Written by Kristina Kananen

The Voluntary Correction Program

While IRS regulations are written with the expectation of perfection, with the specter of plan disqualification looming over a plan with failures, IRS has come to realize that no one is perfect.  Mistakes happen.  Disqualifying a plan impacts the plan participants as much or more than the plan sponsor and is contrary to the government’s policy of increasing retirement savings for plan participants.

As we discussed in a prior white paper, the IRS developed the Employee Plan Compliance Resolution System (EPCRS) for plans with qualification failures which includes a Self-Correction Program (SCP), a Voluntary Correction Program (VCP) and an Audit Cap Program (Audit Cap).  Under SCP insignificant failures, and some significant failures that are found and corrected within the required period, face no penalties as long as participants are put into the position they would have been if there had been no failure.  The VCP is for insignificant failures that were not corrected in the required timeframe and significant failures.  A submission procedure must be followed, the guidance in Rev. Proc. 2021-30 must be followed to make the correction and penalty(ies) must be paid.  The IRS will issue a Compliance Statement at the end of the process which will only address the failures included in the VCP. Audit Cap is for correcting failures that are found by an IRS auditor.  When the corrections have been made to the auditor’s satisfaction and penalties paid, a Closing Agreement is issued.

The biggest difference between SCP and VCP is that the VCP applicant receives a written statement from the IRS agreeing to the correction methods chosen to correct failures.  It ensures the plan document is brought into compliance with federal tax law and IRS guidance.  Should there be an SCP that does not meet with all of the IRS guidelines and the plan is later audited, those failures will come under IRS scrutiny.  A benefit to using VCP is that the applicant can request relief from federal income or excise taxes that would otherwise be required due to the failures.

Qualified Plans, 403(b) Plans, SEPS and SIMPLE IRA Plans can correct their failures under VCP.   This discussion will only cover Qualified Plans.

Qualification failures fall into one of four categories:

  • Operational Failure – Failure to administer the plan within the provisions of the plan document and the plan document cannot be retroactively amended outside of VCP;
  • Plan Document Failure – Failure to maintain the plan document in accordance with current regulations;
  • Demographic Failure – Failure to correct 410(b) and 401(a)(4) testing failures within 9 ½ months after the close of the plan year; and
  • Employer Eligibility Failure – Allowing an employer to adopt a plan when that employer is not allowed to adopt such a plan. In 1995 the law was changed to allow a not-for-profit organization or a governmental unit to adopt a 401(k) plan, so all plans are eligible to adopt a 401(k) plan now, but if they adopted the 401(k) plan before 1995, corrections would have to be made


Appendices A and B of Rev. Proc. 2021-30 contain 19 failures that can be corrected and 36 examples of how to accomplish those corrections.  The corrections shown are safe harbors and have been deemed to be reasonable and appropriate methods for correcting a failure, depending on the facts and circumstances.   The examples are not the only correction methods available to a Plan Sponsor as long as the correction chosen meets other requirements of VCP and should:

  • Restore the plan to the position it would have been in had the failure not occurred, including restoration of current and former participants and beneficiaries to the benefits and rights they would have had if the failure had not occurred.
  • Resemble a correction method already available in the Internal Revenue Code (IRC).
  • Keep plan assets in the plan, unless a corrective distribution is to be made to participants or beneficiaries.
  • Provide benefits for Non Highly Compensated Employees (NHCEs) when a nondiscrimination testing failure occurs.
  • Not violate any other applicable provisions of the IRC or ERISA.



Operational failures are the most numerous failures as there are many ways for plan administration to go wrong.  A few examples are:

  • Misapplying plan eligibility provisions so that participation in the plan is delayed for a participant. This can happen when there is an error in determining when age/service requirements occurs, or when service with a related employer is not credited or using the wrong entry date. The correction:
    • Restoration of the participant’s benefits, including earnings. Appendix A and Appendix B of EPCRS describe the corrective contributions for a 401(k) or §401(m) arrangement.
  • Bringing an employee into the plan too early, such as treating an employee as being in an eligible employment classification, permitting elective deferrals to be made to the plan before the appropriate entry date and using an entry date that is too early under the terms of the plan. There are two options to correct this:
    • Amend the document to make the employee retroactively eligible which is the only reasonable correction when elective deferrals are included as there is no mechanism to return deferrals to the employee; or
    • Reallocate improperly allocated employer contributions to other participants or used to reduce future employer contributions.
  • Using an incorrect allocation method or accrual formula that is not stated in the plan document. While EPCRS does not include specific guidance regarding this failure, an acceptable method of correction of a defined contribution plan would be:
    • Reallocate the contributions according to the proper allocation method or the employer contributes additional amounts to make the allocations fit the allocation method in the plan.
      • Note: If a terminated participant was paid an amount larger than should have been allocated to him, the plan must take steps to recoup the overpayment if the amount of the overpayment exceeds $250 or the employer must make up the difference to the plan
    • Using compensation that did not fit the compensation definition in the plan document to allocate the employer contribution. While EPCRS does not include specific guidance on this failure, using its suggested method for failure to include a participant in a profit-sharing plan would be reasonable to apply here.
      • If an employee’s compensation was understated, the employer contributes additional amounts to makeup the employee’s allocation;
      • If an employee’s allocation was overstated, the amount in excess of the allocation he is entitled to using compensation compliant with the plan definition, the excess amount is forfeited and can be used restore allocations to those who were understated or to reduce future employer contributions.
    • Failing to limit compensation to the dollar amount under 401(a)(17) in determining the participant’s allocation or benefit accrual. There are a couple of ways to correct this failure.
      • Reduce the allocation for benefit accrual for the affected participants. The excess allocation can be reallocated as an additional employer contribution if the plan allows, or reduce future employer contributions; OR
      • Amend the contribution formula to increase the allocation to other participants to equal the correct allocation percentage for the participant who received an allocation base on compensation in excess of 401(a)(17).
    • Failure to meet Top Heavy Minimum Contribution Requirements
      • Make up the allocation for those participants who did not receive their minimum allocation
    • Failure to apply the correct vesting schedule, incorrectly determining vesting service, not shifting to the Top-Heavy vesting schedule, failing to recognize service with a related employer or incorrectly excluding years of service.
      • Adjust the vesting percentage to the correct percentage. If a payment was made and the improper application of the vesting percentage resulted in a forfeiture, the forfeited amount can be reinstated to the participant’s account, or the employer can make an additional contribution.
    • Failure to obtain participant, or spousal, consent before making a distribution
      • Participant can give retroactive consent, or can repay the distribution so that Qualified Joint and Survivor Annuity benefit can be paid.
      • If the spouse does not respond to a notice or cannot be located, the spouse is entitled to the QJSA that would have been paid upon the participant’s death or retirement IF the spouse makes a claim.
    • Making a distribution that is not allowed in the plan document.
      • Secure repayment from the participant. If the overpayment is not premature, the employer will have to make the plan whole OR retroactively amend to plan to allow the distribution.  If the overpayment was premature, and the employer cannot obtain full repayment, the employer is not required to make up the difference to the plan.
    • Failure to make required minimum distributions
      • Makeup distributions must be made
      • The Employer may request IRS waiver of the applicable excise taxes through the VCP application
    • Excess Annual Additions under 415.
      • Refund employee deferrals to the employee with forfeiture of any match amount, or
      • Credit the excess to an unallocated account to reduce future contributions
    • Excess Deferrals were not distributed by April 15th of the following calendar year
      • Distribution of the excess amount adjusted for earnings
    • Failure to withhold elective deferrals from employee’s paycheck
      • A QNEC for a percentage of the missed deferral amount and a makeup contribution for the missed matching contribution could be made depending on the correction method chosen.  It is not possible for the employer to collect the missed deferrals from the participant after the payroll for the deferrals has passed
    • Loans that violate the plan’s loan provisions for maximum amount of the loan, maximum repayment term or amortization requirements
      • Repayment of excess amount, or re-amortization of the loan
        • If loan failures are the only failures being submitted under the VCP, the plan may qualify for a reduced VCP fee.
      • Loans are made, but the plan document has no loan provisions
        • Repayment of the loan, or recharacterization as a distribution, if the participant is eligible to take a distribution, or
        • Retroactive amendment to the plan to allow the loan.
      • ADP or ACP nondiscrimination testing failures not corrected within 12 months after the end of the plan year.
        • A QNEC contribution can be made to correct the failure
        • A One-to-One correction method can be used where corrective distributions are made from the HCEs and a corresponding employer contribution is made for allocation to the NHCEs
      • Corrective distributions for ADP/ACP testing failures that are in excess of the amount needed for the correction
        • Request repayment of the incorrectly paid distributions

A Demographic Failure example would be a coverage and nondiscrimination testing failure, other than ADP or ACP, that is not corrected within 9 ½ months after the close of the plan year.  The plan could be amended to increase participation levels of NHCEs, or possibly increase the accruals of already eligible NHCEs.

An example of a Document Failure would be the failure to adopt required plan qualification changes within the prescribed remedial amendment period or interim amendments (required or discretionary).  Corrective amendments would be required and benefits would need to be restored, if necessary.

Once failures and the correction methodologies have been determined, it is time to file the VCP submission with the IRS. With the exception of Document Failures, the corrections are proposed until the Compliance Statement has been signed by the IRS and then they can be executed. The entire submission must be accomplished on the pay.gov website and includes the following:

Form 8950 Application for Voluntary Correction Program which identifies:

  • The plan sponsor,
  • The person to contact if the IRS has questions and if it is a representative a Form 2848 Power of Attorney be attached
  • The type of VCP submission (As of 12/31/21, VCP anonymous submissions will no longer be accepted)
  • The Plan Name, type of plan, 3-digit plan number, the month in which the plan year ends, total dollar value of the plan assets and the total number of participants
  • Forms 14568-A through 14568-I Only Forms 14568, 14568-A, 14568-B, 14568-E, 14568-G, 14568-H and 14568-I apply to qualified plans.


  • Whether a retroactive plan amendment is included in the correction of the failure
  • If there an abusive tax avoidance transaction
  • Was there a diversion or misuse of plan assets
  • Whether the plan or the plan sponsor is under IRS examination

A Procedural Requirements Checklist is included on Form 8950 that lists all of the documentation that would be required based on your answers in addition to the Forms 14568, 14568-A through 14568-I.  The IRS encourages the submission of the Form 14568 Model VCP Model Compliance Statement and schedules in the VCP submission so the data provided is standardized and is easier for IRS agents to review and quicker to process.  Use of the 14568 forms also allows the User to skip Items 10 through 17. Those items on the Checklist that apply to the submission should have a checkmark and included in the filing in the order listed in the checklist.  The Form 14568, Model VCP Compliance Statement serves as a summary of the failures and asks for the:

List of failures;

Proposed correction methods,

Proposed procedure to locate and notify former employees and beneficiaries,

Proposed revision to administrative procedures to ensure the same issue does not appear again

Request for a waiver of certain taxes, and

Loan failures.

Once the IRS has reviewed the submission Section VII – Enforcement Resolution of the Form 14568 will be completed and signed by the IRS.  This ensures that the IRS agrees with the correction to be made, which provides assurance that the plan is qualified.

Before the Forms 14568, 14568-A through 14568-I were created the Form 8950 referenced attached Schedules, which the applicant had to complete on their own.  The IRS continued the Schedules in the name of the Forms 14568-A through 14568-I. Each of these forms covers different issues, asks for the plan years in which the failure existed, the number of participants affected, the proposed correction and the changes to be made to administrative procedures to avoid a repeat of the failure.

  • Form 14568-A, Model VCP Compliance Statement – Schedule 1: Interim Non amender Failures – Each failure to adopt statutory, regulatory or other requirement for which the plan was not timely amended must be listed as well as the published cumulative list where the IRS published the requirement. The amendment number and paragraph number of the amendment or the page and section number for a restated plan must be included to assist the IRS in finding the amendment to determine if it complies with the requirements.  Copies of signed and dated amendments must be enclosed with this form.
  • Form 14568-B, Model VCP Compliance Statement – Schedule 2: Other Non amender Failures and Failure to Adopt a 403(b) Plan Timely. This form lists all law changes from the Tax Reform Act of 1986 through the 2015 Cumulative List.  The form has not been updated since June, 2018, but there is provision to specify a more recent failure.  Again, copies of the amendment or restatement, the plan document in effect before the amendment, and a copy of the most recent determination letter issued with respect to the plan.  The determination letter referenced is the letter issued to the document sponsor for a pre-approved document.
  • Form 14568-E, Model VCP Compliance Statement – Schedule 5: Plan Loan Failures. A listing of the plan year involved, the number of participants affected, total number of loans that violated IRC Section 72(p)(2)(A) by exceeding the dollar limit for a loan, IRC Section 72(p)(2)(B) by exceeding the term of a loan and IRC Section 72(p)(2)(c) by not complying with the amortization and frequency of repayment as well as defaulted loans.  An explanation of how and why the plan loan failures occurred must be included as well as the proposed correction methods for each of the sub-failures.  The Applicant can request relief from reporting all participant loans as deemed distributions, or to report them for the year of correction instead of the year of the failure or to do a combination of the two.  Every loan agreement for each participant involved including amortization schedules and the specific calculations for the affected employees to demonstrate the proposed correction method must be included in the submission.
  • Form 14568-G Model VCP Compliance Statement – Schedule 7 Failure to Distribute Elective Deferrals in Excess of the 402(g) Limit – Each plan year in which the failure occurs, the number of participants affected in each year and the amount of excess deferrals distributed is listed. The corrections are hard coded on the form as there is only one way to correct, except for the earnings adjustment.
  • Form 14568-H Model VCP Compliance Statement – Schedule 8: Failure to Pay Required Minimum Distributions Timely.  Each Calendar year (not the plan year) in which Required Minimum Distributions were not timely paid, or an amount less than the required payment was made is listed along with the number of participants affected and the total amount of the missed required minimum distributions shown.  Defined Contribution Plans must calculate the amount that should have been distributed for each year and include the calculation of earnings to be returned as well.  Defined benefit plans will include the method for determining the additional payment and whether the plan is subject to lump sum payments.  Both plan types can request relief from excise taxes under IRC Section 4974 and include a reason for the IRS to provide such relief.
  • Form 14568-I – Model VCP Compliance Statement – Schedule 9: Limited Safe Harbor Correction by Plan Amendment is a summary of the failures which the IRS has outlined the preferred method of correction.  These failures are:
    • Exceeding IRC Section 401(a)(17) limit on compensation
    • Making hardship distributions when the plan document did not allow such distributions
    • Making plan loans to participants when the plan document did not allow such loans
    • Including an employee in the plan before the entry date provided in the plan document

User fees must be paid before the IRS will begin reviewing a VCP submission.  In fact, if you check the Procedure Requirements Checklist on the Form 8950, the Form 8951 User Fee for Application for Voluntary Correction Program (VCP) is the first item on the list.

Revenue Procedure 2021-4 provides the User Fees for VCP submissions.  This Revenue Procedure is updated each year.  Currently the user fees are based on total plan assets:

Assets of $500,000 or less                                          $1,500

Assets of $500,000 to $10,000,000                            $3,000

Assets over $10,000,000                                             $3,500

As with the Form 8950, Form 8951 must be completed on the pay.gov website. The user fees must be paid at the time of the form completion.  Both forms, the applicable Forms 14568 and all supporting documentation (included as one PDF file) must be submitted electronically through pay.gov.  Paper submissions will be returned immediately to the applicant.  The PDF file is limited to 15 MB.  If the attachments being filed exceed that size, those that cause the limit to be exceeded can be faxed to the IRS, as long as they are appropriately identified by including the EIN, applicant name, plan name and pay.gov tracking ID.  The pay.gov tracking ID allows the IRS to associate the faxed documents with the correct submission.

While it is reassuring to know that the IRS does not require perfection, there is no forgiveness if failures existed for more than the period allowed for the Self Correction Program.  There is also some uncertainty under SCP that the correction method used meets with IRS approval.  VCP gives the plan sponsor reassurance that the qualified status of the plan is maintained and there is no chance of disqualification.  Disqualification of a plan would require its termination and all assets distributed to participants.  Those distributions would not be eligible for rollover and would be taxable at the time of distribution. Once identified, each failure must be documented, calculations made, the forms completed. Because the qualified status of the plan is at risk it is wise to hire a representative (a Service Provider, or the Plan’s attorney) to complete the form, oversee the proposed correction calculations, compile the attachments and answer any questions from the IRS to ensure the IRS agreement to the correction.  This representative would also oversee the implementation of the correction methods in accordance with the IRS approval or modifications.

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