403(b) Plan - Can QNECs, User Fee Be Paid from Plan Assets

My client is a 501(c)(3) organization eligible to maintain a 403(b) plan. Even though the plan provided for salary reduction contributions, they had never been implemented. There are a couple of other operational errors as well. The client has raised the following questions: (1) can the user fee be paid from plan assets? and (2) can the correction of QNECs equal to a default of 1.5% of compensation plus earnings be credited to the plan using plan assets? I am inclined to say no to both questions.

Are you referring to the VCP User fee? If yes, you are correct, it cannot be paid from the plan assets.

The Internal Revenue Manual section on EPCRS expressly provides that VCP user fees are not payable from plan assets. See below:

IRM 7.2.2.7  (10-03-2017)

VCP Submissions - Initial Review

Verify that the user fee has not been paid with plan assets :

1. Review the cover letter or narrative in the VCP case file to determine if there is an indication that the user fee was paid by the plan.
2. Review the HQEP printout and copy of user fee check to see if the plan is the payor of the user fee. If the copy of the check is missing, secure a copy of the compliance fee check from the VCP Applicant.
3. If there are indications that the plan paid the compliance fee, discuss the matter with the Group Manager or Group Coordinator. If the fee was paid by the plan, ensure that the plan is immediately reimbursed by the plan sponsor (or some other party) with interest for any amount of VCP compliance fees paid. The VCP submission cannot be processed any further until the plan has been reimbursed.