Operational Compliance Failures and Correction Programs
Why failures happen
Qualification is a year-by-year, operation-by-operation standard: a correct written document is necessary but not sufficient. Common operational failures include late deferral deposits, exclusion of eligible employees, incorrect compensation definitions, missed matching contributions, flawed ADP/ACP corrections, improper loans, missed RMDs, and late Form 5500 filings. Each failure has its own correction path and its own deadline.
EPCRS
The IRS Employee Plans Compliance Resolution System has three tracks. The Self-Correction Program (SCP) lets a sponsor fix insignificant operational failures at any time without IRS involvement; significant failures may be self-corrected within a three-year correction window, which SECURE 2.0 expanded. The Voluntary Correction Program (VCP) handles what SCP cannot - plan document failures, significant failures outside the window, egregious issues - with a submission, compliance statement, and user fee (Form 8950). Audit CAP applies when the failure is discovered on examination and involves a negotiated sanction. Correction must restore the plan and participants to the position they would have occupied; earnings are included.
Correcting specific failures
Missed deferrals: a QNEC of 50% of the missed deferral (often 25% under the SCP safe harbor), plus 100% of the missed match. ADP/ACP failures are corrected with distributed excess contributions plus earnings, or through QNECs. Late Form 5500 filings go to the DOL Delinquent Filer Voluntary Compliance Program. Prohibited transactions are reported on Form 5330 and carry a 15% excise tax, rising to 100% if uncorrected.
Traps
SCP cannot fix a document failure, and a plan lacking a favorable determination letter can still use SCP if it has established practices and procedures. Recurring failures suggest a systemic problem that may not be insignificant. Corrections must use the plan's actual earnings rate, not an assumed one.