Posted by Anthony LaFratte, CPA
Disclaimer: All blog posts are valid as of the date published.
In the 14th century epic poem Troilus and Criseyde, Geoffrey Chaucer describes a tragic love tale between Troilus, a Trojan warrior, and Criseyde, the daughter of a Greek fortuneteller. The poem is credited with serving as the origin for the adage “All Good Things Come to an End,” a common observable theme experienced through the implementation of IRS Rev. Proc. 2018-4 and the IRS Volunteer Correction Program (VCP) fee restructuring.
What “Good Thing” ended?
In our previous blog post, Correction Program Options for Retirement Plan Errors, we discussed plan sponsors’ ability to use the Employee Plans Compliance Resolution System (EPCRS) to self-correct operational errors through the Self-Correction Program (SCP) or to enjoy reduced VCP fees for any significant plan errors not timely detected. Through the release of Rev. Proc. 2016-54 effective February 1, 2016, VCP submissions for plans with 501-1,000 participants experienced a VCP compliance fee reduction from $8,000 to $5,000 (note: compliance fees for plans with 101-500 participants remained at $5,000). This reduction was favorable when coupled with special fee schedules provided for common failures under Rev. Proc. 2015-27, including participant loan corrections and minimum required distributions (MRDs).Through the Revenue Procedures, the “good things” have all but ended for smaller plans and have been curtailed for large plans that only had a handful of loan and/or MRD violations. On the other hand, large plan stakeholders continue to benefit from reduced VCP submission fees. Troilus continues to remain in the blissful company of Criseyde.
For plans with 1-50 participants that would have paid a VCP fee of $500-$750, the “good thing” ended immediately effective January 2, 2018 through Rev. Proc. 2018-4, which upended the VCP fee schedule in favor of a model based on assets with a minimum fee of $1,500 that doubled or tripled what they would have paid even one day earlier.
A picture is worth 1,000 words, so to properly paint the sad, sad picture of the fee increase that now applies to most small plans in the nation, the transition of VCP fees is summarized as follows:
|Previous Fee|| Fee Effective
February 1, 2016
January 2, 2018
|Number of Participants||Fee||Number of Participants||Fee||Total Assets||Fee|
|20 or fewer||$750||20 or fewer||$500||$500,000 or less||
|21 to 50||$1,000||21 to 50||$750|
|51 to 100||$2,500||51 to 100||$1,500|
|101 to 500||$5,000||101 to 1,000||$5,000||Over $500,000 – $10,000,000||
|501 to 1,000||$8,000|
|1,001 to 5,000||$15,000||1,001 to 10,000||$10,000|
|5,001 to 10,000||$20,000||Over $10,000,000||
|More than 10,000||$25,000||More than 10,000||$15,000|
For larger plans, including those with greater than 101 participants, since they likely have over $500,000 in assets, the “good thing” remains alive and well, where a reduction in the assessed fee from $10,000 or $5,000 to $3,000 is “good” and from the maximum fee of $15,000 for plans with assets over $10,000,000 to $3,500 is “great”. Small and large plans, however, are exposed to substantially higher VCP fees primarily due to the special reduced VCP compliance fees for loan failures and MRDs provided through Rev. Proc. 2015-27 being removed altogether.
The history (and termination) of these reduced fees is summarized as follows:
|Loan Failure Fees
(thru January 2, 2018)
|MRD Failure Fees
(thru January 2, 2018)
|Loan Failure and MRD Failure Fees (effective January 2, 2018)|
|Number of Participants with Loan Failures||Compliance Fee||Number of Participants with RDM Failures||Compliance Fee||Number of Participants with Failures||Compliance Fee|
|13 or fewer||$300||
150 or fewer participants
No longer available
|14 to 50||$600|
|51 to 100||$1,000|
|101 to 150||$2,000||151 – 300 participants||$1,500|
What does this mean?
The best part of the “good thing” ushered into the VCP process through the superseded Rev. Proc. 2015-27 involved special reduced fees for loan and RMD failures, two of the most common types of compliance violations. With that in mind, let’s run a few scenarios:
- Plan with 50 participants and $550,000 in plan assets with one loan failure warrants a $3,000 fee. This would have been $300 under the previous schedule — a 1000% increase! The fee is over .55% of plan assets.
- Plan with 100,000 participants and over $100,000,000 in plan assets with over 150 loan failures is subject to a $3,500 fee. This would have been $3,000 under the previous schedule — a .0005% increase! The fee is .0035% of plan assets
- Plan with 50 participants and $550,000 in plan assets with one MRD error results in a $3,000 fee, which would have been $500 under the previous schedule.
- Plan with 100,000 participants and over $100,000,000 in plan assets with over 300 MRD failures is subject to a $3,500 fee, which would have been $1,500 previously.
As illustrated, large plans benefit relative to smaller plans, even at ostensible risk of paying higher VCP fees for loan and RMD failures. With respect to loan and RMD failures not eligible for self-correction, everybody loses: a “good thing” ended for both large and small plans. With respect to operational violations, a great thing ended for small plans, potentially encouraging them to choose self-correction and take a risk instead of using the VCP program. To add insult to injury, there was no warning or transition period granted for VCP submissions in progress when the new fee schedule became effective immediately on January 2, 2018.Through Rev. Proc. 2018-4, Criseyde and Troilus have sadly parted ways.
We recommend plan sponsors work with legal counsel, plan administrators, and independent auditors to understand and assess how Rev. Proc. 2018-4 impacts their benefit plan, evaluate any risks of noncompliance, and develop a plan to navigate the renewed VCP process. If you have additional questions or seek additional information on this subject, please contact our Employee Benefit Plans Team.