Change in VCP Fee Structure Bumps Up Fees for Smaller Plans

A change in methodology means that some plan sponsor clients will pay significantly less to fix plan mistakes through the Voluntary Correction Program (VCP) – but those with fewer than 100 participants will generally pay more.

The VCP is one of three correction programs that can be used to correct errors under the Employee Plans Compliance Resolution System (EPCRS). Correcting plan mistakes through the VCP preserves the plan’s tax-favored status – and that’s important because a tax-favored retirement plan (401(k) or other qualified plan, 403(b), SEP or SIMPLE IRA) generally loses its tax-favored status if “failures” occur.

Structure Change

Rev. Proc. 2018-4, issued Jan. 2, outlined new fees for VCP applications under EPCRS. However, this new fee schedule is based on plan assets rather than participant head count. Under the prior schedule, fees could have run as high as $15,000 for plans with 10,000 or more participants. Fees for regular VCP filings (including anonymous submissions) submitted on or after Jan. 2 now are:

  • $1,500 for plans with assets of $500,000 or less;
  • $3,000 for plans with assets of over $500,000 to $10 million; and
  • $3,500 for plans with assets of over $10 million.

All of which means that, particularly for plans with more than $10 million in assets where the fee is now capped at $3,500, the change could indeed represent a significant reduction – and that is how the change was initially positioned.

However, the change in methodology, not to mention the elimination of special reduced fees previously available for certain failures, means that for many, if not most small plans, VCP fees will increase significantly.

Discounts ‘Dumped’

While the fee for group submissions and fee waiver for terminating orphan plans are unchanged, all other reduced or alternative fees no longer apply. A Mercer analysis indicates that the following discounts are now gone:

  • $375 fee for failures involving late adoption of interim amendments
  • $500 fee for failures to timely adopt amendments required as a condition of a favorable determination letter
  • 50% discount for failures submitted within one year after the expiration of the applicable extended remedial amendment period
  • Discounted fees for plan loan failures
  • Discounted fees for required minimum distribution failures

In essence, by eliminating the discounts for early correction and the common plan document and operational failures noted above, the VCP has essentially become a flat fee program.

In addition to the VCP change, the user fee for a Form 5310 filing (a determination letter application for a terminating plan) has increased from $2,300 to $3,000.

The IRS webpage states that plans should submit the correct fee shown in Rev. Proc. 2018-4 and continue to use the current Form 8951 until IRS updates the form and instructions.

Next Steps

The Government Affairs Committee’s IRS subcommittee is currently analyzing the issue and plans to engage with the IRS on it.

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