Changes to VCP User Fees: A Holiday Gift That Some Plan Sponsors Would Rather Return
Benefit plan practitioners returned to their desks after the holidays to the surprising news that the Internal Revenue Service issued guidance that made sweeping changes to the user fees for the Internal Revenue Service’s Voluntary Correction Program (“VCP”). (And notably more than one IRS agent has informally indicated they were surprised by the changes, which were almost immediately effective, as well!)
An often-used option under the IRS’s larger Employee Plans Compliance Resolution System (“EPCRS”), VCP allows plan sponsors experiencing operational and document failures with their tax-qualified plans to, within the bounds of the available guidance under Rev. Proc. 2016-51, submit such failures to the IRS and seek its blessing (in the form of a signed Compliance Statement) on a proposed correction method. In the post-determination letter landscape, VCP is seen as an increasingly important means to protect and ensure a plan’s qualification status.
One downside of the program, however, is its user fee. For submissions filed prior to January 2 of this year, such user fees were based on the number of plan participants, and could be as high as $15,000 for plans with over 10,000 participants. As of January 2, user fees are based on plan assets, with a top user fee of $3,500 for plans with $10 million or more.
Great news for plan sponsors, right?
Not so fast. Besides the obvious pitfalls in the changes – the greatly reduced user fees in the range of $300-$500 for certain loan, required minimum distribution, and nonamender failures are no more—the feedback from sponsors of small plans has been resoundingly negative as the math does not work in their favor. For example, a VCP filed prior to January 2 by a plan with 48 participants and between $500,001 and $10,000,000 in assets would have cost $750. Going forward, it costs considerably more–$3,000, or a 400% increase.
But there is hope! At a recent conference of practitioners attended by representatives of the IRS, attendees were quick to voice their opinions, and were cautiously optimistic that they’re being heard. An IRS official indicated that user fees were changed due to a prior ruling confirming that such fees are “user” fees versus “compliance” fees. The IRS has interpreted this to mean that, by statute, such fees must closely align to the IRS costs for processing a VCP filing. The cost of processing a VCP filing on behalf of a small plan is the same as processing a filing for a large plan, hence the streamlined table of user fees, with only minor concessions for smaller plans. The official confirmed, however, that the IRS remains open to feedback on the structure (in particular, ideas for the way the fees can be adjusted to help small plans while still meeting statutory requirements) and is willing to taking a second look.
Meanwhile, many sponsors of small plans may decide to utilize the Self-Correction Program component of EPCRS rather than going through VCP to save the user fee, even though a self-correction isn’t always available based on the magnitude of a failure, and yields no Compliance Statement and the reassurance that goes with it.