One of the important benefits to companies in establishing a retirement plan for its employees is the tax-favored status granted to a 401(k), 403(b), SEP, or SIMPLE IRA. This includes deducting employer contributions to such employee plans. However, in order to maintain tax-favored status, the plan has to meet certain qualifications. Once the retirement plan no longer meets these requirements, employers can lose out on the plan's intended benefits, costing them more out of pocket.
Qualification violations are often caught during a tax audit. Discovering mistakes before a tax audit can allow a retirement plan to keep its tax-favored status. If these mistakes are caught in time, the company can correct those issues through the Voluntary Correction Program. This allows a company to obtain an IRS compliance statement, approving the proposed correction method and maintaining compliance with federal tax law.
The IRS has recently made changes to the user fees charged under the VCP. The user fee changes for the VCP went into effect on January 2, 2018. The new fee assessment is intended to be simpler, based on the total amount of net plan assets. Prior alternative and reduced user fees have generally been eliminated.
According to the IRS, VCP submissions mailed on or after January 2, 2018 have the following fee schedules, based on net plan assets:
Net Plan Assets
VCP Submission User Fee
$0 to $500,000
Over $500,000 to $10,000,000
To determine net retirement plan assets, in most cases, you can use the plan's most recently filed Form 5500-series return. For SEP, SARSEP, or SIMPLE IRA plans, the amount of net plan assets is the total value of all plan participants' IRA account balances that are associated with the plan. (Group VCP, Orphan, or 457(b) plan submissions do not use the new fee schedule.)
Part of the purpose for providing voluntary compliance is to establish limited fees for voluntary corrections, to reduce employer uncertainty in tax liability. Fees are graduated so as to provide an incentive to employers to correct compliance mistakes promptly.
One of the most common causes that put a previously compliant plan out of compliance is the passage of time. As tax regulations and company plans change, an employer may be unaware that their retirement plan has fallen out of compliance with federal tax law and at risk of losing tax-preferred status. This can subject employer retirement contributions to payroll taxes, including Social Security, Medicare, and unemployment taxes. Employers should conduct a regular audit of their employee benefits plans for qualified status compliance.
If you have any questions about your company's retirement plan and staying compliant with the IRS, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits and business tax law. Our firm can provide fiduciary counseling and help you avoid costly tax penalties. Contact our office today with any questions on how we can help you and your business succeed.