IRS Pressed on VCP Fee Changes at Hill Hearing

By Andrew Remo • April 18, 2018 • 0 Comments
Members of a House subcommittee pressed IRS representatives this week to explain their recent decision to dramatically increase the cost to small businesses of remedying retirement plan mistakes.

An April 17 hearing held by the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access focused on examining the rationale behind the recent change to the user fees that the IRS charges to correct retirement plan mistakes and the impact that change will have on small businesses and their willingness to sponsor a retirement plan.

The American Retirement Association has previously expressed its deep concern that the vast majority of small plans will now see a significant fee increase when a small business has to correct a retirement plan mistake, a concern that was shared and communicated directly to the IRS during the hearing from subcommittee members of both political parties. The American Retirement Association submitted a statement for the record on the issue at the hearing.

Sunita Lough, Commissioner of the IRS’ Tax Exempt/Government Entities (TEGE) division (who is currently assigned to lead the IRS’ Tax Reform Implementation Office) provided testimony to a skeptical subcommittee to explain her rationale behind the changes. Lough argued that the IRS was bound by an obscure intragovernmental policy document, Office of Management and Budget (OMB) Circular No. A-25, that directs all federal agencies to assess user fees that reflect the resources required to administer federal benefit programs.

The IRS seems to have unilaterally determined that the retirement plan correction program — the Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS) — falls into this category. She failed to mention in her oral testimony, however, that section 1101 of the Pension Protection Act, which authorized the EPCRS program, specifically directed the IRS to take into account the special retirement plan compliance concerns of small businesses.

Under questioning by members of the subcommittee, Lough admitted that the IRS did not study how an increase in VCP user fees would affect small businesses’ willingness to adopt and/or maintain retirement plans. Instead, the IRS’ sole focus was on calculating the average time its employees spent on processing applications approving retirement plan corrections. Lough argued further that according to the IRS’s data analysis, the minimum user fee to correct mistakes through VCP should actually be $3,000 (up from a minimum fee of $500 in 2017) but that the IRS decided to only charge a $1,500 fee for plans with less than $500,000 in assets.

Lough did offer that the IRS recently streamlined the work flow it used in the past to process retirement plan corrections such that user fees could be lowered during the next biennial review. She also stated that “we are open to looking at” where the IRS can expand the instances where retirement plan sponsors can correct mistakes by themselves — through EPCRS’s Self-Correction Program (SCP) — which will not involve any user fee. However, she qualified that response by suggesting that there are certain instances where self-correction doesn’t work and that the IRS needs to be careful about where there is a “third-party” or participant tax consequence that won’t fit into a self-correction regime.

The American Retirement Association plans to be an active participant in a retirement plan community stakeholder meeting with the IRS in early to May to discuss the ways that the IRS can ameliorate the detrimental impact that these recent fee increases will have on small business retirement plans. The meeting will focus on ways to improve and expand the SCP program. The ARA recently filed a comment letter with a number of recommendations to do just that.

Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.