New IRS Correction Fees & What They Mean for Plans

It’s common knowledge that ERISA law is complex and even the best-intentioned retirement plan sponsors make mistakes. The Department of Labor (DOL) estimates that three out of four plans are out of compliance with ERISA, and these violations can lead to significant fines.[1] But because audits are timely and expensive, 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.

IRS Correction Fees in the Past

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 audit findings. 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. For example, a plan could correct up to 13 plan loan errors for only $300 or a plan could correct failed participants’ minimum required distributions (MRDs), as long as there were not more than 150 participants, 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 very 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:

Plan Assets

VCP Fee

$500,000 or less

$1,500

Over $500,000 to $10,000,000

$3,000

Over $10,000,000

$3,500

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 can be 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 on January 2, 2018.

How to Protect Your Small Plans from Fees

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.

It is crucial for you to work with someone who can help you build and manage effective, successful retirement plans. A specialist who is intimately familiar with every aspect of ERISA law can help you keep your plan compliant and avoid expensive correction fees altogether. If you feel you would benefit from working with a professional experienced in reviewing and monitoring retirement plans, schedule a free 15-minute introductory phone call!

About Bob

Bob Herdoiza started his career as a CPA auditing retirement plans and is a Partner at Stonebridge Financial Group, a registered investment advisory firm. Stonebridge seeks to help clients build and manage highly effective, successful retirement plans. Bob also served as President of CEBOS for more than 15 years where he managed his company’s retirement plan before joining Stonebridge Financial Group. He takes pride in his firm’s 98% client satisfaction rate (according to a 2017 client survey) and individualized implementation approach. Learn more by connecting with Bob on LinkedIn or visiting www.stonebridgefinancialgroup.com.

[1]https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/retirement-plan-compliance-guide.aspx