What Is the Maximum Payment Amount in EPCRS?

The Maximum Payment Amount is an estimate of the federal tax the IRS could collect if a qualified retirement plan were disqualified for tax years still open under the applicable limitation rules. It is not the amount a 401(k) sponsor automatically pays under Audit CAP.^[1]

That distinction is the article.

A plan can have:

• $60,000 of participant correction
• $1.8 million of estimated disqualification tax exposure
• a negotiated Audit CAP payment that is neither number.

Those amounts measure different things.

MPA Is a Tax-Exposure Estimate

For a qualified plan, EPCRS defines the Maximum Payment Amount, or MPA, as a monetary amount approximately equal to the tax the IRS could collect upon plan disqualification.^[1]

The calculation is built from tax years still open under the applicable limitation rules.

It aggregates tax exposure that can arise across several taxpayers:

• the plan trust
• the employer
• participants.

That is why MPA can be much larger than the dollar size of the original plan error.

MPA Does Not Set the Treasury Payment

Revenue Procedure 2021-30 describes the Audit CAP payment as a:

negotiated amount

based on facts and circumstances.^[1]

The IRS also says the amount should:

• not be excessive
• bear a reasonable relationship to the nature, extent and severity of the failure
• generally not be less than the applicable VCP user fee.^[1][2]

The tax-exposure estimate is one factor in that negotiation.

It does not operate as a formula that produces the final Treasury amount.

Four Numbers That Should Never Be Mixed Together

Treating these as interchangeable creates bad analysis.

Example: Four Different Numbers

Assume:

• plan assets: $22 million
• participant correction: $85,000
• calculated MPA: $2.4 million
• negotiated Audit CAP payment: $45,000.

Nothing about that fact pattern is inherently inconsistent.

The $85,000 repairs participant economics.

The $2.4 million estimates theoretical disqualification tax exposure.

The $45,000 resolves the IRS qualification case.

Plan assets help describe the plan but are not themselves the MPA.

The Qualified-Plan Definition Has Five Components

For a qualified plan, the current EPCRS procedure lists five categories that can enter MPA for years not closed by the applicable statute of limitations:^[1]

1. tax on the plan trust
2. additional employer income tax caused by loss of contribution deductions
3. additional participant income tax caused by income inclusion
4. participant-loan tax when a loan fails Section 72(p)(2)
5. other tax arising from the qualification failure that would apply but for EPCRS correction.

Each component needs its own analysis.

Component 1: Tax on the Plan Trust

A qualified plan trust generally receives federal income-tax exemption under Section 501(a).

Disqualification can remove that protection.

The IRS explains that a disqualified retirement-plan trust becomes a:

nonexempt trust

and must generally file Form 1041 and pay tax on trust earnings.^[3]

MPA therefore includes the trust-level tax for still-open tax years, along with applicable interest or penalties included in the EPCRS definition.^[1]

Why Trust Earnings Matter

Suppose a large 401(k) trust has:

• $150 million average assets
• substantial dividends
• interest
• capital gains.

The underlying qualification failure might affect only:

six participants.

Yet theoretical disqualification puts the trust's tax-exempt status into play.

That can make trust-level exposure large relative to the participant correction.

This is one reason:

small correction ≠ small MPA.

The Trust Is a Separate Taxpayer

The plan trust is not merely an accounting bucket inside the employer.

It is a separate legal entity for federal tax purposes.

When qualified:

trust tax exemption generally applies.

When disqualified:

the trust can owe income tax on its earnings.^[3]

That trust-level exposure is distinct from employer and participant tax consequences.

Component 2: Lost Employer Deductions

Qualified-plan contributions receive special deduction treatment under the Code.

Disqualification changes the rules.

The IRS explains that contributions to a nonexempt employees' trust are generally not deductible until the contribution is includible in the employee's gross income, and the deduction can be limited by the amount included.^[3]

The MPA therefore captures additional employer income tax resulting from lost or delayed deductions for open years.^[1]

Deduction Exposure Is About Tax, Not Contribution Principal

Assume employer contributed:

$4 million

during an open year.

That does not mean:

$4 million enters MPA.

The relevant amount is the additional federal income tax resulting from the changed deduction treatment.

MPA is a tax measure.

Not a gross-contribution measure.

Example: Deduction Timing Changes

Employer contributes:

$10,000

for an employee.

Under qualified-plan treatment, the employer claims the applicable deduction.

After disqualification, assume only:

$4,000

is includible in the employee's gross income during that year under the applicable nonexempt-trust rules.

The employer's deduction can be limited or delayed accordingly.^[3]

The MPA component is based on the resulting additional employer tax.

Not the full $10,000 contribution.

Fiscal-Year Employers Can Be More Complicated

The IRS notes that when the employer and employee have different taxable years, deduction timing can shift into the employer's taxable year ending after the participant's inclusion year.^[3]

That can create:

• timing differences
• amended-return issues
• interest calculations.

A sponsor cannot accurately estimate this component from a plan contribution report alone.

Tax-return data matters.

Component 3: Participant Income Inclusion

Loss of qualified status can create participant-level taxable income.

The IRS states that, under the general rule, an employee can be required to include employer contributions in gross income during disqualified years to the extent the employee is vested in those contributions.^[3]

The MPA definition therefore includes the additional participant income tax for tax periods that remain open.^[1]

This component can be substantial in a large plan.

Vesting Can Change the Amount

Assume employer contribution for Participant A:

$20,000

Participant is:

25% vested.

Under the general disqualification rule described by the IRS, income inclusion can be tied to the vested portion.^[3]

Illustrative vested amount:

$20,000 × 25% = $5,000

The participant-level MPA calculation looks to resulting tax.

Not simply the $20,000 contribution.

Fully Vested Participants Can Create More Exposure

A participant with:

• immediate vesting
• large employer contributions
• years within the relevant limitation period

can have materially more current income exposure than an otherwise similar participant with low vesting.

That makes participant census detail important.

A plan-level total is not enough.

Coverage and Nondiscrimination Failures Can Change the General Rule

The IRS explains that participant income treatment can become more severe for highly compensated employees when plan disqualification involves:

• Section 401(a)(26)
• Section 410(b).

It also states that Section 401(a)(4) nondiscrimination failure is treated as a coverage failure for this purpose.^[3]

Under specified circumstances, an HCE can have all previously untaxed vested account amounts included rather than only current-year employer contributions.^[3]

This can materially increase theoretical tax exposure.

Example: Coverage Failure

Assume an HCE has:

• vested account balance: $600,000
• current-year employer contribution: $25,000.

A coverage-related disqualification rule can produce a participant tax result that reaches much further than the $25,000 annual contribution, depending on the facts.^[3]

That is why a demographic failure can create MPA consequences out of proportion to the immediate corrective allocation.

INV-113 covers demographic failure itself.

NHCE Treatment Can Differ

The IRS disqualification summary distinguishes HCE and NHCE treatment in specified coverage situations.^[3]

That means an MPA population model may need to separate:

• HCEs
• NHCEs
• vested amounts
• failure type
• unclosed tax years.

Applying one percentage across every participant is not a defensible calculation.

Rollovers Can Be Pulled Back Into the Tax Analysis

The MPA definition expressly includes participant income tax on distributions that were rolled over to:

• other qualified trusts
• eligible retirement plans.^[1]

Why?

A distribution from a disqualified plan generally is not an eligible rollover distribution.^[3]

The tax consequence can therefore follow money that has already left the original plan.

Example: Prior Rollover

Participant terminated.

Distribution:

$250,000

Participant rolled it into an IRA.

Later the source 401(k) is treated as disqualified for the relevant period.

The IRS states that distributions from a disqualified plan are generally not eligible rollover distributions.^[3]

The theoretical participant tax exposure can therefore extend beyond the current balance remaining in the original 401(k).

That is another reason recordkeeper assets alone do not define MPA.

Component 4: Noncompliant Participant Loans

The qualified-plan definition separately includes tax the IRS could collect when a participant loan fails:

Section 72(p)(2).^[1]

A compliant participant loan can avoid immediate income inclusion under the applicable rules.

A noncompliant loan can lose that treatment.

The MPA therefore adds the tax exposure attributable to the loan not being excluded from gross income.

Loan Exposure Is Not Just Outstanding Principal

Assume a participant loan:

• original amount: $40,000
• current balance: $22,000
• failed Section 72(p)(2) when issued.

The tax analysis is not automatically:

$22,000 × marginal tax rate.

The applicable deemed-distribution or income-inclusion rules depend on:

• failure date
• loan terms
• repayment history
• years within the relevant limitation period
• participant tax facts.

The EPCRS MPA concept measures tax the IRS could collect.

That requires tax reconstruction.

Component 5: Other Failure-Related Tax

The fifth category is deliberately broad.

EPCRS includes:

other tax resulting from the qualification failure that would apply but for correction under EPCRS.^[1]

This prevents the calculation from missing a tax consequence simply because it is not one of the first four named buckets.

The sponsor still needs a legal basis for including it.

"Other tax" is not a plug number.

Closed Years Drop Out of the Tax Model

The definition repeatedly limits the aggregation to:

unclosed tax years.^[1]

That phrase prevents a common error.

A plan failure might have existed for:

10 years.

The MPA does not automatically sum every theoretical tax consequence from all 10 years.

The relevant statutes of limitation must be analyzed taxpayer by taxpayer.

One Failure Can Involve Different Open Years for Different Taxpayers

Remember who may be involved:

• trust
• employer
• Participant A
• Participant B
• Participant C.

Their taxable years and filing histories can differ.

A year that is closed for one taxpayer may not be closed for another.

The phrase:

"the failure began in 2020"

does not answer:

"which MPA years are open?"

Example: Old Failure, Narrower MPA Window

Operational failure begins:

2018

IRS examination occurs:

2026

Assume several earlier tax years are closed under the applicable limitation periods.

Participant correction under EPCRS may still need to address all affected years.

MPA, however, is defined around federal tax exposure for years not closed by the applicable statute of limitations.^[1]

That means:

correction period

and:

MPA tax window

can differ.

Correction Cost and MPA Use Different Time Horizons

This distinction is easy to miss.

Participant correction

Can require restoring all affected years under EPCRS correction principles.

MPA

Aggregates specified federal tax exposure for still-open tax years.

A sponsor can therefore owe corrective benefits relating to years that do not contribute to the MPA calculation.

These are separate legal models.

Plan Assets Are a Different Number

Suppose a 401(k) has:

$500 million

in assets.

MPA is not:

• $500 million
• 10% of $500 million
• some fixed fraction of assets.

Plan assets can influence the tax exposure indirectly because a larger trust can generate larger earnings.

But the MPA definition is based on:

tax that could be collected upon disqualification.

VCP Fees Come From a Different Rule

VCP fees are currently determined through an asset-based schedule.

MPA is not.

A plan can have:

• $20 million assets
• $4,000 regular 2026 VCP user fee
• $3 million MPA.

Those numbers are generated by different rules.

INV-116 covers VCP fees.

Participant Loss Measures Something Else

A missed-match correction can be:

$40,000 plus earnings.

MPA asks a different question:

What federal tax could arise if qualified-plan treatment disappeared?

That may produce a much larger or smaller number.

The participant correction measures promised benefits.

MPA measures tax qualification risk.

A Large MPA Does Not Prove a Severe Failure

Imagine:

• large mature 401(k)
• high trust earnings
• many participants
• significant employer contributions
• one isolated configuration defect affecting three employees.

MPA can be large because disqualification consequences apply broadly.

The underlying failure can still be narrow.

That is why Section 14 requires the IRS to consider other factors beyond MPA.^[1][2]

A Small MPA Does Not Prove the Failure Is Minor

Reverse the example.

Assume:

• smaller plan
• modest trust earnings
• fewer open tax years
• low theoretical disqualification tax.

The actual failure:

• excluded 40 NHCEs
• persisted six years
• sponsor ignored repeated warnings
• no pre-audit correction.

The MPA may be modest.

The sanction posture can still be poor because:

• NHCE impact
• duration
• controls
• cause
• pre-examination conduct

also matter.^[1][2]

The IRS Weighs More Than the Tax-Exposure Number

The current sanction analysis includes facts such as:^[1][2]

• preventive controls
• detection efforts
• correction completed before examination
• number and type of affected employees
• number of adversely affected NHCEs
• demographic failure
• employer eligibility failure
• duration
• cause
• MPA.

The IRS is not supposed to negotiate from MPA alone.

Why Old Percentage-of-MPA Articles Can Be Misleading

Older EPCRS procedures described Audit CAP payments as a negotiated:

percentage of Maximum Payment Amount.

Revenue Procedure 2021-30 changed the operative formulation.

The current procedure describes:

a negotiated amount determined from facts and circumstances.^[1]

MPA remains an express factor.

It is no longer framed as the sole mathematical base for a mandatory percentage calculation.

That distinction should be preserved in any current 2026 analysis.

IRS Examiners Still Calculate MPA

The Internal Revenue Manual instructs Employee Plans examiners handling an Audit CAP case to:

• determine MPA
• prepare an Audit CAP MPA worksheet
• send the worksheet and workpapers through the examination process.^[4]

So MPA remains operationally important inside the IRS.

The change in sanction language did not make the calculation irrelevant.

MPA Shapes the Government's Alternative

A negotiation makes more sense when you understand each side's alternative.

If the parties cannot resolve the qualification failure under Audit CAP:

the plan can face disqualification.^[1]

MPA approximates the tax consequences available to the IRS if that happens.

That gives the number negotiating relevance.

It is a measure of the tax exposure sitting behind the settlement.

Example: Large MPA, Narrow Error

Assume:

• plan assets: $180 million
• correction principal: $22,000
• four affected participants
• failure lasted one year
• robust controls
• error caused by one data-conversion field
• full correction completed before examination
• MPA: $4 million.

The $4 million matters.

But Section 14 also tells the IRS to consider:

• isolated scope
• correction progress
• controls
• cause
• employee impact.^[1]

That is why:

$4 million MPA → $400,000 sanction

is not a valid automatic conclusion.

Example: Moderate MPA, Bad Facts

Assume:

• MPA: $500,000
• 90 NHCEs excluded
• five-year duration
• no compliance review
• vendor raised issue twice
• sponsor did not correct until examination.

The theoretical disqualification exposure is lower.

The conduct and participant impact are worse.

Audit CAP is designed to let those facts influence the negotiated amount.

Example: Trust-Tax Component

Assume the disqualified trust has open-year taxable investment income producing estimated federal tax of:

$180,000

including applicable interest/penalty amounts used in the EPCRS calculation.

Trust-tax MPA component:

$180,000

That is only the trust bucket.

The sponsor must still calculate:

• employer tax
• participant tax
• loans
• other applicable tax.

Example: Employer-Deduction Component

Open-year employer tax analysis determines that loss or delay of qualified-plan deductions produces:

$90,000

of additional employer income tax plus applicable amounts included under the EPCRS definition.

Employer MPA component:

$90,000

This amount is not the total contribution deducted.

It is the tax effect.

Example: Participant Component

Participant tax reconstruction across open years produces:

• Participant group A: $210,000
• Participant group B: $80,000
• rollover-related participant tax: $35,000.

Participant MPA component:

$325,000

Again, those amounts represent estimated federal tax.

Not account balances.

Example: Loan and Other-Tax Components

Noncompliant participant loans generate estimated tax:

$25,000

Other failure-related tax:

$10,000

Total illustrative MPA:

• trust: $180,000
• employer: $90,000
• participants: $325,000
• loans: $25,000
• other: $10,000

MPA = $630,000

That $630,000 still is not automatically the negotiated Audit CAP payment.

The MPA Calculation Is Usually a Team Exercise

A TPA may be excellent at:

• eligibility
• contribution correction
• nondiscrimination testing
• earnings.

MPA requires additional tax work.

Likely contributors include:

• benefits counsel
• tax counsel
• CPA
• payroll
• TPA
• recordkeeper.

Why?

Because the inputs can include:

• trust taxable income
• employer tax returns
• participant vesting
• individual income inclusion
• historical rollovers
• participant loan tax
• statutes of limitation.

That is broader than ordinary plan administration.

The Recordkeeper Cannot Produce MPA by Itself

Recordkeeper data is useful for:

• balances
• contributions
• vesting records
• distributions
• loans.

It generally does not contain:

• employer taxable income
• deduction effect
• trust Form 1041 tax analysis
• participant marginal tax consequences
• limitation-period analysis
• tax on rolled-out distributions.

A recordkeeper report can supply inputs.

It is not the calculation.

Participant Tax Reconstruction Is Often the Hardest Part

For a large 401(k), participant-level analysis can require:

• historical compensation
• employer contributions
• vesting
• HCE status
• distribution history
• rollover history
• open-year status.

The tax result can vary across participants.

A shortcut such as:

total employer contributions × 30%

can be economically tempting.

It is not what the EPCRS definition says.

Failure Type Matters

The same account balance can create different disqualification tax consequences depending on the reason qualification was lost.

The IRS's own disqualification guidance distinguishes:

• ordinary disqualification treatment
• coverage/participation-related treatment for HCEs
• NHCE treatment in specified cases.^[3]

That means the MPA analyst must understand the qualification failure.

Tax cannot be modeled independently from benefits law.

Rollovers Create Historical Data Problems

A participant may have:

• left the company
• rolled the account to an IRA
• later rolled that IRA into another employer plan.

If the original distribution came from a plan disqualified for the relevant period, rollover eligibility can become part of the theoretical tax consequence.^[1][3]

That creates a data problem years after the money left.

Distribution and rollover records belong in the MPA file.

Open-Year Analysis Should Be Explicit

A useful MPA workbook should have a separate tab or schedule showing:

Do not bury the limitations analysis inside a final total.

It determines what enters the calculation.

Correction Can Still Cover Closed Years

A year excluded from MPA is not automatically excluded from EPCRS correction.

Suppose a participant was shorted employer contributions in:

2019

and that participant's relevant tax year is closed for MPA purposes.

The plan can still need to restore:

• principal
• earnings

for 2019 under the correction rules.

Tax exposure and participant entitlement are different.

MPA Should Be Reconciled to the Failure Theory

Before accepting an MPA total, ask:

What event causes trust tax?

Plan disqualification.

What event changes employer deductions?

Loss of qualified-plan deduction treatment.

What amount becomes taxable to participants?

Depends on applicable disqualification rules, vesting and failure type.

Which loans fail Section 72(p)(2)?

Identify them.

What other tax belongs in the residual category?

State the legal reason.

Every component should connect back to a tax rule.

Do Not Inflate MPA to Create Negotiating Theater

A sponsor gains nothing by producing an unrealistically high MPA just to show that a proposed sanction is a small percentage.

The IRS has its own examination process and worksheet.^[4]

An aggressive MPA can damage credibility.

A defensible calculation should be:

• complete
• technically supportable
• transparent
• reproducible.

Do Not Understate It Either

An artificially low MPA can be equally damaging.

Missing:

• trust tax
• historical rollovers
• HCE income consequences
• noncompliant loans
• open participant years

can make the sponsor's entire sanction analysis look unreliable.

The right objective is not:

lowest number.

It is:

correct tax-exposure model.

Keep the Tax Model Separate From the Negotiation Memo

One workpaper should calculate MPA.

A different memorandum should organize the Section 14 sanction factors.

Why separate them?

Because:

MPA = disqualification tax model

while:

Audit CAP payment = negotiated resolution.

Combining them encourages the outdated assumption that one fixed percentage converts the first into the second.

The Sanction Memo Should Explain Why MPA Is Not the Whole Case

A strong Audit CAP presentation can show:

• MPA calculation
• narrow affected population
• strong controls
• short duration
• early sponsor detection
• full pre-examination correction
• minimal NHCE harm
• credible root cause
• corrected procedures.

Those facts explain why theoretical disqualification exposure should not be mistaken for failure severity.

INV-117 covers the sanction analysis.

Frequently Asked Questions

What does MPA stand for in EPCRS?

Maximum Payment Amount.

What is the Maximum Payment Amount?

For a qualified plan, it is an amount approximately equal to the federal tax the IRS could collect upon plan disqualification for tax periods that remain open.^[1]

Is MPA the Audit CAP payment?

No.

No. The final Treasury amount is negotiated from the full facts and circumstances, with MPA serving as one input.^[1][2]

Is MPA the amount needed to correct participants?

No.

Participant correction restores benefits and rights. MPA estimates tax exposure from disqualification.

Does MPA equal plan assets?

No.

What taxes can go into a qualified-plan MPA?

The five categories are:

• trust tax
• additional employer tax from lost deductions
• additional participant income tax
• tax from noncompliant Section 72(p)(2) loans
• other tax resulting from the qualification failure that would apply but for EPCRS correction.^[1]

Why does the trust owe tax after disqualification?

A disqualified qualified-plan trust can lose its tax-exempt status and become taxable on trust earnings.^[3]

Can employer deductions change?

Yes.

The IRS explains that deductions for contributions to a nonexempt employees' trust follow different timing and amount rules.^[3]

Can participants owe tax?

Yes.

Disqualification can accelerate or create participant income inclusion depending on vesting and the failure type.^[3]

What happens to rollovers from a disqualified plan?

IRS guidance states that distributions from a disqualified plan generally are not eligible rollover distributions.^[3]

Are participant loans included?

A loan failing Section 72(p)(2) can create a separate MPA tax component.^[1]

Are closed tax years included?

The qualified-plan MPA definition is limited to years within the relevant limitation period.^[1]

Can correction still cover a closed year?

Yes.

EPCRS participant correction obligations and the MPA tax window are separate concepts.

Does a large MPA mean the Audit CAP payment will be large?

No. Controls, correction progress, employee impact, duration, cause and failure type also enter the analysis.^[1][2]

Who calculates MPA during an IRS audit?

IRS examination procedures instruct the examiner to determine MPA and use an Audit CAP MPA worksheet.^[4]

The ROIStreet MPA Calculation Sequence

Define the qualification failure → identify theoretical disqualification period → determine unclosed tax years separately for the trust, employer and relevant participants → calculate trust tax exposure → calculate employer deduction-related tax exposure → reconstruct participant income inclusion → identify rollover-related tax consequences → calculate Section 72(p)(2) loan tax → identify any other failure-related federal tax → aggregate only supportable open-year amounts → reconcile the total to source tax data → keep participant correction cost separate → use MPA as one factor in the Audit CAP payment analysis

The shortcut to avoid is:

"MPA is what we owe the IRS."

It is not.

MPA is the government's estimate of what plan disqualification could cost in federal tax across open years. Audit CAP exists precisely because the negotiated resolution can be far more targeted than imposing those full disqualification consequences.

Sources & References

1. Internal Revenue Service: Revenue Procedure 2021-30 — Employee Plans Compliance Resolution System — https://www.irs.gov/pub/irs-drop/rp-21-30.pdf
2. Internal Revenue Service: Audit Closing Agreement Program — General Description — https://www.irs.gov/retirement-plans/audit-closing-agreement-program-audit-cap-general-description
3. Internal Revenue Service: Tax Consequences of Plan Disqualification — https://www.irs.gov/retirement-plans/tax-consequences-of-plan-disqualification
4. Internal Revenue Service: IRM 4.70.14 — Resolving the Examination — https://www.irs.gov/irm/part4/irm_04-070-014r
5. Internal Revenue Service: EP Examination Process Guide — https://www.irs.gov/retirement-plans/ep-examination-process-guide
6. Internal Revenue Service: Revenue Ruling 2007-48 — https://www.irs.gov/irb/2007-30_IRB

Educational Disclaimer

ROIStreet publishes educational content about retirement-plan qualification, EPCRS and federal tax consequences. This article is not legal, tax, actuarial, fiduciary or plan-administration advice. Maximum Payment Amount calculations depend on the specific qualification failure, years not closed by the applicable statute of limitations, trust income, employer deduction history, participant vesting and tax treatment, distributions, rollovers, participant loans and current IRS guidance.

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