What Is a VCR Charge in Retirement Plan Compliance?

The term “VCR charge” refers to a financial obligation associated with correcting errors in tax-qualified retirement plans. This phrase signals a proactive effort by plan sponsors to maintain their plan’s compliant status with federal tax laws. This charge is a component of a structured program designed to help rectify administrative oversights and ensure the long-term integrity of retirement savings vehicles.

Understanding the VCR Charge

The “VCR charge” is a common, though outdated, reference to the user fee imposed by the Internal Revenue Service (IRS) for submissions under its Voluntary Correction Program (VCP). The acronym “VCR” originally stood for “Voluntary Compliance Resolution,” which was the previous name for this program. Since 2002, the official designation has been the Voluntary Correction Program, part of the broader Employee Plans Compliance Resolution System (EPCRS).

The VCP is a formal, voluntary process that allows retirement plan sponsors to correct operational and document failures within their qualified plans. These failures, if left unaddressed, could jeopardize the plan’s tax-favored status. The charge is a fee paid to the IRS to process a VCP submission, which involves disclosing plan defects and proposing methods for their correction. This user fee is a prerequisite for the IRS to review and approve the proposed corrective actions, bringing the plan back into compliance.

Why the VCP Program Exists

The IRS established the Voluntary Correction Program (VCP) to encourage plan sponsors to proactively identify and rectify errors in their retirement plans. This program serves as a mechanism for maintaining the tax-advantaged status of qualified plans, which benefits both employers and employees. Without such a program, even minor administrative errors could lead to severe consequences for a retirement plan.

The primary benefit of utilizing VCP is to avoid potential plan disqualification, which would result in significant adverse tax implications. A disqualified plan loses its tax-exempt status, leading to taxable distributions for participants and potential penalties for the employer. VCP provides a structured pathway for plan sponsors to self-correct under IRS oversight. This process helps safeguard the tax deductions associated with plan contributions and ensures participants’ retirement savings continue to grow tax-deferred.

Determining the VCP User Fee

The user fee for a Voluntary Correction Program (VCP) submission is determined by the IRS based on a published fee schedule. This fee is not a penalty but rather a processing charge for the IRS to review the submitted correction proposal. The primary factor influencing the amount of the fee is the total net assets within the retirement plan, as reported on the most recently filed Form 5500-series return. For plans not required to file a Form 5500, such as SEP/SARSEP/SIMPLE IRAs, the fee is based on the total value of all participant IRA account balances.

The current structure generally categorizes fees based on asset tiers. For instance, plans with assets up to $500,000 may incur a lower fee, while those with assets exceeding $10 million face a higher, though capped, fee. For most submissions, fees can range from $1,500 to $3,500.

Common Errors Corrected Through VCP

The Voluntary Correction Program (VCP) addresses a range of operational and document failures that can occur in qualified retirement plans. Common issues include:

Failure to follow the plan’s terms, such as not making required employer contributions or incorrectly determining employee eligibility for participation.
Errors related to exceeding Internal Revenue Code contribution or benefit limits, which can lead to excess contributions.
Failure to adopt required plan amendments in a timely manner, ensuring the plan document complies with current tax laws.
Improper exclusion of eligible employees from plan participation, or miscalculations in their eligibility.
Operational failures concerning distributions to participants or the administration of plan loans, such as late deposits of employee contributions.