Compliance on a compass The DOL and the IRS have increased the cost of penalties for 401(k) and benefits plan non-compliance. (Photo: Shutterstock)

Just after the New Year, the United States Department of Labor (DOL) issued a final rule increasing ERISA’s noncompliance penalties.

In Department of Labor Federal Civil Penalties Inflation Adjustment Act Annual Adjustments for 2018, 83 Federal Register 7 (Jan. 2, 2018), the DOL announced the annual adjustments that apply to penalties assessed after Jan. 2 for certain violations that occurred after Nov. 2, 2015. On the same day, the Internal Revenue Service (IRS) released Revenue Procedure 2018-4 which revamps the user fee schedule for qualified plan failures submitted to the IRS Voluntary Correction Program (VCP) for compliance statements pursuant to the Employee Plans Compliance Resolution System (EPCRS), set out in Revenue Procedure 2016-51. The IRS announcement is especially significant because the Revenue Procedure eliminates reduced fees for common compliance errors in qualified plans like 401(k) plans and defined benefit plans.

Increased ERISA penalties

Increased penalties should encourage employers to pay closer attention to the routine plan processes that create operational risks and address compliance concerns immediately so that the new penalties do not (themselves) become an issue.

On the ERISA front, this means:

  • Issuing automatic contribution notices before the plan year starts—the new penalty is $1,693 per day;
  • If it is conceivably possible that a record-keeping platform (or other operational) change restricting plan rights will span longer than three consecutive business days, issuing timely blackout notices—the penalty increases to $136 per day per participant;
  • Not ignoring DOL requests for plan information—new penalties start at $152 per day per document request;
  • Maintaining predecessor employer records sufficient to determine any applicable creditable service—the penalty increases to $29 per participant per day; and
  • Curbing impermissible use of participant genetic information—new penalties increase to $114 per day per participant, plus a potential $2,847 civil monetary penalty that could increase to $17,084 for uncorrected violations that are more than de minimis and $569,468 for egregious unintentional failures.

New fee structure for VCP-corrected qualified plan failures

For qualified plans, the new VCP fee schedule is a stark change because fees now are based on plan assets reported on the most recently filed annual report (Form 5500).

There is an exception to use a prior year’s Form 5500 if asset information is not available when filing the VCP application, but that exception is not available if the submission is filed more than seven months after the close of the most recent plan year.

The deadline for filing Form 5500 is the last day of the seventh month after the plan year ends (without an extension). So, in other words, an employer who has not complied with the Form 5500 requirement cannot file a VCP submission while the untimely/late/delinquent form is outstanding. Both of the compliance failures must be addressed—the late annual report must be filed and the VCP user fee must be calculated based on the plan assets reported on that late form. Otherwise, the IRS will return the VCP filing (possibly without the submitted fee), which may create even more risk if the IRS then considers the substance of that returned filing when determining whether to initiate an audit.

The new VCP fees start at $1,500 for small plans with no more than $500,000 in plan assets, and double ($3,000) for plans between $500,000 and $10 million. For large plans with over $10 million in assets, the fee is $3,500. Common compliance errors that are now more costly to fix include (for large plans):

Failure Before 1/2/2018 Now
Good faith and interim amendment failures $375 $3,500
Certain late amendment (non-amender) failures 50% fee reduction $3,500
Required minimum distribution (RMD) failures (when the failure affects less than 150 participants and it is the sole error submitted)  




Certain plan loan 72(p) limit, duration, amortization and default failures (when the failure affects less than 25% of participants during the impacted year (51-100 participants) and it is the sole error submitted)  




Compliance risks related to required minimum distributions are particularly common and far-reaching because oftentimes participants fail to keep their contact information updated. In October, the Acting Director for IRS Employee Plan Examinations issued an internal memorandum generally instructing agents not to pursue RMD violations related to late commencement of distributions if the relevant plan took specific steps to search diligently for missing/non-responsive participants.

Most notably, some of the steps include searches of related plan and plan sponsor records, and enlisting third parties (either a third-party tool or the third party itself). These are prerequisites for IRS audit relief related to late RMDs. Keep in mind that, on a more global ERISA scale, the failure to search diligently creates breach of fiduciary duty risks.

The bottom line is that, although there may be institutional challenges with getting a handle on plan compliance, increased risks and noncompliance penalties will be more painful.


Christina M. Crockett is Senior Counsel (Employee Benefits) at Fifth Third Bank. Before joining Fifth Third, she was in private practice for several years in the Washington, D.C., metropolitan area where she focused exclusively on employee benefits tax and ERISA compliance matters.