Small Employer Retirement Plans Negatively Impacted by VCP User Fee Change

When small employers make operational errors in their 401(k) or other retirement plans, and before the IRS or DOL provide a notice of an audit, the employer has the ability to self-correct under two different IRS programs: The Voluntary Compliance Program (VCP) and the Self-Correction Program (SCP) under the IRS’ Employee Plans Compliance Resolution System (EPCRS). It has always been in both the employer’s/plan’s and the IRS’ best interest to correct operational errors before an audit occurs, and since small employers are sometimes more likely to make inadvertent errors (such as missing a Required Minimum Distribution), small employers were previously given a break on the user fees in order to file under the VCP program.

The IRS issued a notice to change user fees under the VCP program effective January 2, 2018 from a participant count basis to a plan asset basis.  This will significantly help very large employers but significantly negatively impact smaller employers.

The new IRS user fee schedule is as follows:

Total Plan Assets User Fee
$500,000 or less $1,500
$500,001 – $10M $3,000
Over $10M $3,500

For example, prior to January 2, 2018, a small employer with fewer than 21 participants and $1M in plan assets who made an operational error that fell within the purview of the VCP could make the necessary corrections, file the required notice with the IRS, and pay a $750 user fee. With that, if that operational issue was raised subsequently under audit, the IRS acceptance of the VCP filing would preclude the auditor from sanctioning the employer for that failure.  Under the new fee schedule, that same employer would now pay a $3,000 user fee, an increase of 400 percent.

Kushner & Company has advocated with the IRS on behalf of its clients to conduct a review of its new VCP fee schedule with an eye toward providing relief for small to mid-sized employers.