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The Ins and Outs of an EPCRS Filing

Practice Management

Errors: not inevitable, but also not unusual. When they concern compliance with the Internal Revenue Code and regulations that apply it, one of the steps that can be taken is to use the Employee Plans Compliance Resolution System (EPCRS). A Dec. 6 session of the ASPPA Winter Symposium took a look at making filings through that system.

Ilene H. Ferenczy, APA, Managing Partner at the Ferenczy Benefits Law Center, emphasized that EPCRS is for qualification failures. It is available for qualified plans, 403(b) plans, SEPs and SIMPLE IRAs, she said, and not for: 

  • failures for which the Internal Revenue Code or regulations already provide a correction; 
  • Form 5500 filing issues;
  • PT excise taxes and resolution;
  • fiduciary breaches; 
  • diversion/misuse of plan assets;
  • resolving excise tax problems, except for those involving Code Section 4972 (nondeductible contributions), Code Section 4973 (excess contributions), Code Section 4974 (required minimum distributions), Code Section 4979 (excess 401(k) contributions) and Code Section 72(t) (early distributions);
  • deduction mistakes; and 
  • abusive tax avoidance transactions.

Significance of an Error

How significant an error is key, Ferenczy indicated. A variety of factors are in play in the determination of how an error’s significance, she said—it’s a judgment call. But she suggested that a rule of thumb is that an error is significant whenever it’s not insignificant.

So when is an error insignificant? Ferenczy said that determination depends on an analysis of facts and circumstances and weighing factors, including: 

  • whether other failures occurred in the affected years; 
  • the percentage of plan assets and contributions involved;
  • the number of years involved;
  • the number of participants affected relative to total plan participants and those who could have been affected;
  • whether a correction was made within a reasonable time of discovery; and 
  • the reason for the failure.

EPCRS Options 

Ferenczy outlined the three correction procedures available under EPCRS:

1. The Self-Correction Program (SCP), which she described as “the easiest and cheapest.” Self-correction, Ferenczy said, “is almost always where you want to start.” Under the SCP, she noted, the plan sponsor finds the failure and fixes it. There is no IRS filing/involvement, there are no user fees and lower service provider fees. But there are limits—the SCP is for use with operational failures and limited plan document failures only. Significant failures, she said, can be self-corrected within a limited period after they occur.

2. The Voluntary Correction Program (VCP), which is voluntary, and requires a submission to the IRS that must be signed by the client or a Circular 230 practitioner, i.e., a lawyer, CPA, enrolled actuary, ERPA or enrolled agent. In addition, it involves a user fee. Further, Ferenczy noted that the VCP can be an involved process. “It can take quite a while,” she said; how much time it takes depends on the complexity a case as well as the IRS backlog. It “can become a very, very big project,” she said, observing that she has seen such cases take more than a year.

3. The Audit Closing Agreement Program (Audit CAP), which she told attendees is “the most expensive and difficult.” It is used when the IRS finds a qualification failure on audit. The IRS and the plan sponsor negotiate concerning the correction method and sanction amount; the IRS drafts the closing agreement. “Be sure to pay attention to its exact wording,” said Ferenczy. The client agrees to correct the mistake and pay the sanctions, and in return the IRS agrees not to disqualify the plan. 

Steps to Be Taken

Ferenczy also outlined steps to be taken when using correction methods. 

SCP 

  • Make sure you qualify for SCP.
  • Identify the errors.
  • If you need to “stop the bleeding,” do so right away!
  • Identify the corrections and make them. 
  • Document! 
  • Keep records!

VCP 

1. Identify errors—and if anything is ongoing, take action to “stop the bleeding.” 

2. Determine the correction for past failures. 

3. Prepare correction exhibits. 

4. Create the filing; that is, the letter, forms and attachments. Form 8950 will be completed online, Ferenczy noted, suggesting, “Be sure to do a rough draft. When it’s in, it’s in.” When filing a Form 2848, she said, its “magic language” includes mentioning that the VCP application is submitted pursuant to Revenue Procedure 2021-30, as well as signing and filing Form 8950 and accompanying documents. 

5. Have a client sign Form 2848. 

6. Assemble the submission in proper order. “This is the order they want to see it in,” Ferenczy said:

  • Penalty of perjury statement 
  • Form 2848 
  • Cover letter
  • Form 14568 
  • Narrative attachment to Form 14568 
  • Additional forms/schedules 
  • Supporting Computations 
  • Plan document—full or relevant excerpts plus opinion letter or FDL

A Final Note

Ferenczy offered a final reminder to attendees: “EPCRS almost always requires full correction of everything.”