The Internal Revenue Service (“IRS”) has described its recent changes to its Voluntary Correction Program (“VCP”) user fees as “simplification.” This simplification is achieved by significantly changing the way user fees are determined and by eliminating alternative and reduced fees that were previously available. At first blush, this simplification appears to result in a general reduction in user fees, however, in certain circumstances, the changes will actually result in significantly higher fees. If you are the person responsible for issuing or requesting checks for your plan’s VCP application(s), it is important to note the differences from the past fee structure so that you will know what your plan is in for (good or bad) the next time a VCP application is necessary.
In case you are not familiar with the VCP, the IRS created the program under its Employee Plans Compliance Resolution System, to allow tax-favored retirement plans not currently under examination to correct certain failures that would otherwise result in the loss of tax-favored status. If a plan sponsor elects to submit an application under the program, the fee that must be paid with each application is called a “user fee.” This user fee has always been subject to change, but never before has the user fee structure undergone such an extreme makeover from one year to another.
On the surface, the biggest change to the VCP user fee structure is that for applications submitted prior to January 2, 2018, the user fee was based on the number of plan participants, and for applications submitted on and after January 2, 2018, the user fee is based on the plan’s assets. The current user fee structure is as follows:
|Plan Assets||User Fee|
|$501,000 - $10,000,000||$3,000|
|$10,000,001 or more||$3,500|
Previously, the applicable user fee ranged from a low of $500 for plans with 20 or fewer participants to a high of $15,000 for plans with more than 10,000 participants. As a result, capping user fees at $3,500 under the new fee structure results in a huge break for the largest plans since the prior applicable user fee was $15,000. However, a plan with 51 participants and $10,000,001 in assets would have previously paid a $1,500 user fee and now it will be required to pay a $3,500 user fee. In this example, “simple” is not good.
In addition, the IRS eliminated special reduced user fees for certain common errors such as failures related to minimum distribution requirements or plan loans. Again, this “simplification” is not good for plans that would previously have benefitted from the reduced user fees. For example, where a plan would have previously paid a $300 user fee for its VCP application related to a plan loan failure which affected 13 or fewer participants, the applicable user fee is now $3,500 if the plan has $10,000,001 or more in assets. Orphan plans and group submissions are still eligible for alternative VCP user fees, but gone are the failure-based exceptions to the standard VCP user fees.
Take heed, and check your plans regularly for compliance, so that your plan isn’t another example of how “simple isn’t always good” with the new VCP application user fees!