Depositing Corrections Before or After VCP Submission

[IhrtERISA]

Greetings,

Is it recommended to refrain from depositing calculated corrective contributions until after a VCP submission has been reviewed and blessed by the assigned reviewer?

On the one hand, if the IRS reviewer does not agree with the amount of the corrections, and the corrective contributions have already hit affected participants' accounts, it would make matters more difficult.

On the other hand, if the deposits are not made until after confirmation by the IRS reviewer (which could be months later), the amount of lost earnings would be for a longer period and at a greater expense to the plan sponsor.

Assuming deposits are not made until after the IRS gives its blessing on the proposed corrections, how far out is it recommended that the lost earnings be calculated to (i.e., the end period for the interest calculation)?

Thank you!

[ETA Consulting LLC]

It would depend on how confident you are that the IRS will accept your calculations. Or, should they not, would their suggestions create the need to fund additional amounts to each affected participant.

Good Luck!

[ESOP Guy]

The VCPs I have gone through one of the earliest questions we got was have you made your proposed corrections? It was clear they were expecting a "yes" in my mind. I guess I could have been misreading it. In fact what is the real risk? In most cases if the IRS doesn't like it they want more put in not less. I don't think I have ever seen the IRS come back and say you are proposing too much of a correction. So really unless they say we simply reject the very idea of your correction putting it now makes sense to me.

I will admit I am a TPA not a lawyer and I am not an expert on VCPs. I am merely telling you what I have been a part of in the past.

[EBECatty]

I recommend waiting until at least verbal approval from the VCP reviewer before calculating and depositing corrective contributions. Unless the amount at issue is astronomical, the additional earnings generally are fairly small relative to the overall costs. The VCP process also seems to be going faster now than before, so the cost of waiting is decreasing.

I've had one case where a VCP reviewer wanted us to correct in a less-expensive way. The procedures for the correction are clear in EPCRS and the regulations, but the reviewer initially wanted us to correct using another method that would result in smaller contributions but in my mind was incorrect. The difference between correction methods was immaterial (a few hundred dollars in a correction totaling tens of thousands), but I advised my client to use (and had to convince the reviewer to accept) the more expensive correction.

Even if the reviewer wants more money put in the plan, you still need to do another round of calculations and earnings, make deposits, draft and send additional participant communications, field phone calls from confused employees who thought you already corrected the problem, etc.

There are hard costs involved in re-calculating everything as well, like revising the VCP narrative to reflect the different contribution amount, earnings deposit date, etc. As a lawyer, my response to the client almost always includes something along the lines of: "If the recalculation process adds an hour or two at my billing rate, you're probably losing money."