Retirement Plan Compliance

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In What Kind of Shape is Your Retirement Plan?

By Dave Reyes, CPA, CEBS, Shareholder

IRS and your Retirement Plan

For the sponsor of any retirement plan, like a 401(k) plan, those involved with the operation of the plan will tell you that things can and will go wrong. The rules that plans must follow are numerous and complicated. So it should come as no surprise that the IRS has increased its audit staff to take a closer look at all types of retirement plans. Over the last few years we have assisted clients with IRS audits of 401(k) plans, 403(b) plans, ESOP’s, Cash Balance Plans and Defined Benefit Plans.

The IRS has been sending out more inquires, and depending on the results of these inquires, conducting more audits.

Because of the large public trust placed in employee benefit plans and the sizable tax breaks they receive, the IRS routinely monitors issues involving a plan’s compliance with regulatory and reporting requirements.  Consequently it’s in a plan sponsor’s best interest to keep a sharp eye on plan compliance. First, to ensure that the retirement plan follows its terms as required by law and secondly if any errors are found, a plan sponsor can take advantage of IRS correction programs to fix these errors prior to being contacted by the IRS.

According to the IRS, here are some of the most common compliance mistakes:

  • Not following the terms of the plan document.
  • Not covering the proper employees.
  • Not giving employees the required information about the plan.
  • Not depositing employee deferrals or contributions in a timely manner.
  • Not properly handling distributions or loans.
  • Not limiting employee deferrals and employer contributions to the amounts permitted by law.
  • Not properly calculating participants’ vesting percentages.
  • After a merger or acquisition, not making the correct contributions or making them late for employees of the newly acquired company.

The Carrot and the Stick

The IRS characterizes its approach toward employee benefit plan compliance as one of a “carrot and stick,” with the carrot being the agency’s three correction programs and the stick being an audit. These programs enable plan sponsors the opportunity to correct inadvertent errors at a lower cost than if the noncompliance issues were found during an audit.

Here is a rundown of the three IRS programs, which are only available for failures that do not involve the misuse or diversion of assets from the plan:

Self-Correction Program Under the IRS Self-Correction Program, the retirement plan sponsor does not have to contact the IRS and does not pay a penalty to the IRS for the failure. To be eligible, the failure must be “operational,” meaning that the terms of the plan were not followed. Other requirements: The failure is an insignificant operational error; the plan must have received prior favorable determination letters; and it must not currently be under investigation by the IRS.

Voluntary Correction Program If the plan failure does not meet the standards necessary for using the Self-Correction Program, the sponsor might be able to use the Voluntary Correction Program, provided there has been no contact from the IRS about the issue. This may work if, rather than a minor operational error, the operational failure is more significant, or you have a plan document failure.

This program requires a filing with the IRS, so consult with your tax adviser or employee benefits professional before going forward. (There’s even a way to enter this process anonymously.) There is a filing fee based on the number of participants in the plan.

Audit Closing Agreement Program Predictably, the final fix for retirement plan failures is the least desirable. The Audit Closing Agreement Program is for a problem discovered by the IRS, typically during an examination of a plan. At this point, the plan faces potential disqualification and the sponsor may be given the opportunity to make full correction and pay a sanction amount negotiated with the IRS. Correction and payment of the sanction have to be made before a binding Closing Agreement document can be executed. However, even at this late date, correction can preserve the plan’s qualified status. For more information or to find out how your plan stacks up, contact Dave Reyes at 216.344.5233 or