IRS Slashing Prices on Participant Loan Failure Filings
Chris Allesee
The IRS’ voluntary compliance program (“VCP”) provides a participant-conscious solution for plans with participant loans failures, including loans that exceed the allowable amounts or repayment period, or those that have gone into default. Oftentimes, a plan sponsor that applies under VCP can prevent the issuance of a 1099-R to innocent participants - sure, they got the cash, but they may not have been responsible for the failure and never expected it to be taxable income. Sounds like a great way to take care of your employees, yet many plan sponsors been hesitant to apply because the IRS’s services do not come cheap. Until recently, the VCP filing fee for participant loans was based on the total number of participants in the plan, and a small plan with one loan failure may have paid $375, while larger plans with the exact same problem may have paid as much as $12,500. At such a prohibitive cost, sponsors of large plans with loan failures affecting a small number of participants were unlikely to apply, and the participants were stuck reporting the loan and paying income taxes.
In Revenue Ruling 2015-27, the IRS updated the VCP guidelines to resolve this problem by establishing a new fee structure for participant loan failure VCP filings. Now, a plan sponsor must pay a filing fee based on the number of participants with loan failures, not the total number of participants. Most plans, small or large, will find they only owe a $300 filing fee (13 or fewer affected participants), but even the largest fee is capped at $3,000 (more than 150 affected participants). If you sponsor a large plan, encounter participant loan problems, and love a good bargain, the VCP may now be worth a fresh look as a means of relieving your participants from a major tax headache.
The IRS’ voluntary compliance program (“VCP”) provides a participant-conscious solution for plans with participant loans failures, including loans that exceed the allowable amounts or repayment period, or those that have gone into default. Oftentimes, a plan sponsor that applies under VCP can prevent the issuance of a 1099-R to innocent participants - sure, they got the cash, but they may not have been responsible for the failure and never expected it to be taxable income. Sounds like a great way to take care of your employees, yet many plan sponsors been hesitant to apply because the IRS’s services do not come cheap. Until recently, the VCP filing fee for participant loans was based on the total number of participants in the plan, and a small plan with one loan failure may have paid $375, while larger plans with the exact same problem may have paid as much as $12,500. At such a prohibitive cost, sponsors of large plans with loan failures affecting a small number of participants were unlikely to apply, and the participants were stuck reporting the loan and paying income taxes.
In Revenue Ruling 2015-27, the IRS updated the VCP guidelines to resolve this problem by establishing a new fee structure for participant loan failure VCP filings. Now, a plan sponsor must pay a filing fee based on the number of participants with loan failures, not the total number of participants. Most plans, small or large, will find they only owe a $300 filing fee (13 or fewer affected participants), but even the largest fee is capped at $3,000 (more than 150 affected participants). If you sponsor a large plan, encounter participant loan problems, and love a good bargain, the VCP may now be worth a fresh look as a means of relieving your participants from a major tax headache.