Each year, thousands of employee benefit retirement plans are audited by the IRS. The goal is to ensure that plan sponsors are compliant and that documented procedures and policies are in place and up to date. This is actually a very needed and useful oversight to protect the retirement accounts of employees.
The first thing to know?
The majority of IRS audits are random and general in nature and don’t signal any known issues with your plan. For the most part, an audit has no specific focus and generally reviews every aspect of the plan’s compliance and tax status.
First step!
If you’ve received a notice indicating an IRS audit is to be scheduled, it’s important to work with your TPA (Third Party Administrator) to quickly respond to the notice. They will then help you get all the information together that the IRS has requested, which is usually a standard package of data.
Most audits do go smoothly, but if you are aware that your plan has some issues, notify your TPA and get the support you’ll need to make it through the audit. Your TPA can also help you to preemptively identify any issues that need addressed coincident with the audit.
Your TPA, like Retirement Planners and Administrators (RPA) will be able to advise you on the types of information or data that should be shared with the IRS. TPAs “specialize in the consulting and administration of qualified retirement plans. They have actually prepared and completed the Form 5500; performed the required ADP/ACP test; conducted the required coverage and nondiscrimination testing under Internal Revenue Code sections 410(b) and 401(a)(4), respectively; and may have assisted with the design of your plan and prepared the plan’s Adoption Agreement and Summary Plan Description.” A great TPA like RPA has an excellent understanding of ERISA, knows how to apply the rules and regulations, and can effectively communicate these rules to the you and the IRS in an understandable way.
In addition, your TPA can also represent you if they have an Enrolled Retirement Plan Agent on staff, like RPA does. An enrolled retirement plan agent (ERPA) is an individual who has been approved by the IRS to practice before the IRS on certain retirement plan issues. Just ask RPA.
Reviewing the data
After the IRS has reviewed the data, you’ll have a better idea if there are any issues that have been identified and need addressed. For example, there may be potential issues driven by some form of non-compliance from a Department of Labor perspective. Or there may be issues that point to potential IRS tax penalties, or even in severe cases, potential plan disqualification.
Does my plan have issues?
1. If the audit focus becomes non-compliance:
For example, have all Form 5500’s been filed? Has the Summary Plan Description and any applicable Summary of Material Modifications been provided to all participants, as required? Are employees receiving benefit statements? If the answers to these questions are “no” or “I’m not sure” then that could very well become the focus of the audit.
However, if you answered yes to those questions, but can’t answer the following questions, you may be at risk of IRS penalties:
2. If the audit focus becomes about Plan document deficiencies:
Is there a plan document and is it properly drafted, signed and dated? Have plan amendments been properly drafted, signed and dated?Is there an IRS Letter of Determination? Prototype and Volume Submitter plan documents typically can rely on the IRS Opinion Letter obtained by the Prototype or Volume Submitter Master Plan Sponsor.Individually designed plan documents have no such reliance and should obtain their own IRS Letter of Determination.
Plan document deficiencies are common violations…such as missing amendments, missing signatures or forms forgotten to be filed.
If this sounds like your company and you’ve received an IRS audit letter, immediately notify your TPA. There is no sense in procrastinating, going through this alone, or fearing the outcome. Your TPA will assist you through the process.