It’s common knowledge that ERISA law is complex and even the best-intentioned plan sponsors make mistakes. Because audits are timely and costly, the IRS devised a system for plan sponsors to acknowledge and correct their mistakes on their own initiative. The Voluntary Correction Program (VCP) allows plan sponsors to save both time and money by correcting plan failures on their own without being audited.
The History Of IRS Correction Fees
The IRS created the VCP to encourage voluntary compliance and make their own jobs easier. They made it appealing to plan sponsors by charging fees much lower than potential sanctions resulting from a failed audit. The fees started at $750 for plans with 20 or fewer participants and went all the way up to $25,000 for plans with 10,000 or more participants. For small plans with 100 or fewer participants, the maximum fee was $2,500.
In 2015, the IRS made voluntary correction even more affordable. They even created a special fee schedule for the most common errors. A plan could correct up to 13 plan loan errors for only $300 or have under 150 participants fail to take their minimum required distributions (MRDs) and only be charged $500. While the special fee schedule was designed to help large plans with minimal errors, all plans benefited from it and voluntary correction became even more appealing.
The IRS lowered VCP filing fees in 2016, to a range of $500 to $15,000. The only plans that did not see a reduction in fees were those with 101 to 500 participants. This made self-correction and compliance even more accessible and appealing to plan sponsors.
New 2018 Fees
In January of this year, a new fee schedule was released. Instead of being based on the number of participants in a plan, it is now based on plan assets. Here it is:
As you can see, the fees have been compressed so that the minimum fee has tripled and the maximum fee is less than a quarter of what it used to be. While this is great news for large retirement plans, it is disturbing for small plans. For a small employer with only a handful of employees and $550,000 in plan assets, a $3,000 fee is a big hit to take.
In addition to the new fee schedule above, the special schedule for loan and MRD failures has been eliminated. So, if the plan in the example above has a single loan failure, their correction fee has increased 1,000%, from $300 to $3,000.
All of these changes were effective immediately, on January 2, 2018.
How To Protect Your Clients’ Small Plans
With a much higher barrier to self-correction, it is now more important than ever to do things right the first time around. However, staying on top of ERISA law and all the details that come with it can be very difficult for small companies that sponsor retirement plans. There is so much that a plan administrator needs to know and it is very easy to make mistakes.
Now, with such high correction fees, it is more important for your clients to work with a retirement plan consultant than ever before. A specialist who is intimately familiar with every aspect of ERISA law can help them keep their plans compliant and avoid expensive correction fees altogether.
If you have clients that could benefit from working with a pension expert, email me today at email@example.com.I can help them maintain compliance so that they can keep their money invested in their business instead of paying it all to the IRS in fees.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.