[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.
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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.
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