VCFP vs. self correction

[Guest CRM]

I work for a broker of 401(k) plans - we have a client with a late contribution from 2008 (about $7K) - I used the VCFP calculator to calculate the lost earnings ($150) and the client will be sending in the contribution and earnings to the trust. My question is this - is there a disadvantage to going through the VFCP program (and filing the application) versus just self-correcting (and not going through the VFCP)? This is the only late contribution and there are no other compliance issues with the plan. Can anyone else who has been thorugh the VFCP process let me know whether this causes more issues for a plan (like bringing about an audit)?

[Bird]

Maybe someone who knows this inside and out can straighten me out, but this is what I think I know:

technically, the VFCP calculator (based on federal underpayment rates) can only be used for VFCP filings. In other words, if you don't do a VFCP filing, you are supposed to calculate "the greater of" using those rates or the actual earnings the participant would have received under the plan investments. This is widely ignored, to say the least.

If you don't do a VFCP filing, and you properly report the late deferrals on the 5500 as you should, then you might get correspondence about it, asking if you did a VFCP filing or whatever. If you did, then you tell them you did, if not, you can do it then. (It's kind of a pain.)

I think most people are paying the excise tax and considering that to take care of it. If you get the correspondence then you say you paid a penalty and hope it goes away. I don't think that's entirely correct but I think that it is working (if your goal is to minimize grief).

[Guest Jennyb473]

We actually just had this exact thing happen. Client had late deposits in 2007, we indicated on Form 5500, Schedule I that a total of $77k was late and filed the Form 5330. Client paid excise tax and we used VFCP calculator to compute lost earnings which were deposited at trust.

Client received a "love letter" from DOL last week with VFCP application and instruction that it might not be a bad idea to apply. We called DOL - I spoke with investigator and was told the filing was not mandatory, but if you do get audited you don't have any coverage on the issue, etc. The fact that the letter was sent is a little bit of a red flag and could prompt an audit, but not necessarily. I told her the issue was resolved and no further late deposits have been made. She suggested putting that in writing, including documentation of how it was corrected, proof of payment of lost earnings, etc. She said they would keep letter and documentation in file for future reference. She indicated that if the plan was pulled for audit, the auditor may look at the notes and decide not to bother since red flag issue has already been resolved. Not a guarantee, but not too bad either.

THat is the route we have decided to take.