Recent changes to the rules and procedures governing qualified employee benefit plans could have a major impact on employers of all sizes. Navigating through this evolving regulatory landscape will require adept planning, sound recordkeeping and, in some cases, expertise from outside advisers who specialize in the operational aspects of these benefit plans.

Perhaps the biggest change that employers must prepare for is the Internal Revenue Service’s decision to employ a “focused examination” approach to auditing retirement plans. These exams will try to curb systemic flaws or other issues before they become bigger problems down the road, while saving the federal government’s limited resources.

The good news is that the IRS says focused exams should help reduce scrutiny of plan sponsors whose plans comply with federal laws, while allowing deeper investigations into non-compliant plans. In a focused exam, IRS agents will conduct a preliminary analysis of an employer’s internal processes and controls regarding predetermined areas of compliance, such as eligibility, vesting or distributions. Then agents will decide whether to close the examination or expand it. That puts the onus on companies to have strong internal controls in place, so that the IRS can move on quickly to other plan providers.

Also see:DOL outlines benefit plan audit deficiencies.”

Now more than ever, the amount of time companies must invest in exams comes down to the quality of their internal controls. The IRS, like many government agencies, has been hit with cost cuts and hiring freezes, so being able to move on as quickly as possible from exams is beneficial to both the agency and employers. A full Employee Plan Team Audit (EPTA) examination can involve between 75 and 150 requests for information, and consume between 200 and 300 staff days. These full exams, when conducted, found between $2 billion and $3 billion in corrections and adjustments, the IRS has said.

Employers should consider bringing in outside advisers and lawyers to make sure plan documents, internal controls and recordkeeping are sound, especially with IRS audits increasing. Companies that are strong in these areas are more likely to preserve time and money, increase productivity, and allow the IRS to go after the plans that aren’t compliant.

To stay on top of these regulatory changes and avoid the expansion of a focused exam into a full exam, employers should perform regular self-audits and other corrective initiatives before the IRS becomes involved.

To stay on top of these regulatory changes and avoid the expansion of a focused exam into a full exam, employers should perform regular self-audits and other corrective initiatives before the IRS becomes involved. If an employer finds a violation before an IRS audit, it may be corrected with the IRS’ blessing under the Voluntary Correction Program. This program can help an employer avoid penalties. VCP is not available to an employer after notification of an IRS audit has been received, adding yet another incentive for companies to conduct regular self-audits.

Individually designed plans

Another uncertainty may impact employers who offer individually designed plans (IDPs). The IRS has said that due to limited resources, it will soon stop issuing determination letters in staggered five-year cycles. Starting in 2017, these types of plans will only receive these determination letters upon their launch and when they are terminated. Some IDPs could receive exceptions, but not many.

While these letters aren’t a requirement for a plan to qualify under Section 401(a) of the tax code, a favorable letter is often enough for an employer to show its plan document is qualified and its related trust is tax exempt under Section 501(a) of the code.

These changes shift the burden to the plan sponsors and their advisers to demonstrate the qualification of their IDPs under the Internal Revenue Code. Consequently, employers and plan sponsors may now be forced to spend significant time and expense demonstrating the qualified status of their IDPs.

Also see:10 scary mistakes that could trigger a 401(k) plan audit.”

To prepare for the change, employers with IDPs should work to renew their latest determination letter. They should also find out whether another determination letter deadline exists before the cycle ends. In the absence of that, all employers with IDPs should review their plans periodically, and amend them at least once per year to comply with the tax code and IRS guidance.

Best practices for hiring accounting firms

No matter the benefit plan type, employers are always advised to seek the proper advice. In a 2015 report that assessed the quality of benefit plan audits performed by CPAs, the U.S. Department of Labor found that 39% had major deficiencies that would have led to the rejection of a plan’s Form 5500.

The solution for employers is simple: Hire accounting firms with experience auditing employee benefit plans. In 2011, for instance, CPA firms that performed only one or two audits had a 76% deficiency rate. Those that performed more than 100, on the other hand, had a deficiency rate of just 12%.

CPA firms that are members of the American Institute of Certified Public Accountants’ Employee Benefit Audit Quality Center, many of which were among the firms that performed more than 100 audits, tended to have the least deficiencies.

Register or login for access to this item and much more

All Employee Benefit News becomes archived within a week of it being published

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access