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What Are IRS Correction Programs for SIMPLE IRA Contribution Errors?

 When you make an error in a SIMPLE IRA plan, such as contributing too much, too little, excluding an eligible employee, or miscalculating employer contributions. The IRS gives you three structured methods to fix the mistake while keeping your plan compliant. These are called Correction Programs, and they fall under the IRS’s Employee Plans Compliance Resolution System (EPCRS).

This guide explains each correction method, what types of SIMPLE IRA errors it can fix, specific requirements, and examples so you know exactly how each program works.

Correction Programs Available

The IRS provides three official correction paths:

1. Self-Correction Program (SCP)

2. Voluntary Correction Program (VCP)

3. Audit Closing Agreement Program (Audit CAP)

Each program serves a different purpose depending on:

• how serious the error is

• whether the plan normally follows IRS rules

• whether the IRS is already auditing the plan

• whether excess contributions will remain in the employee’s IRA

1. Self-Correction Program (SCP)

SCP allows you (the employer) to fix certain SIMPLE IRA mistakes on your own without IRS approval and without paying IRS fees.

When you can use SCP

You can use SCP only if:

• Your plan normally follows IRS rules (you have established processes and procedures in place).

• The mistake is a failure to follow the plan’s written terms.

• The failure is either insignificant, or significant but corrected within the required correction period.

• No excess employer contributions remain permanently in an employee’s SIMPLE IRA.

If excess amounts must remain in the IRA, SCP cannot be used. You must move to VCP.
 

Types of SIMPLE IRA errors you can fix under SCP

• Wrong employer contribution amount
  Example: Employer match calculated using the wrong compensation amount.

• Miscalculation of elective deferral limits

• Using incorrect compensation to compute contributions

• Failing to follow the plan’s formula (2% nonelective or 3% match)

• Short-term exclusion of eligible employees

• Under-contributing for one or more employees
   

Types of errors you CANNOT fix under SCP

• Any error where excess amounts must remain in the employee’s IRA.

• Errors that show systemic or repeated failure, meaning your business lacks procedures.

Procedure

1. Identify the mistake and determine when it happened.

2. Verify that standard administrative procedures exist.

3. Document the error: dates, amounts, employees affected.

4. Apply the IRS-approved correction method (restore missed contributions, correct match, deposit lost earnings, etc.).

5. Keep written records of the correction for audit purposes.

 

2. Voluntary Correction Program (VCP)

VCP lets the employer voluntarily report the mistake to the IRS, submit the correction plan, and receive IRS approval before the correction is finalized.

You use VCP when:

• SCP does not apply, or

• You want written assurance from the IRS, or

• You need IRS approval to leave excess money in employee IRAs.

When you MUST use VCP

• If you want to leave excess employer contributions in employees’ SIMPLE IRAs, the IRS requires VCP.

• If the failure is significant and not corrected within the SCP time limit.

• If you do not have adequate compliance procedures (meaning you cannot qualify for SCP).

• If you want a formal IRS compliance statement.
   

Types of SIMPLE IRA errors you can fix under VCP

Everything allowed under SCP, plus:

• Excess employer contributions that remain in the IRA

• Large or multi-year under- or over-contribution errors

• Repeated or systemic administrative failures

• Long-term exclusion of eligible employees

Procedure

1. Prepare a VCP submission using Form 14568 (Model VCP Compliance Statement).

2. For SIMPLE IRA issues, attach Form 14568-D (Schedule 4 – SIMPLE Plans).

3. Submit the application through Pay.gov.

4. Pay the VCP user fee (fee is based on the total value of all IRAs in the SIMPLE IRA plan).

5. The IRS reviews your submission and issues a written compliance statement.

6. Complete the corrective action exactly as approved.
   
   Learn more in detailed about the step-by-step procedure to Apply VCP
    

Additional cost requirement

If excess contributions stay in participant IRAs, you must pay an additional amount to the IRS equal to at least 10% of the excess contributions.

3. Audit Closing Agreement Program (Audit CAP)

Audit CAP applies only when the IRS finds the error during an audit.
This is the penalty route.

You:

• Cannot choose Audit CAP voluntarily.

• Must negotiate with the IRS for a sanction.

• Must correct the plan according to IRS instructions.
   

What you can fix under Audit CAP

Any error, including:

• Over-contributions

• Under-contributions

• Eligibility errors

• Wrong employer match for multiple years

• Failure to follow the plan’s formula

• Excess money remaining in SIMPLE IRAs

Procedure

1. The IRS identifies the mistake during an audit.

2. IRS and employer negotiate a closing agreement.

3. Agreement outlines:

   • What correction method must be used

   • How contributions or excesses will be fixed

   • The sanction (penalty) owed

4. The employer pays the negotiated sanction (must be “reasonable”).

5. The employer performs the corrective action.
    

Sanction Guidelines

Sanction is based on:

• Nature and severity of the error

• Duration of the error

• Number of employees affected

• Whether employer voluntarily tried to fix it earlier

• Whether employer had compliance procedures in place

Sanctions under Audit CAP are always higher than VCP fees.

Example

The employer miscalculated contributions for four years and never corrected it.
→ IRS finds the problem during an audit.
→ Audit CAP applies. Large sanction likely.