When the IRS and DOL come knocking...
What to Expect and How We Can Help
Lisa Jones, Esq., CPC, QPA
(You can’t pretend you’re not home.)
What We Will Cover
Why you?
Overview of DOL/EBSA Initiatives
A deeper dive into what an IRS audit looks like
What the IRS and DOL are looking for and why
Your Options regarding who will handle the audit
Most common errors
What happens if the IRS finds an error
Correcting errors before the government finds them
Best practices
Your questions
Why You?
• An IRS audit can be randomly generated, caused by a response on your Form 5500 or part of a focused audit.
• There are also multiple ways to trigger a DOL audit:
1. A benefits advisor may contact the employer due to an employee question or complaint.
» Informal process: If the employer works with the benefits advisor to address their concerns the employer may be able to avoid an audit.
» If an employer does not respond, if there appears to be a violation that is systematic and widespread, if the company is in financial distress or criminal activity is suspected chances are you will not be able to avoid an audit.
2. If you have reported an error or potential ERISA violation on your form 5500, the DOL may open an audit of your plan.
DOL, EBSA Enforcement Initiatives
Health and Welfare Plans
They are looking for SPDs, Summaries of Benefits and Coverage, materials describing any wellness programs or disease management programs offered by the plan along with other notices used to comply with HIPAA, COBRA, and the ACA.
Plans with Employee Deferrals
Targets fraud and abuse against participants and beneficiaries of contributory plans.
Employer Bankruptcies
To ensure that plan assets are preserved. Employee Stock Ownership Plans
Most common issue is the incorrect valuation of employer securities. Continuing Investigations into Plan Fees
DOL Audit Request for Retirement Plans
Plan Document, all Amendments, Adoption Agreement, and Base Plan
Document
Trust Agreement and all Amendments
Summary Annual Reports (usually for the last three years)
Fidelity Bond
Form 5500 (usually for the last three years)
Most recent IRS Determination Letter
Minutes of Plan Board of Trustees' Meeting and committee meeting
minutes
Loan information
Balance sheets
Service agreements and fee schedules
Names of plan fiduciaries and service providers
Documents evidencing employer contributions
Description of how all contributions are forwarded to the trustee,
custodial trustee, or investment manager
Fee disclosure notice (408(b)2))
DOL Audit Request for Retirement Plans (continued)
Knock Knock...
Department of the Treasury/TEGE Employee Plans Date: A bad day in 2014
Name of Plan/Plan Year Ending: Agent and Manager’s Contact info
Dear Plan Sponsor:
Your retirement plan for the year indicated above has been selected for examination. This selection does not imply that the information was incorrectly prepared. Most returns are randomly selected from the universe of all information returns (Form 5500) filed.
To help make the examination as brief as possible, I have prepared two attachments, Attachment 1 is data that I would like mailed to my office in advance to our
scheduled appointment and Attachment 2 which is data you should make available at the time of the examination.
In accordance with section 301.7605-1(d) of the Income Tax Regulations, the audit should generally be conducted at your place of business. Please call me within 10 days from the receipt of this letter to schedule an appointment and to answer any
questions that you may have. I can be reached at the telephone number shown in the heading of this letter.
If you wish to have someone represent you during the examination other than employees or officers of the company, you may provide a completed Form 2848, Power of Attorney and Declaration of Representative, or other written declaration containing the same information required on Form 2848. If you do not provide this, your representative will not be permitted to receive or discuss confidential
information
Thank you for your cooperation.
Sincerely,
Employee Plans Specialist
Knock Knock...
Attachment #1
Items the agent wants to receive prior to the visit:
Please mail the listed information to me within three weeks of this letter. Providing this information ahead of the scheduled audit will allow me time to review it and help make the actual examination as brief as possible.
1. If you are using a prototype or volume submitter plan:
a. A copy of the IRS opinion letter or advisory letter issued to the sponsor of the prototype or volume submitter plan,
b. The executed Adoption Agreement along with any amendments, and c. The Master Plan Document (Base Document)
2. Copies of the ADP and ACP tests.
3. Copy of the allocation schedule for the employer contributions.
1. Forms 5500 series returns (Annual Return/Report of Employee Benefit Plan) for each year under examination, the preceding year and succeeding year. Please be sure to include all schedules and attachments required to be filed with the Form 5500.
2. If applicable, any Forms 5330 (Return of Excise Taxes Related to Employee Benefit Plans) for the year(s) under examination.
3. The summary plan description (SPD), summaries of all material modifications (SMM), and the summary annual report (SAR).
If the plan was intended to be a safe harbor plan, to verify that the requirements of IRC section 401(k)(12) were satisfied, please provide a copy of the required notice given to eligible employees.
Attachment #2
Items to be made available during the in-person exam:
To determine if the plan satisfies the eligibility and coverage
requirements, please provide the following:
1. The employer's records that were used to determine employees' eligibility to take part in the plan for the year(s) under examination, such as payroll records, time cards, personnel records, and employment contracts. Also, include a copy of:
a. Forms 940 (Employer's Annual Federal Unemployment Tax Return), b. Forms 941 (Employer's Quarterly Federal Tax Return),
c. Forms W-2 ( Wage and Tax Statement), and
d. Related Forms W-3 (Transmittal of Income and Tax Statements).
2. Participant allocation schedules, employee census reports and participant account statements.
3. A demonstration outlining how the plan satisfied the minimum coverage requirements of IRC 410(b).
4. Identification/documentation of any controlled group members or other related entities.
To determine vesting and distribution compliance:
The Form 5500, Schedule H, Part II, line 2e(l) (or Schedule I, Part I, line 2e) indicates that $100,000 was paid to plan participants. Please provide:
a. A list of these participants,
b. Their dates of hire, dates of birth and dates of termination, c. Proof of payment and/or proof of rollover,
d. Spousal consent forms to waive the Qualified Joint & Survivor form of benefit if required,
e. Any Qualified Domestic Relations Order (QDRO) requests received or QDRO distributions made for the plan year under examination, and
f. Forms 1099-R, for distributions from the plan for the year(s) under examination.
To demonstrate how the plan satisfies the deductible limits:
Provide cancelled checks / fund transfers verifying contributions made to the plan and deductions taken on the tax return. Please reconcile the deduction taken on the return to the contributions made to the plan.
The following items are being requested to examine the operation of the trust including determining the ownership, existence and fair market value of trust assets:
1. Evidence of a fidelity bond for all people handling trust assets as required by ERISA section 412(a).
2. Supporting documents for all plan assets and liabilities, such as broker's statements, bank statements, insurance contracts, loan documents, deeds, etc., and how assets are valued at fair market.
3. Copies of the loan agreements for all outstanding participant loans as of the end of the plan year under examination.
Summarizing the Letter and Getting Started
• The IRS audit will consist of three parts
Review of the plan documents, amendments, loan paperwork
Review of transactions like distributions, loans, contribution timing and amount
Review of discrimination testing such as coverage, ADP/ACP.
• Additional documents the DOL will request
Service agreements and fee schedules, fee disclosure notices, minutes of plan board of trustees’ meeting and committee meeting
You can handle this yourself and deal directly with the auditor or you can have someone experienced in IRS audits like Sentinel, your accountant or your
attorney handle it.
Using an outside party that is familiar with plan audits and the auditors can be
good for many reasons.
First, you may not initially realize the potential risks.
Before Sentinel sends requested information to an auditor we review the plan documents and make sure the contributions on our valuation reports match the 5500 and match the clients tax return. We also look at the 5500 for audit triggers. Second, you might inadvertently disclose an issue to the IRS.
We handle the majority of our audits by mail and email so there is little conversation. We have handled so many audits and know the auditors and the process so well that many of the auditors let us send the majority, if not all of the requested information to them instead of reviewing it at your office. Third, its hard for you to be objective.
Fourth, you may not be as skilled at making the argument that an
error is insignificant and should therefore be allowed to be self corrected.
Who Will Handle the Audit
Most Common Errors that the IRS Finds
Plan documents not in good order. Amendments not timely adopted.
Not using the definition of compensation that is in the plan document.
Late loan payments that should be deemed distributions and not following loan provisions in document. Failure to pay 10% early distribution penalty.
IRS determining that company is part of a controlled group, coverage, HCE, and ADP/ACP implications.
HCEs determined incorrectly possibly due to ownership attribution rules
Incorrectly excluding part-time employees
Issues after company mergers
Fluctuations in plan participants, (partial termination)
“Other Assets” not valued properly
If the IRS finds an error in one year they will often open additional years.
What happens if the IRS finds an error?
If the IRS considers the error “insignificant” they will let you correct it with no penalty.
Otherwise, the amount of the penalty will be a percentage of what is termed the Plan Disqualification Amount “PDA”. The PDA is the sum of the tax on all
earnings of the trust for all open tax years, plus penalties and interest on the amount of tax owed by the employer because of disallowed deductions taken in previous years. This PDA also includes the sum of the regular income tax due on all plan distributions, including the distributions that have been rolled over to other qualified plans or IRAs.
The percentage of the PDA that the IRS would impose on any case is negotiated between the taxpayer and the IRS. Factors such as the reason for the failure, the number of participants affected, the number of years over which it occurred and steps the sponsor has taken, if any, to correct the error.
Correcting the Problems before the IRS finds them
If you become aware of plan errors, the IRS allows you to correct them yourself before they are discovered on audit. Revenue Procedure 2013-12 contains the Employee Plans Compliance Resolution System “EPCRS” which spells out how different types of errors should be corrected.
EPCRS allows you to correct “insignificant” errors on your own with no IRS involvement. The premise of the program is to put the participants in the position they would have been had the error not occurred.
“Significant” errors must be submitted to the IRS using the Voluntary Compliance Program (VCP).
In general document issues must be submitted through VCP.
Once an audit of a plan has commenced by either the Department of Labor or IRS, VCP is no longer available as an option to correct a plan defect.
On audit the IRS will almost certainly require a significantly greater penalty than the comparatively small fee payable to the IRS under VCP.
Other correction programs
If you have 5500s that have not been filed or were filed late you can use the Delinquent Filer Voluntary Correction Program to correct that at a fraction of what the regular penalty would be.
If you have made late deferral contributions we can self correct that by using or following the correction procedures in the DOL’s Voluntary Fiduciary Correction Program.
Best Practices
Keep your plan documents and records in one place. Sentinel keeps all of your plan documents and records for at least 6 years as ERISA requires.
Make sure you have an SPD for your health and welfare plans. If not we can help get one drafted.
Understand your business structure. We can help you determine if you are part of a controlled group or affiliated service group. This determination effects your ability to properly perform discrimination testing on your plan and to
properly draft plan documents.
Keep records showing you provided safe harbor notices, SPDs, SARs,
opportunity to enroll, notice of RMDs. Sentinel can help you distribute and track these items.
Keep proof and verification of hardship, loan paperwork, dates of termination and reasons and hours worked.
Best Practices
Be mindful of participant complaints if you are proactive you can address issues before they become larger problems.
Document your reasons for making decisions Establish written policies and procedures and follow them. Monitor your service providers, your investment options, have an ISP. ERISA requires that you act for the exclusive benefit of the participants and that you act prudently in making your decisions.
Internal Audit. Every few years you should make sure the plan documents match what is being done operationally. In order to use the EPCRS correction program that we discussed the IRS requires that you have established
procedures. A plan document alone does not constitute evidence of
established procedures. This type of mini audit will help demonstrate this. (Sentinel can assist with this.)
