An Annual Retirement Plan “Check-Up” May be Just What the Doctor Ordered!
February is Heart Health Month, which always reminds me to schedule my annual doctor checkup. This got me thinking that the need for ongoing “checkups” and maintenance applies not just to our health, but to our homes, cars, and even to your company’s retirement plans! That’s right—if you work with your employer’s tax-qualified retirement plans, such as a 401(k) or pension plan, now is the time to consider implementing operational checkups for those plans to ensure that the plan is being administered in compliance with the plan’s terms as well as applicable law. The new user fees for the IRS VCP correction program (described below) should be considered to the extent you find any errors during a plan checkup.
What Should You Include in a Retirement Plan Checkup?
Determining whether your retirement plan is being properly administered can be a critical element to reducing future plan costs and administrative headaches, decreasing fiduciary liabilities of the company, a benefits committee or other plan administrator(s), and minimizing the overall risk of future mistakes that would impact your employees. In fact, the IRS agrees on the importance of periodic plan reviews and recently released a short bulletin with helpful tips and information about how to create and implement a useful retirement plan checkup.
A retirement plan operational checkup should always include a careful review of your plan documents and communications in light of your ongoing administrative practices. In particular, any comprehensive review will confirm that the plan’s current terms are being administered correctly and that the current plan language still makes sense or is not unnecessarily limiting based on practical administrative considerations, such as your current workforce and payroll processes. For an adequate review, you should work with your internal HR and payroll teams who focus on your company’s retirement plans, as well as the third-party administrators, legal counsel, and other service providers who regularly work with the plans.
There are many common mistakes that occur in retirement plan administration, and the sooner a company finds the issues, the easier (and less costly) any correction will be. Some common mistakes to check for during any review of your retirement plans include:
- failing to timely enroll eligible employees in the plan or inadvertently allowing ineligible individuals to participate in the plan;
- using incorrect elements of “compensation” under the plan when determining deferral amounts or employer contributions;
- incorrectly calculating a participant’s hours or years of service under the plan;
- failing to timely deposit employee deferrals or employer contributions;
- failing to provide employees necessary notices and plan information;
- improperly administering plan loan repayments; and
- failing to satisfy IRS maximum contribution limits.
New User Fees for VCP Corrections
If you happen to find any problems with your ongoing retirement plan administration, you are not alone! In fact, errors in plan administration are common enough that the IRS has created a multi-tiered correction program for retirement plans to correct these mistakes (called the Employee Plans Compliance Resolution System or EPCRS). Under the self-correction tier, a company can internally correct certain “insignificant” mistakes without informing the IRS (although you should always keep detailed records of any completed self-correction to demonstrate ongoing compliance). Under the voluntary correction tier (called VCP), a company can file a request with the IRS to formally approve the corrective action.
In a recently released IRS revenue procedure, the IRS included a surprising and immediate change to the user fees for such a VCP correction filing. Effective immediately, the VCP user fee is calculated based on the size of the plan’s assets and not on the number of participants. Specifically, the new VCP user fees for all VCP filings are:
|Plan Assets||User Fee|
|$0 – $500,000||$1,500|
|$500,001 – $10M||$3,000|
|Greater than $10M||$3,500|
For large employers in particular, this new fee structure likely means that a VCP filing would be less costly now than in prior years. Companies should take the new fee structure into account when determining whether to self-correct a plan error or use the VCP program to get formal approval of the correction from the IRS.
In addition, the old user fee schedule had much smaller fees (as low as around $300) to correct some common plan mistakes, such as certain plan loan or required minimum distribution (RMD) failures. However, those reduced fees have been eliminated in the new fee structure. Companies that previously used those reduced fees for such common mistakes should keep better track of the administrative process for handling items such as participant loans and RMDs, as those failures may be more costly to fix under the IRS correction program going forward. That being said, there is no limit on the number of plan errors that can be included in a single VCP filing, so any errors discovered during a plan checkup could be included in a VCP filing for a single user fee.
Remember, ongoing retirement plan checkups could minimize future costs and headaches for your company and plan administrators. If you find plan errors and decide to make a VCP filing with the IRS, make sure the filing includes a check (and a photocopy of the check) with the correct fee amount based on the new fee schedule, as the IRS has made it clear that it will return any submission with an incorrect fee payment!