When was the last time you reviewed your company’s retirement plan for compliance? The administration of a 401(k) plan is governed by complex rules that are frequently revised. Failure to comply with these rules can lead to plan disqualification or other significant penalties.

Recently, the Internal Revenue Service has focused enforcement activity on examining the implementation of a strong internal control system. The IRS has publicly stated that if a plan is selected for audit the agent will use their evaluation of the plan’s internal controls to determine whether the scope of the examination will be focused or expanded.

Here are five tips for establishing an effective system of internal controls to ensure your plan remains compliant:

Develop annual plan document review procedures. The plan sponsor must identify and document who is responsible for performing an annual review of the plan document and monitoring tax law changes and deadlines for adopting related plan amendments. The IRS publishes a table of recent legislation and required amendment dates that can be used to determine the completeness of plan amendments. The plan sponsor should have a policy that ensures the plan document and all amendments are properly executed and retained for the life of the plan.

Review the terms of the plan document. The most common errors discovered in the operation of 401(k) plans relate to the employer not following the terms of the plan document. These errors include, using an incorrect definition of compensation, omitting eligible employees, and providing improper loans and distributions. In addition, plan sponsors should be aware of three areas receiving increased regulatory focus this year: the handling of uncashed checks, benefit payments to deceased retirees, and deferral of salary from manual checks. 

Create a procedures manual. Most compliance issues can be avoided by having a procedures manual that documents all of the requirements in the plan document and the process for reviewing and approving transactions that comply with the plan document. In addition, someone that understands the plan document and regulatory requirements should establish procedures that require a review of plan operations.

Monitor third party service providers. Since many operational functions of a plan are usually outsourced, the proper oversight of these duties is critical. The plan sponsor has ultimate responsibility for the operation of the plan even for functions that are outsourced. Therefore, an effective selection and monitoring program of service organizations that perform recordkeeping and reporting services is essential and can reduce the risk that errors will go undetected.

Perform ongoing internal analysis. The development of compliance issues is not uncommon in the operation of a 401(k) plan. Plan sponsors should be performing an ongoing internal analysis of their plan operations and can use the IRS 401(k) Fix-It Guide as a tool. This guide lists the most common compliance mistakes in the operation of 401(k) plans, how to find the mistake, fix it and how to avoid the mistake in the future.

Through the implementation of an effective system of internal controls, plan sponsors can identify and correct errors timely and protect the status of their retirement plans. 

Jared A. Rosen is a principal in the audit, accounting and consulting department of Ellin & Tucker, a Baltimore-based CPA firm. He leads the firm’s employee benefit plan services group and as such, provides audit services for numerous defined contribution and defined benefit plans, as well as health and welfare plans, for clients in the manufacturing, wholesale distribution and not-for-profit industries. He can be reached at jrosen@ellinandtucker.com.

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