Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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What is the voluntary correction program (VCP)?

The so-called "voluntary correction program" (VCP) allows companies to correct plan errors by filing appropriate requests and proposing corrective action to the IRS. There is a schedule of fees for this program, depending on the violation and size of the plan. These fees are much less than what would apply if the IRS finds the problem. The VCP program generally is used for procedural problems relating to "qualification issues," such as Section 415 issues, improper distributions, failure to include people in the plan who should have been included, violation of the top heavy rules, failure to make timely distributions, etc., rather than plan flaws that could have harmed participants or resulted in improper tax benefits. The VCP program applies to the general qualification issues for ERISA plans (profit sharing, 401(k), ESOPs, etc.), but does not apply to special ESOP provisions, such as Section 1042 (the ESOP rollover), Section 133 (interest income exclusions for banks), Section 404(k) (dividend deductibility), etc. A closing agreement program (CAP) may be required depending on the magnitude of the problem, the preferences of the IRS district office, timing issues, and other variables that are not possible to catalogue easily.

In 2001, the IRS divided the VCP program into several components:

1. Self-correction of insignificant operational failures: If the problem is minor (failing to pay out an employee by a matter of days, for instance) and can be self-corrected, plan sponsors can simply fix the plan without notifying the IRS or paying a fee. Whether the failure is insignificant or not is a facts and circumstances matter.

2. Self-correction of significant operational failures: In this procedure, more significant problems can be fixed, again with payments or notification, if the problem is fixed by the last day of the second plan year after which the violation occurred.

3. Voluntary correction of operational, document, or eligibility or demographic failures: Under three separate programs (general procedures, operational failures, and common failures), companies can file with the IRS to fix failures, following a range of fees specified by regulation.

In the past, initial submissions could be made anonymously, but after December 31, 2002, this was no longer allowed.

Link to this FAQ Topic: Governance, Fiduciaries & Compliance