self-correction does not remove the requirement to report the delinquency on Form 5500.

What the auditor does with a failure

Evaluate whether the failure could cause a material misstatement (for example, an unrecorded liability for corrective contributions), communicate it as a reportable finding, read management's correction plan and evaluate the disclosure of the plan's tax status. The auditor does not perform the correction or decide which program to use; that is management's call with its advisers.

Common file mistakes

No current plan document or amendments in the file.
Operational failures found in testing but not evaluated for corrective contribution accruals.
SCC treated as available for a delinquency remitted 200 days late.

Worked example

Bridgeport Tool & Die 401(k) Plan: which correction route?

The 2025 audit of Bridgeport Tool & Die 401(k) Plan finds two problems.

Problem 1: deferrals from the June 13, 2025 payroll ($38,500) were deposited on July 21, 2025, 24 business days after the pay date (June 19 and July 4 are federal holidays) against a normal 3-day pattern. Lost earnings computed with EBSA's online calculator are $214. Remitted 38 calendar days after withholding, well within 180 days, and lost earnings are under $1,000, so the SCC is available. Management files the SCC notice and pays the $214. The $38,500 is still reported on Schedule H line 4a for 2025.

Problem 2: the plan excluded overtime from compensation for 2024 and 2025, but the plan document includes it. Missed deferrals and match for 19 employees total $27,600 including earnings. This is an operational failure under the Code, corrected through the IRS program. Management concludes it has established practices and procedures and uses SCP, making corrective contributions in March 2026.

Audit effect: the corrective contribution relates to failures in plan years through 2025, so the team evaluates whether a $27,600 contribution receivable belongs in the 2025 statements. It is below performance materiality of $95,000, but management books the receivable, so nothing is left on the summary of uncorrected misstatements. Both problems are communicated in writing as reportable findings.

Self-check

Answer each question before you open the answer.

What is the difference between a plan document failure and an operational failure?
Show answer
A plan document failure is a defect in the written plan, such as a missing required amendment. An operational failure is not following the plan’s terms in practice, such as using the wrong compensation definition.
Deferrals were remitted 200 days after withholding with $300 of lost earnings. Can the sponsor use the VFCP self-correction component?
Show answer
No. The SCC requires remittance within 180 calendar days from withholding or receipt, in addition to lost earnings of $1,000 or less. The sponsor can still apply under the full VFCP.
Which EPCRS program applies when the IRS is already examining the plan?
Show answer
The Audit Closing Agreement Program (Audit CAP), under which the sponsor corrects the failure and pays a sanction under a closing agreement.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error