House Small Business Subcommittee Issues Testimony From IRS Project Director
"Chairman Brat, Ranking Member Evans and Members of the Subcommittee, thank you for the opportunity to testify on small businesses and the
"EPCRS is a comprehensive system of correction programs designed to help retirement plans, including those of small employers, correct technical mistakes. Qualified retirement plans offer significant tax benefits to employers and employees, including current deductibility of certain employer contributions and deferral of tax on the retirement fund. Yet these benefits are available only on fulfillment of the numerous legal requirements that govern eligibility, vesting, and distribution, among other topics, which can confuse employers, especially small businesses, who sponsor qualified plans. EPCRS offers relief from errors in form or operation that could otherwise result in significant tax consequences to the plan sponsor, participants, and trust fund.
"Currently, EPCRS contains provisions intended to benefit or assist the small business sector. The Self-Correction Program (SCP) contains flexible provisions permitting both individual plan sponsors and financial institutions providing services to employer-sponsored retirement plans, including Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees of Small Employers maintained in Individual Retirement Arrangements (SIMPLE IRA Plans) to self-correct operational defects. Additionally, EPCRS has special provisions for small corrections, including recovery of small overpayments and the distribution of small excess amounts, which may have greater applicability to small business, even though the provisions are available to all plans.
"Since the creation of EPCRS a couple of decades ago, the applicable fees have been on a "sliding scale" relative to plan size, favoring small business. Incentives for voluntary compliance were implicit at the inception of EPCRS, even before there could have been historical data on program costs. Through a series of governing revenue procedures, the
OVERVIEW OF EPCRS
"The
"Currently, Revenue Procedure 2016-51 sets forth the requirements for the three components of EPCRS:
* Self-Correction Program (SCP), mentioned above, is available for a sponsor of a qualified plan that has either insignificant operational failures or significant operational failures that the plan sponsor proactively identifies and corrects in a timely fashion (basically, within two years). To correct the failure, the plan sponsor must establish practices and procedures reasonably designed to promote and facilitate overall compliance with the tax law so that the error does not recur. The plan sponsor must maintain adequate records to demonstrate the correction in the event of an audit of the plan. As the name implies, the
* Voluntary Correction Program (VCP) allows plan sponsors proactively to identify and correct a wide range of operational or form failures that are either not small enough to qualify for SCP or occur beyond the two-year SCP window. To enter VCP, the plan sponsor completes an application form that identifies the mistake, proposes the appropriate correction method, and remits a fee for the
* Audit Closing Agreement Program (Audit CAP) may address plan operational and form failures that are not eligible for SCP or VCP because of the type of failure or because they are discovered by the
HISTORY OF EPCRS
"The history of EPCRS goes back to the establishment of the Audit CAP pilot program in the early 1990s, in which plan sponsors could correct deficiencies found on audit based on a percentage of the tax that would be due if the plan were disqualified.
"In 1992, the Voluntary Compliance Resolution (VCR) program began as a pilot program that became permanent in 1994, allowing plan sponsors who had favorable determination letters to disclose operational violations to the
"To ameliorate plan failures and the adverse consequences to innocent participants and beneficiaries while still maintaining the incentive for plan sponsors to abide by the tax law, Revenue Procedure 98-22 modified and consolidated the various correction programs into one comprehensive system for sponsors of retirement plans referred to as EPCRS. In 2001, various programs were combined into what is now known as VCP.
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"[I]t is important to allocate sufficient funds for EP/EO staffing adequately to monitor and assist businesses in establishing and maintaining retirement plans. Recently, in Revenue Procedure 98-22, the
"In the Pension Protection Act of 2006, sec. 1101,
EPCRS FEES
"When a qualified plan does not meet the tax requirements, there are many potential ramifications. The
"As introduced above, VCP and Audit CAP are two of the programs in EPCRS designed to help plan sponsors fix these problems. The difference between the two programs is the timing and the payment necessary to participate in each program.
"A plan enters VCP prior to examination by
"On the other hand, Audit CAP applies when a retirement plan is under examination by the
"As part of Audit CAP, the plan will have to pay a sanction amount. The amount is based on a number of factors including, but not limited to: the income tax ramifications of disqualification; the culpability for the plan failure; the efforts to fix the failure; and the total number of affected employees. Audit CAP sanction amounts tend to be significantly larger than VCP program fees.
PERIODIC ADJUSTMENT OF PROGRAM FEES
"From 1994 through 2001, the fees for VCR were on four tiers based on a combination of the size of plan assets and the number of participants. The fees ranged from
"In 2002, the fees for VCP changed to a range based on a presumptive amount. The presumptive amount ranged from
"In 2003, the fees changed again. The new structure had eight tiers based on the number of plan participants. The fees ranged from
"In 2016, the fee structure changed to six tiers generating a range of fees, from
"In 2018, the VCP fees changed to three basic tiers based on the amount of plan assets. Also, most of the miscellaneous user fee amounts imposed for specific types of plan failures were eliminated. The fees now range from
"The 2018 VCP fees were determined by multiplying the average hours needed for the
CONCLUSION
"Although changes to the fees were necessary to more accurately reflect resources required to administer the program, the recent VCP user fee changes continue to reflect special concern for small employers. In particular, the fee for plans with the smallest amount of plan assets (
"Chairman Brat, Ranking Member Evans and Members of the Subcommittee, this concludes my statement. I would be happy to answer your questions."
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