[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




 
 SMALL BUSINESS RETIREMENT PLANS AND THE IRS' EMPLOYEE PLANS FEE CHANGE

=======================================================================

                                HEARING

                               before the

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 17, 2018

                               __________
                               
                               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               

                               
                               

            Small Business Committee Document Number 115-067
             Available via the GPO Website: www.govinfo.gov
             
             
                           __________
             
                 U.S. GOVERNMENT PUBLISHING OFFICE
                   
 29-582                   WASHINGTON : 2018                
 
 
             
             
                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                      RALPH NORMAN, South Carolina
                           JOHN CURTIS, Utah
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                     
                     
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Dave Brat...................................................     1
Hon. Dwight Evans................................................     2

                                WITNESS

Ms. Sunita Lough, Project Director, Tax Reform Implementation 
  Office, Internal Revenue Service, United States Department of 
  the Treasury, Washington, DC...................................     4

                                APPENDIX

Prepared Statement:
    Ms. Sunita Lough, Project Director, Tax Reform Implementation 
      Office, Internal Revenue Service, United States Department 
      of the Treasury, Washington, DC............................    14
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    American Retirement Association..............................    20
    Small Business Council of America............................    23


SMALL BUSINESS RETIREMENT PLANS AND THE IRS'S EMPLOYEE PLANS FEE CHANGE

                              ----------                              


                        TUESDAY, APRIL 17, 2018

                  House of Representatives,
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                   Tax, and Capital Access,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Dave Brat 
[chairman of the Subcommittee] presiding.
    Present: Representatives Brat, Chabot, Evans, and Clarke.
    Chairman BRAT. Good morning. I would like to call this 
hearing to order. Thank you all for being with us.
    In light of April 15 occurring on a weekend and yesterday's 
D.C. holiday, today, Tuesday, April 17, is tax day. We are glad 
to have the IRS with us to discuss a matter that is critically 
important for small businesses and all Americans saving for 
retirement.
    Small businesses have a number of options available to 
offer their employees when it comes to retirement plans. Most 
fall under one of three categories: defined contribution plans, 
defined benefit plans, or the various employer-based individual 
retirement accounts, also known as IRAs. To encourage and 
incentivize savings, many of these options also include tax 
advantages.
    Unfortunately, research shows that not all small businesses 
are utilizing these options, and small-business owners often 
cite resource and cost issues as the reasons they do not offer 
retirement plans.
    This cost issue is why the recent user-fee change 
implemented by the Internal Revenue Service to its Voluntary 
Correction Program is concerning.
    Small businesses often do not employ an army of compliance 
officers to interact with the IRS. Instead, it is frequently 
the owner who sacrifices time away from growing and expanding 
the business in order to attend to tax matters.
    Because of the complexity of the filing process, businesses 
can utilize the Voluntary Correction Program to correct and fix 
plan submission errors before an IRS audit commences. In order 
to utilize this program, a user fee is charged.
    In January of this year, the user-fee schedule was altered 
by the IRS. It went from a table of six different fees 
corresponding to the number of participants in the plan to 
three different fees based on a retirement plan's asset size. 
The lowest fee went from $500 to $1,500. That is a significant 
increase for any business, especially a small business that 
operates on the margins.
    From Main Streets in my hometown of Virginia to communities 
across the Nation, small businesses play an important role in 
the local and national economy. Retirement plans are a key 
ingredient for hiring, employee retention, and business 
expansion. Thus, retirement-plan offerings are important to 
achieve small-business success. It is for these reasons that 
small-business equity is critical when it comes to compliance 
issues.
    I am looking forward to our witness addressing many of 
these important topics and helping our Subcommittee better 
understand the recent user-fee change. This Subcommittee 
strives to create an environment where small businesses, 
entrepreneurs, and startups have the opportunity to grow and 
expand. Today's testimony will help us as we continue to 
monitor the small-business ecosystem.
    I now yield to the ranking member for his opening remarks.
    Mr. EVANS. Thank you, Mr. Chairman, for holding this 
hearing.
    As part of their retirement planning, most Americans rely 
on employer-based retirement plans. As our population ages, it 
is critical that small employers and their employees have 
access to quality financial security in their retirement years, 
but only 14 percent of small firms offer such a benefit.
    Small firms not only face the challenge of offering a 
retirement vehicle but enrolling their employees. Roughly 50 
percent of the private-sector workforce participates in an 
employer-sponsored pension plan. We can do better and have made 
strides in increasing that number.
    However, recently released revenue procedures from the 
Department of Treasury may have caused us to take two steps 
back in our effort to increase retirement savings. While it is 
important to recognize and applaud your efforts to provide 
relief and fairness, the action taken by the IRS may 
disproportionately harm small firms. It could even cause small 
businesses to eliminate their plans.
    The Internal Revenue Service is one of the key pieces to 
maintaining a healthy national retirement system. They have the 
important jobs of ensuring compliance, fairness within plans. 
And because they cannot ensure that every plan complies with 
the relevant rules and regulations, the Employer Plan 
Compliance Resolution System was created.
    This system is an important tool, allowing plan sponsors to 
correct mistakes and avoid disqualification of the plan. It 
gives them a predictable and streamlined process for fixing 
independent mistakes at a fair fee. Doing so has encouraged the 
sponsorship of many retirement plans and the fiscal security of 
workers. I call this a tool in our retirement toolbox.
    Yet the IRS abruptly and without notice made substantial 
changes to the Voluntary Correction Program within the system. 
Rather than base fees on the particular plan size, the IRS now 
charges fees based on the plan asset value. And they have not 
provided any evidence suggesting this change was merited and 
the amounts reasonable. This leaves me very concerned about the 
future state of our retirement system and the costly 
consequences it will have on our small plans.
    But, most importantly, I hope this hearing will provide 
more information not only on the facts and circumstances behind 
this decision, but why the IRS did not allow the statutorily 
mandated requirement to consider the special concerns and 
circumstances that small employers face with respect to 
compliance and correction of compliance fairness.
    I understand that fees must be adjusted and changed over 
the years, but such drastic action by the agency leaves me 
speechless over the disregard of how this affects small 
employers and workers all around the country.
    These consequences do not conform to the Committee's effort 
of assisting small firms with their retirement goals. Any 
policy regarding retirement plans should ensure small employers 
have the resources they need to overcome challenges in 
compliance. It is not only in their best interest but our 
entire economy.
    For this reason, we need to make sure that the retirement 
plans are attractive for small businesses, as their retirement 
savings is an intricate part of our Nation's future. And this 
is why we are here today. This hearing will give us the chance 
to gather information about the rule, how it will harm small 
businesses, and why the IRS needs to rethink and reverse this 
rule. Remember: First, do no harm.
    I thank the witness for being here today, and I yield back 
the balance of my time, Mr. Chairman.
    Chairman BRAT. Thank you, Mr. Evans.
    If Committee members have an opening statement prepared, I 
would ask that it be submitted now for the record.
    I would like to take a moment to explain the timing lights 
for you. Although, today we just have one speaker; I think we 
will be in good shape. You have 5 minutes to deliver your 
testimony. The light starts out green, then yellow, then red. 
All right? I shortened that up.
    Our only witness today is Ms. Sunita Lough. Ms. Lough is 
the Commissioner of the Tax-Exempt Government Entities Division 
at the IRS. However, she is currently on assignment leading the 
IRS in its implementation of the recent tax reform legislation.
    With over two decades of IRS service, Ms. Lough has served 
in roles with the IRS's Large Business and International 
Division, the Office of Chief Counsel, the Office of Tax-Exempt 
Bonds, and the Office of Federal, State, and Local Governments.
    In addition to her public service, she has nearly a decade 
of private-practice experience. Ms. Lough has a juris doctorate 
from George Mason University and a master of law from 
Georgetown University.
    We know today is a big day for the IRS, so we appreciate 
your participation. We also appreciate the expertise that you 
will share with us today.
    You are recognized for 5 minutes. And you saw that, as 
usual, the Democrats and Republicans are in total unity on 
everything up here. It is a day you did see us agree on 
something, right? So if you want to zoom in after your 5 
minutes and spend a couple minutes on probably the primary 
issue we are here, and then we can go to questions after that.
    And you may begin. Thank you very much.

    STATEMENT OF SUNITA LOUGH, PROJECT DIRECTOR, TAX REFORM 
IMPLEMENTATION OFFICE, INTERNAL REVENUE SERVICE, UNITED STATES 
                   DEPARTMENT OF THE TREASURY

    Ms. LOUGH. Chairman Brat, Ranking Member Evans, and members 
of the Subcommittee, thank you for the opportunity to testify 
on small businesses and the IRS Employee Plan Compliance 
Resolution System, or EPCRS.
    Since January, I have been in a temporary posting as the 
Director of the IRS Tax Reform Implementation Office, having 
stepped away from my position as the Commissioner of Tax-Exempt 
and Government Entities Division. I was serving in TE/GE at the 
time of the fee change at issue.
    At the IRS, an important goal is to help small businesses. 
They are a critical part of the Nation's economy, helping 
provide jobs for millions of taxpayers. Small businesses face 
unique challenges complying with the complexity of our Nation's 
tax laws, and the IRS wants to do everything it can to assist 
them.
    The topic of today's hearing is an important one. The law 
involving qualified retirement plans is complex, and it is easy 
for a small business or their plan administrator to have issues 
navigating the rules. These retirement plans are critical to 
small businesses as well as the employees who participate in 
them.
    At the IRS, we want to do everything we can to help small 
businesses stay on track with their retirement plans. To help 
them navigate plan issues, the IRS has worked hard to offer 
ways businesses can correct mistakes as simply as possible 
without jeopardizing their plan status. This is important for 
everyone involved--the small businesses, their employees, and 
the tax system.
    This is a complex area, so I would like to take moment to 
walk you through some of our retirement plan correction 
programs designed to help on these issues.
    EPCRS is a comprehensive system of correction programs 
designed for retirement plans, including small employers, to 
help correct technical mistakes.
    Qualified retirement plans offer significant tax benefits 
to employers and employees, including current deductability of 
certain employer contributions and deferral of tax on the 
retirement fund. Yet these benefits are available only on 
fulfillment of numerous legal requirements that govern 
eligibility, vesting, and distribution, which can confuse 
employers, especially small businesses, who sponsor qualified 
plans.
    EPCRS offers relief from errors in form or operation that 
would otherwise result in significant tax consequences to the 
employer, the employee participants, and the trust fund.
    Within the EPCRS, the Voluntary Correction Program, or VCP, 
allows plan sponsors proactively to identify and correct a wide 
range of operational or form failures. 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 IRS to review the application. Upon approval, the 
IRS issues a compliance statement indicating that the 
correction was proper. This is important, because it allows the 
plan to avoid the serious tax consequences that a plan sponsor 
and participant would face if a plan lost its qualified status 
due to a failure. Under VCP, the IRS can review the correction 
and work with the plan sponsor, adjusting the correction method 
to resolve complex mistakes.
    In 2018, the VCP were set on three tiers based on the 
amount of plan assets. The changes were necessary to more 
accurately reflect resources required to administer the 
program. These fees were determined by multiplying the average 
hours to complete the case for each category by the hourly 
staff cost. I would point out that the new structure called for 
charging the smallest plans $3,000 per application, but we 
reduced that to $1,500 out of special concern for small 
employers.
    I would also like to mention another important component of 
EPCRS, which is the Self-Correction Program, or SCP. Under this 
program, a plan sponsor can correct plan failures without 
filing an application with the IRS or paying any fees as long 
as the failure is corrected in a timely manner, and that is 2 
years. This can be a very helpful and less costly option for 
small businesses when they discover mistakes in their plans.
    The IRS is continuing to work with the small-business 
community to find ways within the scope of the law to expand 
and improve SCP. For example, we will be meeting with several 
key small-business organizations, including the Small Business 
Council of America, in early May to discuss such improvements.
    Chairman Brat, Ranking Member Evans, and members of the 
Subcommittee, the IRS is committed to doing everything possible 
to help small businesses that sponsor retirement plans and ease 
burdens they may face in administering their plans.
    This concludes my statement. I would be happy to answer 
your questions.
    Chairman BRAT. Thank you very much for your testimony, Ms. 
Lough. I will start out with a couple general ones, and then we 
will move on through the Committee.
    First, with your current responsibility leading the tax 
reform law office at the IRS, I wanted to begin with just a 
general question. And I realize the scope is pretty big, but 
how is the implementation of the tax reform law moving along, 
in your view, in just kind of a summary statement?
    Ms. LOUGH. So, as you know, this is the largest tax reform 
in the last 30 years, and we have a number of provisions--and 
much of it is a new tax regime, as you know, in the 
international area. And we have a team working on it, and we 
have made quite a bit of--you know, we have moved forward quite 
a bit.
    Forms, we expect to get all the forms done, the new forms 
done, and the revisions by the end of this month and early 
release maybe by midsummer; the instructions at the same time.
    And we are hoping to issue guidance for--we have issued a 
lot of frequently asked questions and FAQs and some guidance 
fairly fast. And we expect to issue most of it in some proposed 
form so taxpayers know what to do before they file their 
season.
    I am confident we are going to have a good filing season 
next year.
    Chairman BRAT. Good. Well, that is great. Thank you very 
much for that.
    And then changing topics a bit, I know that the chairman 
was just in the room. Chairman Chabot sent a letter in December 
to the IRS on their enforcement of ObamaCare's employer mandate 
and its impact on small businesses. And can you let our 
Committee know when the IRS will respond to our chairman's 
letter?
    Ms. LOUGH. Oh, I am not aware of it, but knowing, you know, 
we are responsive, and I am sure he will be getting a response.
    Chairman BRAT. Great. Thank you very much for that.
    And then you just mentioned--I don't think any of us have 
the entire complexity in mind, and you just mentioned another 
alternative avenue for small businesses to pursue that doesn't 
have the fee attached. Is there a downside to pursuing that 
avenue?
    Ms. LOUGH. There is no downside to--it is a great thing. 
They don't have to come in. They correct, and they just keep it 
within their records. And there is no fee.
    The only time they can't come in is if there are tax 
consequences--not the only time, but one of the times that, for 
example, they can't come in, if third parties' taxes--there is 
a tax consequence. For example, if it would affect the 
participant's tax consequence, then they have to come into us 
because they have to provide us that information that they may 
not have.
    And, as I stated, we are meeting with a number of 
interested parties, including the Small Business Council of 
America, I think it is the first week of May, to discuss 
further what types of programs can we include in the self-
correction.
    It is good for them. It is good for us. You know, it 
doesn't take our resources to work on the self-correction 
programs. And it is also good for them because they can do it 
themselves and not have to pay any fee.
    Chairman BRAT. Okay. Great. Thank you.
    And when you change the metric, it is almost hard to kind 
of think through the change in the metric, but it went from 
kind of an employee-based to an asset-based metric in assessing 
the fee that goes to each size.
    And can you just give us the quick logic on why the move 
and the change from number of employees to assets?
    Ms. LOUGH. So, number of participants doesn't necessarily 
show the size of the plan. You can have a one-person plan with 
a large asset size, or you can have a number of participants. 
So, to us, the fair way of looking at it is the size of the 
plan.
    But we also sliced and diced the data every which way to 
find out, does it matter how many hours we spend on a case? 
Whether it is number of participants or the asset or whether it 
is a small employer or large employer, what we found was the 
hours we spent were comparable. Whichever way we look at it, 
whether it is a large--if it is a large plan, we spend 
approximately the same amount of time we do for a small plan. 
Or whether there are 12 participants or there are a thousand 
participants. It is the complexity of the issue, not the size 
of the assets.
    And we are required government-wide to use the OMB Circular 
825 to determine user fees. So we look at the time spent and 
the cost of the time, and what we came out with was $3,000 for 
small businesses. And we understand that is a lot of money, so 
we cut it down to $1,500.
    It is also only a one-time fee. It is not a recurring fee. 
Once they correct their plan, we hope that the plan 
administrator is watching over the plan for them--because they 
sell the plan documents to them and they look at the plan 
documents, they keep up with the amendments--so the small 
employer can keep doing what it is supposed to be doing, 
running its business, and not have to worry about their 
retirement plans.
    Chairman BRAT. Great. Thank you very much.
    I think, with that, I will yield for a few minutes and go 
through the Committee, and I may come back.
    And so, with that, Mr. Evans.
    Mr. EVANS. Thank you, Mr. Chairman.
    The goal of this Committee is to assist small firms in 
providing retirement plans, because only about 14 percent of 
employers do so.
    Can you explain whether the IRS studied how higher fees 
could affect compliance rates and sponsorship of retirement 
plans, particularly as it relates to small--you know, the 
thinking is what I am most interested in.
    Ms. LOUGH. No, we did not study how it would affect, 
because it is hard for us to figure out how that would work. 
But we did look at how much time we spent on the entire 
population that comes in.
    And I also want to make a point, that, out of the--I have 
the data--out of the 694,000 plans, only 3,390 came in in 2015. 
That is one-half of 1 percent of the plans, the entire 
population of plans that have to come in. So it is a very small 
percent of plans that have issues that come in, at least, 
because a lot of them self-correct. And it is also only a one-
time fee that they have to pay.
    And the other thing is it really didn't affect the time we 
spent on it, whether it is participant-based, whether it is a 
small plan or a large plan. So it is hard to tell how it 
affects the plan community.
    The one thing also to keep in mind is, if they don't come 
in voluntarily and we pick this plan for audit, the effect on 
the plan can be, you know, catastrophic, if the plan is picked 
for audit and then doesn't enter into a closing agreement. That 
amount of closing agreement sanctions in an audit is far higher 
than $1,500 or $3,000.
    And if there is no resolution, there are tax consequences 
to the participants, who did nothing wrong, or the employer, 
who actually retained experts to look at its plan, and the 
employer is running his business. So we want to protect the 
innocent participants here and offer this program and also 
expand, as much as we can, the self-correction program.
    So the short answer, we don't know how it affects. But we 
think it affects them positively because they can come in 
without having to worry about an audit and the huge tax 
consequences on them.
    Mr. EVANS. Maybe this is just a piggyback on, you know--can 
you further explain how IRS made the determination to base the 
user fee on the value of the plan? Essentially, how they made 
that determination?
    Ms. LOUGH. Well, we looked at whether the hours spent by 
number of participants is less versus assets. And we spent the 
same number of hours whether we charged the fee by number of 
participants or the number of assets.
    But the six-tier fee that we used to have before this one 
was confusing to the plan participants, because it was also 
based on the type of failure sometimes. And it is also the 
participants. So the three-tier fear intent was to simplify the 
fee structure. You can look at it and say, oh, I fall within 
this category, this is what I have to pay.
    Plus, we use the government-wide user-fee requirements that 
OMB has put out to make a determination. We looked at the hours 
we spent on an average on different types of plans, whether it 
is by asset or by participants, and we found it didn't matter. 
Whichever way we sliced the data, it didn't matter. And so we 
came to $3,000 for the small plans, 500,000 or less, and we 
thought that was a little high for them, so we cut it down to 
$1,500.
    And I just wanted to add, we have a meeting with the 
community to see how we can offer more self-correction programs 
so they can do it themselves and not have to come in.
    The other thing is, since the last year and a half, we have 
changed how we work the cases that come in, and they have 
become much more streamlined. So it is a biannual review. So 
when we review again, I am guessing, because we have 
streamlined the process, the hours will go down for everybody, 
not just for small businesses but even the large. And so, by 
OMB requirements, we will have to look at the fee again, and if 
the hours go down, that means the fees will go down.
    Mr. EVANS. I thank you.
    And I yield back the balance of my time, Mr. Chairman.
    Chairman BRAT. Thank you, Mr. Evans.
    At this time, I would like to yield whatever time the 
Congresswoman from New York, Ms. Clarke, needs.
    Ms. CLARKE. Thank you, Mr. Chairman. And I thank the 
ranking member, Mr. Evans.
    I thank you, Ms. Lough, for coming in this morning to 
testify.
    Every American shares the dream of being able to afford 
retirement. However, a 2017 study by the Pew Charitable Trust 
found that 40 percent of workers do not have access to 
employer-provided retirement options.
    Small businesses are particularly hard-hit, as they often 
have fewer benefits to offer employees. They were also 
particularly affected by Revenue Procedure 2018-04, which 
restructured the Voluntary Compliance Program to be based on 
asset size rather than on the number of participants.
    Ms. Lough, section 1101 of the Pension Protection Act 
specifically directed the IRS to take into account the special 
circumstances that small businesses face with respect to 
retirement plan compliance, yet some have claimed that the new 
fee schedule raised compliance costs on small employers by up 
to 600 percent. Is this the case?
    Ms. LOUGH. So the prior fee structure was based on the 
number of participants. And number of participants doesn't--it 
wasn't based on asset size. So the number of participants 
doesn't necessarily mean that the plan asset is less.
    So to do a comparison of what it used to be, which wasn't 
even based on the user fee required by OMB, to what it is now 
is actually comparing apples to oranges.
    Ms. CLARKE. I understand that, but for an employer, with, 
again, the apples-to-oranges change, the bottom line doesn't 
necessarily recognize that. It is recognizing what the cost is 
to the company.
    Ms. LOUGH. The cost to the company--some small employers if 
they were--based on the participants, if they were small, were 
paying $500. And now those same employers, if they fall in the 
same category, you are right, they will be paying $1,500.
    Ms. CLARKE. Right. So I just would be a bit concerned. And 
do you think that that really comports with the goals of 
section 1101?
    Ms. LOUGH. So we are required--for all the rest of the IRS 
programs, we use the user fees set forth in OMB Circular 825. 
The prior program based the fees on the sanctions that the 
resolution--what type of resolution, what type of error was 
occurring. And what we did was we changed the user fee, the way 
we compute the fee, how we do it government-wide and IRS-wide, 
based on the number of hours spent on each case and the hourly 
cost as directed by the OMB circular. So now we have the same 
way of doing fees used for voluntary compliance in the rest of 
the IRS and for other programs.
    Ms. CLARKE. I understand that, but, I mean, I think that 
small businesses are unique. And I don't know that, sort of, a 
blanket regulation takes into account the nuances and 
uniqueness of small business.
    Was that part of the discussion at all when you got to the 
point of where you felt that there needed to be, I guess, a 
blanket user-fee calculation for all that fall under section 
1101?
    Ms. LOUGH. So we did take that into account, and we reduced 
the fee that would have been by 50 percent.
    Ms. CLARKE. Okay.
    Well, my understanding is that the new user-fee structure 
was announced with little advance notice to plan sponsors. Many 
submissions were ready to go and awaiting a plan official to 
sign the paperwork after the holidays.
    Did the IRS consider whether taxpayers should be permitted 
a transition period to submit VCP applications under the old 
fee schedule?
    Ms. LOUGH. We did not consider that. But that--in the other 
areas, we have noticed that when we have a transition period, 
it is far more confusing to the taxpayers, because they have to 
look to see where it applies, and it causes a lot more 
confusion versus the----
    Ms. CLARKE. So you are determining whether the confusion is 
comparable to the hardship?
    Ms. LOUGH. But this is a one-time fee.
    Ms. CLARKE. I understand that, but if you are not planning 
for an increase in fees, it becomes a hardship when the change 
is so drastic and there is no planning for it on the part of 
the businessowner, especially for small businesses.
    Ms. LOUGH. Well, I don't recall exactly when the Rev. Proc. 
came out. And there was a time between when the Rev. Proc. 
comes out and when the fees are applicable. But we can look it 
up and see how much----
    Ms. CLARKE. I would encourage you to do that.
    Ms. LOUGH. Yes. Okay.
    Ms. CLARKE. EPCRS includes a self-correction program that 
does not require an IRS submission or user fee. Many 
stakeholders have advocated expanding it to include loan 
failures, RMD failures, and other failures.
    Is the IRS considering expanding the SCP to include these 
failures?
    Ms. LOUGH. Well, we have a meeting in early May with the 
business community, which includes the small-business 
community, with the stakeholders. And we are open to looking at 
where we can expand the Self-Correction Program, which is, like 
I initially stated, really good for us and it is good for the 
taxpayers.
    But there are certain instances that self-correction 
doesn't work. And we need to be very careful where there are 
consequences to the participants, whether, you know, tax 
consequences to a third party, rather than just the plan, and 
that we need to make sure that it fits under the Self-
Correction Program.
    Ms. CLARKE. Ms. Lough, I would want to just suggest that, 
you know, there be some level of concentration specifically on 
small businesses. I represent a district where we are really 
talking about mom-and-pop operations, and we know that their 
margin of profitability is very, very slim.
    So I hope that you will give some consideration to perhaps 
doing some sort of focus group with a cohort of small 
businesses so that you can get a far more specific impact, so 
that they are not sort of put into a pool of businesses that 
don't necessarily have the same challenges, if you will, that 
many of our small businesses do in our commercial corridors 
across this Nation.
    And I thank you for your time.
    Mr. Chairman, I yield back.
    Chairman BRAT. Thank you, Yvette.
    I will start up maybe another round of just short 
questions, and then, Dwight, if you have more, we can go around 
the loop one more time.
    I don't know the answer to this question, so I am just 
asking it open. What is the average net income of a small 
business in the country right now?
    Ms. LOUGH. I don't know the answer to that.
    Chairman BRAT. The average family income in Virginia is 
about $70,000. And so, when we are talking about these fees, 
the $1,500 fee, et cetera, I think part of the concerns you are 
hearing from the entire panel here is in light of that ratio, 
of that $1,500 to, say, $60,000, or even a smaller, right, the 
smallest of the small, and a lot of the small businesses are 
losing in the first year or two.
    And so then you are looking at that, and then I can tell 
you are obviously professional, skilled, very smart because 
when you are making reference off the top of your head to OMB 
Circular 325--right? And the problem that we are facing is that 
is just one out of--OMB Circular 325. Well, you are up to 325 
regs, at a minimum. And then you have all the other government 
agencies and, I think, about $2 trillion in regulatory 
overhang, right, on the U.S. economy, out of $20 trillion.
    And, as an economist, that is hitting my ears the wrong 
way. And it is not due to you. I think it is due to--at this 
May meeting, I think we need to assess our pro-growth stance in 
terms of policy for the country and who should be bearing that 
$1,500 cost, right?
    So if you are incentivizing small business--and there is no 
alternative to growth and startups than small business, and 
without which you don't have public education and all the other 
social goods you want to have--maybe we should start thinking 
about who bears the cost in general. Maybe we shouldn't be 
flipping all of these regulatory costs on the firm, right? 
Maybe we should apply it in general to society to show society 
the total cost of regulation in general and then discuss, is 
this prohibitive, right, is this slowing the economy down too 
much.
    And so I am just--if you can comment on--this May meeting, 
you are going to go look for feedback. Will there be economists 
there who assess, hey, look, this regulatory overhang in 
general, this is just one small piece, but a small business 
cannot face up to that number, $1,500, plus a few other of 
those numbers, and probably survive, much less thrive.
    And so just your general comments as to how we look at 
these numbers.
    Ms. LOUGH. So, you know, this is tax day, and you know the 
IRS is--we are very cognizant of the need for the small 
businesses to be able to run their business. That is what they 
want to do. You know, the plumber down the street or the 
hardware store, that is what they are in the business of. And 
they need experts and people like from the IRS to help them 
with their plans. They want to provide retirement plans, and so 
they purchase these retirement plans--because they don't draft 
them, most of the time they purchase them--from plan 
administrators. And the expectation is that these experts will 
look after their plans, because they just want to run their 
business.
    And even given that, because the law is so complex, errors 
get made. The amendments don't get done in a timely manner. 
There are more contributions that should have been done, put 
in. So those kind of things occur because, as we all know, this 
is a very complex area of the law.
    So we have provided mechanisms for plans to come in. When 
they find these errors--we want them to find them themselves, 
rather than us finding them on audit. So we have provided 
mechanisms for them to come in, and we are looking to provide 
more ways for them to correct themselves. And we want to 
encourage people to be more diligent in their--and when they 
provide their retirement plan, to be diligent. Because if they 
are not, the tax consequences are not good.
    So we are looking to see how we can reduce the fee by even 
working ourselves into a more streamlined way so we don't spend 
as much time on working these applications.
    So we are doing two things. We are going to see if we can 
increase the Self-Correction Program in instances. But it can't 
be all Self-Correction, because there are certain things that 
can't go into the Self-Correction Program because of, you know, 
real tax consequences to the participants. But we are also 
looking to see how we can streamline the Voluntary Compliance 
Program so we don't spend as much time.
    But if we apply user fees, we have to apply them the same 
way. But we did reduce them. And the less time we spend, the 
less we can charge--or we would charge.
    So we are looking at how we can help the small-business 
community, but I think it is--we understand that the employers 
really just want to run their business and not have to worry 
about their plans.
    Chairman BRAT. Right. Good.
    And I hate to ask this question, so be gentle and kind with 
your response. But, you know, with our tax reform, we always 
try to simplify, on behalf of small business and individuals 
and whatever. Did we? Or is there even more complexity just 
because the world adds regulatory--and these complex issues 
grow more complex by the day.
    I mean, on average, did we make things simpler for small 
business? I think we did for individuals, but on the small-
business side, I am interested to hear your expertise.
    Ms. LOUGH. Well, we enforce the laws and we implement the 
laws as Congress passes them. And we are still studying--some 
of the regimes are new, and we are looking at it. The qualified 
business income credit, for example, or the international 
regime. And sometimes small businesses can get involved with 
the international part also.
    So, to answer your question, you know, some things are new, 
and we are trying to understand how they will work in the 
small-business community.
    Chairman BRAT. Very diplomatic. Thank you.
    Mr. Evans?
    Mr. EVANS. Thank you, Mr. Chairman.
    After listening to this discussion, you really have sort of 
made the case of a bill I just dropped, H.R. 5512, to require 
the administrators of the Small Business Administration to 
establish a grant program to address rising costs of tax 
compliance.
    And your last statement really says it. I mean, we passed a 
law, and you have the responsibility of trying to implement it. 
And here, either intentionally or unintentionally, there are 
consequences, I am hearing about, and questions have been 
raised.
    And, you know, there is no question I totally agree with 
the chairman about economic growth is ultimately the issue that 
we all are working towards, and that is where we should be. So 
that is part of why I dropped that bill, you know, of the Small 
Business Administration coming up with some kind of program on 
the rising costs. Because there is no question that small 
businesses just cannot afford anymore, quote/unquote, 
``burdens'' put upon them, and we have to find ways to allow 
them to grow.
    That is part of the reason why I asked you a question about 
the study. And, you know, you said you chose not to do the 
study, but I am just going to ask you, if you dig a little 
deeper in that, do you think that needs to be reconsidered? Or 
is it too late to go back and look at the aspect of a study?
    Ms. LOUGH. We can certainly look to see what effect--if it 
is possible for us to see what effect this compliance program 
has on the small-business employers to provide the retirement 
plans to their employees. We can certainly go back and look at 
that, see if there is data, and we can make correlations. 
Because they only come in once, and it is a one-time fee, in 
other words. It is not a recurring fee. So it may be hard. But 
I am not a researcher or an economist, but we can ask our 
research folks to look at it.
    Mr. EVANS. Super.
    Thank you, Mr. Chairman.
    Chairman BRAT. And, Ms. Clarke, any further questions?
    Oh, sorry. Obviously, there are no further questions.
    With that, did you have any further comments you wanted to 
offer the Committee?
    Ms. LOUGH. No. Thank you for the opportunity to be here.
    Chairman BRAT. Thank you very much for joining us here 
today.
    Americans face many challenges with regard to saving for 
retirement. Small businesses can play an outsized role in 
helping formulate a plan for all workers. I think this 
discussion today will help us as we continue to look at tax 
issues and all issues facing small businesses, entrepreneurs, 
and startups.
    I ask unanimous consent that members have 5 legislative 
days to submit statements and supporting materials for the 
record.
    Without objection, so ordered.
    This hearing is now adjourned. Have a great tax day.
    [Whereupon, at 10:42 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X


                          WRITTEN TESTIMONY OF


                            SUNITA B. LOUGH


           PROJECT DIRECTOR, TAX REFORM IMPLEMENTATION OFFICE


                           IN HER CAPACITY AS


                              COMMISSIONER


                TAX-EXEMPT/GOVERNMENT ENTITIES DIVISION


                        INTERNAL REVENUE SERVICE


                               BEFORE THE


                   HOUSE COMMITTEE ON SMALL BUSINESS


             SUBCOMMITTEE ON ECONOMIC GROWTH, TAX & CAPITAL


                                 ACCESS


                 ON THE IRS' EMPLOYEE PLANS FEE CHANGE


           AND THE IMPACT ON SMALL BUSINESS RETIREMENT PLANS


                             APRIL 17, 2018


    INTRODUCTION

    Chairman Brat, Ranking Member Evans and Members of the 
Subcommittee, thank you for the opportunity to testify on small 
businesses and the IRS Employee Plan Compliance Resolution 
System (EPCRS). Since January, I have been in a temporary 
posting as Director of the IRS Tax Reform Implementation 
Office, having stepped away from my position as Commissioner of 
the Tax-Exempt/Government Entities (TE/GE) Division. I was 
serving in TE/GE at the time of the fee change at issue.

    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 IRS has adjusted 
the fees over the years. Although the IRS recently changed the 
fees for one program within EPCRS--the Voluntary Correction 
Program (VCP), which is described in more detail below--the 
sliding scale persists.

    OVERVIEW OF EPCRS

    The IRS and the Department of the Treasury developed EPCRS 
to provide a remedy for retirement plain failures without 
having to revoke the qualified status of the plan under the tax 
law. Otherwise, revocation could have a dramatic impact on not 
just the plan sponsor, who may lose deductions for 
contributions, but also on plan participants and beneficiaries 
whose benefits generally would become currently taxable if 
revocation occurred.

    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 IRS does not review self-correction, and 
        consequently, there is no fee for SCP. By the same 
        token, SCP focuses on those types of errors that are 
        susceptible to clear correction methods, which require 
        little judgment, as prescribed in the revenue 
        procedure. Other types of failures that do not fit 
        within SCP may qualify for the other EPCRS components 
        described below.

           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 IRS to review the 
        application. Upon approval, the IRS issues a compliance 
        statement indicating that the correction is proper. 
        Under VCP, the IRS can review the correction and work 
        with the plan sponsor, adjusting the correction method 
        to resolve complex mistakes.

           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 IRS. 
        Audit CAP is most often employed on examination where 
        the failure is discovered by the IRS. Audit CAP may be 
        the last option before plan revocation. This program 
        permits the plan sponsor and the IRS to enter into a 
        closing agreement that defines the terms of plan 
        correction for a negotiated sanction amount that is 
        less than the Maximum Payment Amount (i.e. the tax that 
        would be due if the plan were disqualified). Audit CAP 
        sanctions are based on facts and circumstances. The 
        sanctions are more than the VCP fees because the errors 
        are not generally identified by the plan sponsor and 
        are not based on the cost of processing an application, 
        but reflect the nature, extent, and severity of the 
        failures. Relevant factors for Audit CAP sanctions 
        include: the extent of internal controls designed to 
        ensure that the plan had no failures or that such 
        failures were identified and corrected in a timely 
        manner; number of affected employees; impact on staff 
        (``non-highly compensated employees''); type of 
        failure, whether demographic or employer eligibility; 
        length of time over which the failure occurred; and 
        reason for the failure. Audit CAP is a voluntary 
        program, but because errors are generally found by the 
        IRS, failure to come to an agreement on correction will 
        often result in plan disqualification.

    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 IRS, make the 
required corrections, pay a fee to the IRS, and receive 
confirmation of the plan's continued qualified status.

    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.

    Congress has repeatedly endorsed EPCRS. On the 1998 
enactment of the IRS Restructuring & Reform Act, the Senate 
Finance Committee report stated:

          [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 IRS 
        announced the expansion of the self-correction programs 
        it offers employers to encourage companies to identify 
        and correct errors without incurring significant 
        penalties. These changes are welcomes

          . . . .

    In the Pension Protection Act of 2006, sec. 1101, Congress 
praised EPCRS, as created by Revenue Procedure 98-22, 
especially VCP, directing the IRS to continue to update and 
improve EPCRS, by focusing on the concerns of small employers, 
and assure that any tax, penalty or sanction is not excessive 
and bears a reasonable relationship to the nature, extent and 
severity of the compliance failure.

    EPCRS FEES

    When a qualified plan does not meet the tax requirements, 
there are many potential ramifications. The IRS may disqualify 
the plan; disallow the plan sponsor's deduction for 
contributions to the plan; and tax the income of the trust, 
participants, and beneficiaries. These potential ramifications 
encourage a plan sponsor to meet the tax requirements and to 
fix any problems when they arise.

    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 IRS. Under VCP, 
the plan sponsor and the IRS work together to correct any 
qualification failures. At the conclusion of the process, the 
IRS will issue a compliance statement, which resolves the 
issues. To participate in VCP, the plan sponsor must pay a fee 
authorized by statute to offset the cost of the program.

    On the other hand, Audit CAP applies when a retirement plan 
is under examination by the IRS. Under this program, the plan 
sponsor and the IRS can agree to resolve an examination. At the 
conclusion of the process, the parties will sign a closing 
agreement pursuant to statutory settlement authority.

    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 $500 for plans 
with few assets and participants to $10,000 for plans with many 
assets and participants. (The dollar amounts of the fees for 
these programs are not indexed for inflation.)

    In 2002, the fees for VCP changed to a range based on a 
presumptive amount. The presumptive amount ranged from $2,000 
for small plans up to $35,000 for large plans. The fee was 
generally the presumptive amount unless certain factors applied 
to move the fee up or down. However, the fee for applications 
based on operational failures continued to follow the pre-2002 
fee schedule.

    In 2003, the fees changed again. The new structure had 
eight tiers based on the number of plan participants. The fees 
ranged from $750 for the smallest plans to $25,000 for the 
largest plans. This fee structure remained in place until 2016.

    In 2016, the fee structure changed to six tiers generating 
a range of fees, from $500 for the smallest plans to $15,000 
for the largest plans. Until 2018, VCP also provided for 
miscellaneous user fees for specific types of plan failures, 
such as the failure to make minimum distributions or the 
failure to make payments under a plan loan. These amounts were 
generally less than the standard fees.

    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 $1,500 for the smaller 
plans, to $3,000 for larger plans, to $3,500 for the largest 
plans.

    The 2018 VCP fees were determined by multiplying the 
average hours needed for the IRS to complete VCP cases by the 
IRS's hourly staff cost of processing the cases. Analysis of 
data from previous years revealed that a steeply tiered system 
based on the number of plan participants was no longer 
appropriate. The data showed that the average time spent and 
complexity of each case did not vary significantly across VCP 
applications based on plan size. Specifically, to issue a 
compliance statement approving the correction of a plan's 
qualification failure, the IRS staff cost did not vary greatly 
depending on the size of the plan. Consequently, changes to the 
fees were necessary to more accurately reflect the resources 
required to administer the VCP program.

    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 ($1,500) is less 
than half of the fee for the largest plans ($3,500). Within 
this narrower range, a ``sliding scale'' of user fees that 
depends on plan size persists.

    Chairman Brat, Ranking Member Evans and Members of the 
Subcommittee, this concludes my statement. I would be happy to 
answer your questions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The American Retirement Association (ARA) thanks Chairman 
Brat, Ranking Member Evans, and the other Members of the House 
Small Business Subcommittee on Economic Growth, Tax, and 
Capital Access for holding a hearing to examine the detrimental 
impact the Internal Revenue Service's recent changes to user 
fees have had on small business retirement plans and for the 
opportunity to submit this statement for the record.

    The ARA is the coordinating entity for its five underlying 
affiliate organizations representing the full spectrum of 
America's private retirement system, the American Society of 
Pension Professionals and Actuaries (``ASPPA''), the National 
Association of Plan Advisors (``NAPA''), the National Tax-
deferred Savings Association (``NTSA''), the ASPPA College of 
Pension Actuaries (``ACOPA''), and the Plan Sponsor Council of 
America (``PSCA''). ARA's members include organizations of all 
sizes and industries across the nation who sponsor and/or 
support retirement saving plans and are dedicated to expanding 
on the success of employer sponsored plans. In addition, ARA 
has more than 20,000 individual members who provide consulting 
and administrative services to American workers, savers, and 
the sponsors of retirement plans. ARA's members are diverse but 
united in their common dedication to the success of America's 
private retirement system.

    On January 2, 2018, the Internal Revenue Service (IRS) 
issued Revenue Procedure 2018-4 (Rev. Proc. 2018-4). 
Surprisingly, and without any advance notice to the regulated 
community, Rev. Proc. 2018-4 made significant changes to both 
the structure and amounts of user fees for the Voluntary 
Correction Program (VCP) within the Employee Plans Compliance 
Resolution System (EPCRS). These changes, which were effective 
immediately, significantly increased the costs on small 
businesses to use VCP.

    Specifically, Rev. Proc. 2018-4 changed the fee calculation 
from being based on the number of participants in the plan to a 
fee based on the value of the plan's assets. While this results 
in significantly lower fees for the largest plans, the vast 
majority of small plans will see a fee increase. For example, 
the lowest fee has gone up from $500 (for plans with 20 or 
fewer participants in 2017) to $3,000 (for plans with assets in 
excess of $500,000 but less than $10 million). That is a 500% 
increase in fees for small business plan sponsors. Also dropped 
from the new fee structure were reduced fees for certain common 
qualification failures (e.g., participant loan defects, or 
required minimum distribution mistakes). This too will result 
in much higher fees than under the previous schedule for plan 
sponsors of all sizes that wish to correct these types of 
mistakes.

    The myriad of rules applicable to qualified retirement 
plans is difficult for any plan sponsor to navigate, and 
particularly difficult for small businesses which have limited 
resources and do not generally have the ability to employ 
dedicated benefits personnel. The ability of plan sponsors to 
voluntarily correct plan errors at a reasonable cost is an 
important factor in a sponsor's decision to adopt and maintain 
a retirement plan.

    Congress recognized this in the Pension Act of 2006, the 
current law of the land. Congress specifically authorized EPCRS 
in section 1101 of the Pension Protection Act to both encourage 
employers to sponsor retirement plans and to encourage 
voluntary compliance with the complicated Internal Revenue Code 
``qualification'' rules for these plans.\1\ The EPCRS 
authorizing provision also clearly directed the IRS to take 
into account the special circumstances and concerns that small 
businesses face with respect to compliance and correction of 
compliance failures.\2\ The IRS totally ignored this 
Congressional directive with the user fee changes announced in 
Rev. Proc. 2018-4.
---------------------------------------------------------------------------
    \1\ Section 1101(a) of the Pension Protection Act of 2006 (P.L. 
109-280).
    \2\ Section 1101(b)(2) of the Pension Protection Act of 2006 (P.L. 
109-280).

    We understand that the IRS is justifying these significant 
changes to the VCP user fee structure by arguing that they have 
to comply with Internal Revenue Code (IRC) section 7528, which 
provides that user fees ``shall be determined after taking into 
account the average time for (and difficulty of) complying with 
requests in each category (and subcategory).'' \3\ However, IRC 
section 7528 also grants the IRS wide discretion to reduce or 
cancel these user fees as the IRS determines to be 
appropriate.\4\ Given Congress's Pension Protection Act 
directive coupled with this discretionary authority, the IRS 
should immediately undo the damage caused by Rev. Proc. 2018-4.
---------------------------------------------------------------------------
    \3\ Section 7528(b)(1)(B) of the Internal Revenue Code
    \4\ Section 7528(b)(2)(A) of the Internal Revenue Code

    One way to undo the damage would be to significantly expand 
the Self-Correction Program (SCP) component of EPCRS. Section 
1101 of the Pension Protection Act also directed the IRS to 
expand SCP availability and the duration of the self-correction 
period.\5\ SCP does not require a submission to the IRS or a 
user fee. SCP encourages the voluntary correction of plan 
errors without unduly increasing the risk of improper 
corrections. SCP reduces the burdens on both the IRS and small 
businesses resulting from retirement plan corrections. ARA 
recommends expanding SCP to cover plan loan failures, required 
minimum distribution failures, and other failures and actively 
supports legislation that would require the IRS to make those 
beneficial and common sense changes.
---------------------------------------------------------------------------
    \5\ Sections 1101(b)(3)&(4) of the Pension Protection Act of 2006 
(P.L. 109-280).

    In conclusion, the new fee structure for VCP submissions 
under Rev. Proc. 2018-4 contravenes the directive of Congress 
to update and improve EPCRS in a way that takes into account 
the special concerns and circumstances of small employers. It 
also is in conflict with the general principles upon which 
EPCRS is based--that voluntary compliance is promoted by 
establishing limited fees for voluntary corrections approved by 
the IRS because it reduces employers' uncertainty regarding 
their potential tax liability and participants' tax liability.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]