Article written by Nicole M. Bodoh / Thompson Reuters Checkpoint Journal of Taxation, November/December 2025, vol. 143, No. 6.
Introduction
Qualified retirement plans must comply with the complex rules of the Internal Revenue Code of 1986, as amended (“IRC” or the “Code”) and the regulations promulgated thereunder to maintain their tax-exempt status. Qualification allows for favorable tax treatment including employer tax deductions for amounts contributed to the plan, pre-tax deferrals of salary by participants and (with regard to some accounts) tax-free accumulation of earnings and the opportunity to roll amounts into another tax-deferred vehicle. However, to obtain these benefits qualified plans must satisfy a myriad of requirements under IRC§§401(a) and 403(a) and it is inevitable that sponsors of these plans, who are sometimes unfamiliar with retirement plan compliance requirements, make mistakes in the ordinary administration of their plans.
Fortunately, the IRS established the Employee Plans Compliance Resolution System (the “EPCRS”), which provides methods for correcting errors that could potentially disqualify a retirement plan. There are three programs available under EPCRS: (1) the self-correction program (the “SCP”), (2) the voluntary correction program (the “VCP), and (3) the audit closing agreement program (the “Audit CAP”).
This article will explain the meaning of plan disqualification, the key principles of Rev. Proc. 2021-30 ,and distinguish between failures eligible for self-correction and those that must be corrected through the filing of a VCP application (assuming the plan is not under audit). This article will also provide some examples of plan failures and correction methods available based upon the IRS’s guidance. This article will not address the Audit CAP program as that resolves failures raised during audit and is beyond the scope of voluntary correction.
Plan Disqualification-the Doomsday Scenario
When a plan is disqualified, the accounts become taxable to the participants. 1 All of the vested contributions are immediately taxable and all non-vested contributions will become taxable as they vest. For open tax years, the employer loses its deductions for non-vested contributions made to the disqualified plan, and distributions are not eligible for rollover. 2 If a disqualification of the plan reaches back to closed tax years, the IRS will not be able to collect the applicable taxes for those years. However, the disqualification of the plan continues until the disqualifying defect is corrected. 3 The IRS may require correction of defects as a condition to requalify the plan, even if the correction affects closed tax years. An employer must be willing to correct all errors, even those that occurred in closed years, to participate in the EPCRS (and the VCP). Plan disqualification leads not only to significant adverse tax consequences but also a lot of unhappy employees, and employers have potential exposure to fiduciary liability claims brought by plan participants.
Key Principles of Rev. Proc. 2021-30
Rev. Proc. 2021-30 is the latest update of the procedures for the IRS’s various resolution programs under the EPCRS, including the VCP. The key principles of the Rev. Proc. and its predecessors 4 are to encourage plan sponsors to establish administrative practices and procedures that ensure the plan is operated according to its terms, and that plan document requirements under the Code are being met. It is to encourage voluntary and timely correction of failures such as discrimination in favor of highly compensated employees, errors in plan operations or in the plan documents and the adoption of plans by employers who are not eligible to adopt them.
The correction can be completed for limited fees, ranging between $1,500 and $3,500, which is far less expensive and time consuming than plan disqualification and penalty assessments. Timely and efficient correction protects plan participants by providing them with their expected retirement benefits, including favorable tax treatment. It also reduces employer uncertainty regarding their potential tax liability and participants’ potential tax liability. One of the general, overarching principles of Rev. Proc. 2021-30 is that administration of EPCRS (including the VCP) should be as consistent and as uniform as possible. 5
Plans and Mistakes Eligible for Correction under ECPRS
The EPCRS (which includes the VCP) can be used to correct disqualifying defects in qualified retirement plans such as:
• Profit sharing plans;
• Defined benefit plans;
• 401(k) plans;
• 403(b) plans;
• Simplified Employee Pension plans (SEP IRAs);
• Savings Incentive Match Plan for Employees (SIMPLE) 401(k); and• SIMPLE IRA plans. 6
There are several types of benefit plans that are not eligible for correction through the VCP, and only plans that are not currently under audit by the IRS may be correct through the VCP. 7 The VCP does not correct mistakes with health and welfare plans, such as cafeteria plans. Nor does it correct mistakes with independent retirement accounts that are not part of a workplace retirement plan. Mistakes with top hat plans may not be corrected through the VCP, and the VCP will not correct mistakes in operating 457(b) plans although the IRS will accept submissions outside of EPCRS for mistakes in operating governmental 457(b) plans (but not 457(b) plans operated by tax-exempt entities that are top hat plans). 8 Also, the EPCRS system (of which the VCP is a component) may not correct issues involving fraud, prohibited transactions and other fiduciary-related problems. 9 Some of these may be corrected in a program operated by the Department of Labor called the Voluntary Fiduciary Compliance Program (the VFCP) which is distinct from the IRS’s Voluntary Correction Program. Also, the VCP cannot be used to correct delinquent or incomplete Form 5500s. Those must be submitted to the Department of Labor through yet another program known as the Delinquent Filer Voluntary Compliance Program (or DFVCP).
Self-Correction vs. Voluntary Correction Programs
Under the SCP, the employer fixes a problem without involving the IRS. The SCP is only available to sponsors of a plan that have established practices and procedures reasonably designed to promote compliance in form and operation of the plan with the Code. The availability for relief is generally limited to insignificant failures as well as operational failures and a small number of plan document failures that are corrected within three years after the plan year in which the failure occurred. The SCP is not available to correct operational failures or plan document failures that are egregious. 10 The SECURE Act 2.0 expanded the SCP to include “eligible inadvertent failures”. These are defined as inadvertent failures that occur despite established practices and procedures designed to promote compliance. Eligible inadvertent failures must be “promptly identified” and corrected which is generally within 120 days after the correction period ends and the Plan must not be under IRS examination or audit.
The VCP, unlike the SCP, requires an application to be filed with the IRS and payment of a user fee with the application. The VCP is available for all types of plan errors including significant and insignificant operational failures, plan document failures, demographic failures, and employer eligibility failures. It is available for insignificant, significant, or egregious failures, and egregious failures must be corrected through VCP. There are several correction methods identified in Rev. Proc. 2021-30 Appendices A and B that are considered “safe harbors” to correction. Appendix A sets forth certain Operational Failures and Correction Methods, while Appendix B provides examples of various correction methods.
Identifying Plan Failures
There are four basic categories of plan failures: operational, plan document, demographic and employer eligibility failures. Identifying the types of plan failure at issue is a critical first step in correcting a plan and determining whether the mistake is eligible for self-correction or whether a filing is required. Only operational failures and a limited number of plan document failures are eligible for self-correction under the SCP. Plan document failures beyond the three-year correction period, demographic failures and employer eligibility failures can be resolved only under the VCP. 11 It is not unusual to identify additional failures during a review of the plan documents and discussion with the plan sponsor. If a practitioner identifies a failure eligible for SCP and another failure eligible for correction only through the VCP, it is advisable to include all failures in the VCP application to obtain the IRS’s sign off on all corrections.
Operational Failures
An operational failure occurs when there is a failure to follow the plan documents. Operational failures are the most common type. Some common examples of these types of failures include:
(1) Failure to implement an employee election;
(2) Failure to pass Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP);
(3) ACP testing failure not corrected within the regulatory period;
(4) Failure to make top heavy contributions within regulatory period;
(5) Excess deferrals by employees;
(6) Exclusion of eligible employees from plan participation;
(7) Failure to include all eligible compensation when calculating employer contributions (match, profit sharing, etc.); and
(8) Exceeding maximum aggregate contribution limits under IRC §415(c) . 12
One of the most common failures is the exclusion of eligible participants from the plan. This failure is often caused by a discrepancy between the plan documents and the sponsor’s intended plan terms. Another common mistake is the failure to make top heavy contributions. A plan is considered top heavy if the value of the assets in a plan allocable to highly compensated employees exceeds 60%. 13 It is not unusual for a plan to be top heavy, but the plan sponsor is required to make a contribution to the accounts of non-highly compensated employees within the regulatory correction period of nine and one-half months after the close of the plan year. The “safe harbor” top heavy corrective contribution is 3% of compensation. If this contribution is not made timely, then the correction must be made through the VCP.
The same rule applies for failure to pass the actual deferral or average contribution nondiscrimination tests. In general, the average actual deferral by highly compensated employees cannot exceed the deferral rate of non-highly compensated employees by more than 2%. Similarly, the average actual (employer or after-tax) contributions to accounts of highly compensated employees may not exceed the average actual (employer or after-tax) contributions to accounts of non-highly compensated employees by more than 2%. Plans often fail these tests but if the failure to pass is corrected by making contributions to accounts of non-highly compensated employees within nine and one-half months after the close of the plan year, then there is no operational failure. It is only when these contributions are not made within the nine and one-half month regulatory period that an operational failure exists.
Assessing the Significance of an Operational Failure
Assessing the significance of an operational failure is a next step in determining whether a VCP application is advisable or if self-correction is available. Although some significant operational failures can be corrected through the SCP if discovered within three years after the close of the plan year in which the failure occurred, significant operational failures discovered after the three-year period must be corrected through the VCP.
Some of the factors in determining whether a failure is significant include:
(1) The percentage of plan assets and contributions involved in the failure;
(2) The number of years that the failure occurred;
(3) The number of participants relative to the total number of participants in the plan;
(4) Whether the correction was made within a reasonable time after discovery of the failure; and
(5) The reason for the failure (whether they were due to minor mistakes such as data errors, transposition of numbers, minor arithmetic errors or were they due to significant compliance issues such as the failure to adopt any procedures to monitor the plan’s compliance).
Plan Document Failures
A plan has a plan document failure when the document lacks a provision that is required under IRC §401(a) , either because it was initially drafted without the required provision or because the plan sponsor failed to amend the plan on a timely basis to reflect a law change. A plan document failure also occurs when no written plan document exists or when a provision in the plan document incorrectly states the law. If a plan document failure is detected after the three-year self-correction period, the failure can only be corrected under the VCP according to the safe harbor rules of Rev. Proc. 2021-30 .
Demographic Errors
A plan has a demographic failure when it has failed to satisfy the nondiscrimination testing requirements under IRC §401(a)(4) , the coverage requirements under IRC §410(b) or the minimum participation requirements of IRC §401(a)(26) . The regulatory correction period for these failures ends nine and one-half months after the close of the plan year. If the correction is not completed within this period, only the VCP can be used to make voluntary late correction of demographic failures. Self-correction after the close of the regulatory correction period pursuant to the SCP is not available (in other words, the three-year self-correction period does not apply to demographic errors). One should note that “discrimination” under these sections of the Code is referring to discrimination in favor of highly compensated employees as opposed to non-highly compensated employees. For the 2025 plan year, highly-compensated employees are those who earn at least $160,000 in salary or own more than 5% of the business. Plans that favor non-highly compensated employees are not considered discriminatory for purposes of testing. Discrimination based upon race, gender, sexual orientation or creed do not factor into the testing requirements that apply to qualified plans, although such discrimination is prohibited in that it would inherently constitute a failure to follow the terms of the plan documents.
Employer Eligibility Failures
Qualified cash or deferred arrangement under IRC § 401(k) have specific rules on who may establish them. Tax-exempt entities (except for state and local governments) are generally eligible. Indian tribal governments (and their subdivisions, agencies, instrumentalities) are eligible, while State or local government (and their political subdivisions, agency or instrumentalities) are ineligible to establish 401(k) plans. If an employer who is not eligible to sponsor a 401(k) plan, adopts a 401(k) plan, the plan has an “employer eligibility failure.” An employer eligibility failure can be corrected through the VCP, even though the employer was precluded from sponsoring a 401(k) plan. Self-correction is not available. This type of failure is less common and it is corrected by ceasing all contributions no later than the date the VCP application is filed. 14 Contributions already made do not lose their qualified plan status and the plan is treated in all other respects as a qualified plan and distributions are eligible for rollover and remain subject to the distribution restrictions that generally apply to 401(k) plans. 15
Example Corrections 16
The following are some examples of the safe harbor correction methods contained in Appendix A and B of Rev. Proc. 2021-30 that apply to the more common types of failures, namely, operational failures.
Example 1. Failure to provide the top heavy minimum contributions.
Correction method: Allocate the required minimum (3% safe harbor), plus earnings, to the non-highly compensated employees.
If a plan was top heavy plan in a given year and failed to make the required top heavy minimum contribution within nine and one-half months after the end of the plan year, then the plan sponsor would contribute the required minimum of either 3% of compensation of the non-highly compensated employees or a lower percentage if enough to make the plan not top heavy. It is important to remember that the plan sponsor must add to the top heavy minimum earnings accrued on those contributions since the date the contributions should have been made.
Example 2: Late correction of ADP/ACP Test
QNEC Correction Method: Make Qualified Non-Elective Contribution (QNEC) as a uniform percentage of compensation of non-highly compensated employees, plus earnings so that the plan passes the test.
One to One Correction Method: the plan distributes the excess amount to the highly compensated employees plus earnings (or forfeits, to the extent they are not vested) which caused the plan to fail the applicable test, and in exchange the employer makes a contribution in the form of a QNEC equal to the total amount of the corrective distributions, which are allocated to the non-highly compensated employees.
Example 3: Exclusion of Eligible Employees from Participation
Correction: make a QNEC equal to the missed deferral opportunity, the missed match, and the missed profit sharing, as applicable, plus earnings on the QNEC since the date of the missed opportunity or contribution. The QNEC for a missed deferral opportunity (on the part of excluded employees) is determined by multiplying the average actual deferral percentage (ADP) for the employee’s group (highly compensated employees or non-highly compensated employees) by 50%. 17 In some cases, there will be no deferrals on the part of non-highly compensated employees because they have always been excluded. In such cases, the ADP is deemed to be 3% of employee compensation, and so the corrective QNEC for the missed deferral would be 1.5%.
If the plan provides for matching contributions, then the Plan sponsor should make a QNEC to accounts of non-highly compensated employees (NHCEs) equal to the match on the missed deferral. If the plan provides for profit sharing contributions, then the plan sponsor should make a QNEC equal to the percentage of compensation that was actually paid as a profit-sharing contribution during the years of exclusion, plus earnings.
Example 4: Excess Deferrals by Employees above the Applicable Limits
Correction: Distribute the excess amounts to the employees, plus earnings.
One should note that the excess amounts that are distributed, plus earnings, must be reported both in the year of deferral and the year of the corrective distribution such that there will be double taxation imposed on the employees in those cases.
Example 5: Failure to Operate Plan According to Plan Documents
Correction: Adopt an amendment to the plan documents to conform its terms to the manner of actual operation. Amendments to plan documents are highly fact-specific. In general, it is advisable to proceed with corrective plan amendments that are prospective. However, if a retroactive amendment is required to align the plan documents with how the plan has actually been operated, the IRS must generally first approve the amendment through the VCP before it can be adopted retroactively. Also, amendments that are retroactive may not result in a decrease of a benefit, right or feature to participants. 18
Filing the Application Documents
VCP submissions must be filed on Form 8950, which is an electronic form available at www.pay.gov. Section 11.11 of Rev. Proc 2021-30 provides guidance on the order in which the documents required in the .pdf attachment should be presented in an electronic VCP submission. Compliance with this procedure will facilitate faster processing of the submission by the IRS. When submitting the Form 8950 online, one also uploads a .pdf file containing a penalty of perjury statement, Form 2848 power of attorney or tax information authorization on Form 8821, cover letter, Form 14568 Model VCP Compliance Statement with a narrative attachment, copies of the relevant plan document, copy of IRS opinion, advisory or determination letter and any other relevant documents (e.g., a copy of proposed retroactive amendment).
The Model Form 14568 compliance statement should accompany all VCP submissions. It should include a description of the failures, an explanation of how and why the failures arose, a description of the proposed method for correcting failures and supporting computations, a description of methods used to locate or notify former employees or beneficiaries affected by failures or corrections, and a description of the administrative procedures that have been or will be implemented to ensure that the failures do not recur. It is rare that only the form is needed to submit the Form 14568 compliance statement. A narrative attachment to the form will be necessary to describe the failures and the proposed corrections.
After submitting the application documents, the VCP applicant pays a user fee based upon the amount of assets in the plan on the last day of the plan year as follows: 19
• Assets $0 – $500,000 – User Fee $1,500
• Assets $500,000 – $10,000,000 – User Fee $3,000
• Assets Over $10,000,000 – User Fee $3,500
Even though the corrections set forth in the VCP application are merely “proposed” for approval by the IRS, it is generally advisable to make any corrective contributions that are warranted ahead of obtaining IRS approval. Important to remember is that corrective contributions must always include earnings on those contributions. Given that the current processing times are over a year and sometimes more than two years, if the plan sponsor has not made corrective contributions ahead of the IRS’s approval, the earnings on those amounts will continue to accrue until they are deposited, which may result in the correction being even more expensive to the plan sponsor than anticipated.
Signed Compliance Statement
The signed Compliance Statement from the IRS confirms the Service’s agreement not to disqualify the plan based on the reported and corrected errors. Note that because the compliance statement only protects the plan from disqualification due to the failures reported with the application, it is important to include all plan failures in the VCP filing. The Compliance Statement does not protect a plan from unreported errors. If a failure is not disclosed and later discovered under audit, it is fair game for the assessment of penalties and potential plan disqualification, even if the sponsor obtained a compliance statement with respect to other errors occurring with respect to the plan in the same year.
Conclusion
Correcting plan failures through the VCP affords relief to plan sponsors whose plans have experienced significant failures that are not eligible for self-correction. Although VCP applications are not required under the Code, regulations or applicable guidance, and the methods of correction under Rev. Proc. 2021-30 are considered “safe harbors” rather than mandatory measures, they are strongly recommended to plan sponsors whose plans are not the subject of an IRS examination where these failures have been detected. Corrections with IRS approval can be expensive and time consuming, and very often the accounting and legal fees associated with the VCP application far exceed the required user fee. Nonetheless, plan sponsors and their advisors find the peace of mind associated with a signed compliance statement and assurance that a plan will not be disqualified well worth the effort and expense.
1 IRC §402(b) ; Treas. Reg. 1.402(b)-1(b)(3) .
2 IRC §404(a)(5) ; Fazi v. Commissioner , 102 T.C. 695 (1994).
3 Martin Fireproofing Profit Sharing Plan v. Commissioner , 92 T.C. 1173 (1989).
4 Rev. Proc. 2019-19 , Rev. Proc 2018-52, Rev. Proc. 2016-51 , and Rev. Proc. 2003-12 among several others.
5 Rev. Proc. 2021-30 1.02.
6 Rev. Proc. Section 4.01(2).
7 Rev. Proc. Section 4.02.
8 https://www.irs.gov/retirement-plans/457b-plan-submissions-to-voluntary-compliance
9 Rev. Proc. 2021-30 Section 6.09(1).
10 Rev. Proc. 2021-30 Section 4.10(2).
11 Rev. Proc. 2021-30 Section 4.02.
12 Rev. Proc. 2021-30 , Appendix A
13 IRC § 416(g)(1) .
14 See Section 6.03 of Rev. Proc. 2021-30 .
15 See Section 6.03(4) of Rev. Proc. 2021-30 .16 Rev. Proc. 2021-30 , Appendix A.
17 Rev. Proc. 2021-30 , Appendix A.05(2).
18 Rev. Proc. 2021-30, Section 4.05(2) ((a)(i).
19 Rev. Proc. 2022-4 .
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