IRS Employee Plans

IRS Employee Plans

How to Survive a VisitFrom the IRS

Steven R. ShermanIRS Revenue Agent,

Employee Plans Exam

IRS – Employee Plans Examinations www.IRS.gov / retirement2

Introduction

• Steps you can take to make sure the reality of a visit from your auditor is not nearly as bad as the anticipation


What are we looking for, anyway?

• Answer depends on which Feds are looking

• Internal Revenue Service – goal is to preserve tax benefits associated with retirement plans by making sure sponsors are operating their plans in accordance with regulations, plan documents, etc.



• Department of Labor –enforcement of rules requiring plan fiduciaries to act prudently and in the best interests of participants and beneficiaries, ensuring:• participants and beneficiaries are receiving all the

benefits to which they are entitled

• fiduciaries are not jeopardizing the plan’s ability to provide those benefits



• Pension Benefit Guaranty Corporation (PBGC) – One of its main functions is to protect the rights of participants in those defined benefit plans subject to ERISA Title IV, particularly in the event of plan termination or in the event of a potential plan termination with insufficient funds to cover benefits.


What areas would IRS audit?

(a) Documentation• Is there a plan document?

• Is there a trust document?

• Is there a current determination letter?

• Have required restatements been done on a

• timely basis?

• Have interim amendments been adopted on a timely basis?



(b) Plan qualification• IRC Sec. 436 Benefit restrictions (DB plans

only)• Coverage tests (including minimum participation

test (DB plans) and the general coverage tests (DB & DC plans) under IRC Sec. 401(a)(26)

• Distribution procedures: election forms, rollover notice, QJSA explanation, Spousal consent, etc.

• Distribution restrictions (limitations on 401(k) plans, pension plans

• Elective deferral limit under IRC Sec. 401(a)(30)



(b) Plan qualification (continued)

• Eligibility requirements, plan entry dates

• Minimum distribution requirements

• Nondiscrimination tests (ADP, ACP, general non discrimination testing of employer contributions

• Partial termination

• Section 415 limits

• Top Heavy

• Vesting



(c) Prohibited transaction• Participant loans

• Transactions between the plan and employer

• Self-dealing by fiduciaries



(d) Plan operation• Allocations properly made

• Compliance with terms of the plan

• Participants incorrectly excluded or included

• Distributions made without triggering event

• Deferral elections properly implemented under a 401(k) arrangement

• Proper application of a plan’s automatic enrollment feature



(e) Plan assets• Investments held by trust

• Contributions transmitted on a timely basis

• Assets returned to employer (mistake of fact, disallowance of deduction, surplus upon termination)

• Payment of expenses with plan assets

• Proper implementation of investment elections in a participant directed plan



(f) Tax issues• Excise taxes on prohibited transactions

• Taxation on deemed distributions due to defaulted loans or IRC 72(p) noncompliance

• Deduction limits

• Excise taxes on shortfalls under minimum distribution rules

• Withholding

• Timing of income on corrective distributions



(g) Reporting requirements• Form 1099-R filings

• Form 5500 filings

• Form 945 (withholding)

• Form 5310-A on certain mergers, transfers

• Form 5310-A to elect QSLOB status


Employee Plans Compliance Unit

• Develops compliance projects

• Perform data analysis

• Not an audit

• Completed projects posted

• Can use during self-audit • www.irs.gov/Retirement-Plans/Employee-Plans-Compliance-Unit-

(EPCU)---Completed-Projects---Projects-With-Summary-Reports


EP COMPLIANCE

UNIT

COMPLIANCE CHECK

AUDIT

CONTACT EPCU Revenue Agent

AUDIT? No Yes – determine tax liability

VERIFY Return information Compliance in form and operation

INSPECT BOOKS AND RECORDS?

No Yes

VOLUNTARY CORRECTION (VCP)?

Available Not available (upon notice of audit receipt)


FY 2014 Exam Focus areas

• TE/GE wide strategy on deterring & detecting abusive transactions and addressing emerging issues

• Using promoter investigations to deter abusive schemes

• Partnering with SBSE, Counsel and DOJ, to seek injunctions and penalties and/or criminal prosecutions against promoters



• Continued work by the EP Emerging Issues Team to address hard-to-value assets

• Continued focus on 403(b) and Government Plans

• A multinational focus in our Employee Plan Team Audit (EPTA) large case program



• Continued 401(k) Questionnaire follow-on projects to address: • concerns with defaulted loans, • top heavy issues, • Roth compliance, & • 401(k) risk modeling


Publication 4324


• Examination selection methodologies• Risk-based compliance

• Industry & plan type/market segment specific examinations

• Learn, Educate, Self-Correct, Enforce (LESE) Projects• Small projects based on judgment sampling

• Referrals

• Employee Plan Team Audit (EPTA) • Large case audit selection criteria

• Promoter investigations/abusive transactions

Your retirement plan is selected for audit


• Why us?• Random selections

• Including EPCU

• Joint examinations • Other IRS functions • DOL

• Initial contact• Generally by telephone

• Follow-up with appointment letter or preplanning meeting



• Why me?• Form 5500 items that may trigger an examination:

• Low % of participants relative to total # of employees

• Large losses on income statement

• Large % of loans

• Funding deficiencies on Schedule B

• Large amounts of administrative expenses

• Large drop in participants (partial termination) or large # of participants separated with < 100% vesting

• Large % of assets identified as “Other”

• Large distributions





Resource – Examination Guide

• EP main page – www.irs.gov/retirement

Examinations and EnforcementAudit guide, compliance check letters and other programs

EP Examination Process GuideTo help customers through the examination process

Eleven sections of materials to assist youthrough the audit process


• Includes a detailed listing of items required to have available for the agent for review

• Having all items and having them organized results in agent able to conduct audit more efficiency and quickly

• May request some items for review prior to the initial appointment

Letter sent requesting review of plan records and documents


• Preparing for the audit• Inform those managers/employees that will be

involved in the audit• Payroll• Human Resources

• Contact banks, vendors, etc.• Make them aware records may be requested



• Preparing for the audit• Have readily available

• Plan document, including amendments

• Determination letter

• Test results (top-heavy, coverage, etc.)

• Be prepared to identify/explain • Plan terms and operation

• Internal administrative processes (internal controls)

• Plan errors resolved through correction programs



• Exam Process Guide links• Section 3 – Initiation of an Examination

• Letter 1346 – initial contact letter• Attachments to initial contact letter• Publication 1-EP – Understanding the Employee Plan

Examination Process• Focused examinations




Place and Time of Conducting an AuditAn article from the Retirement News for Employers that clarifies the EP position of conducting audits at the taxpayer’s place of business

Appointment date set between Employer/POA or

Authorized Representative and IRS Agent


• Tips for a smooth & efficient audit• What Should You Do on the Big Day?

• Be Organized

• Be Helpful

• Be Judicious

• Be Confident… but Respectful

• Be Willing to Ask for Help


• Tips for a smooth & efficient audit• Open communication with IRS

• If items on information request do not seem to be best approach to obtain results, talk to the auditor

• Influence on length of audit• Turnaround time on request for further information

• Clear communication between IRS and employer


Tips for a Smooth & Efficient Audit

• Allocate time for an opening interview between the agent and the ERPA

• All plan documents and requested records should be readily available

• Form 5500 filings should be available

• Efficiently organize all requested materials



• Be prepared to:• Provide applicable test results w/ supporting details

• Coverage• ADP/ACP• Top-heavy

• Explain:• Terms of the plan

• Operation of the plan



• Be prepared to:• Explain administrative processes

• Practices and procedures

• Internal controls

• Address plan errors• Resolved through Self-Correction and VCP

• Unresolved errors

• Suggestions to correct



Audit Efficiency GuideHelps establish a reasonable working relationship between revenue agent and plan sponsor so audit can proceed efficiently and both will know what to expect during the audit when a plan has been selected for audit. This guide also outlines how both parties will work with each other during the course of the audit


• Exam Process Guide links

Section 4 – Communications During ExamProvides general explanation of techniques and procedures used during an EP examination to effectively communicate with taxpayers and representatives. There are also examples of communications involving compliance issues that may occur during examinations


EPTA / Large Case Considerations

• While the issues are the same (i.e., eligibility, coverage, etc.) the manner in which they are addressed is different

• The following slides will highlight some of these differences


Criteria for an EPTA Case

• Maintained by large entities with 2,500 or more participants in the aggregate

• Various criteria used to select • EPTA case selection

• Referrals

• Media reports


Pre-Audit Analysis

• Internet research

• IDRS research

• Assignment of EP agents and specialists• TEGE field actuary• Field counsel

• Assessment of internal controls

• Selection of focused audit issues


Analysis of Records

• Large amounts of data in electronic format

• Use of computer audit specialist

• Stratification and sampling used extensively


Information Document Requests (IDRs)

• Requests for data issued through IDRs

• Data requested on an IDR is specific to an issue and to a plan

• IDRs are issued in a logical, sequential manner• No more than a few at a time so as not to

overwhelm the Taxpayer


Coordination with LB&I

• Efforts coordinated when LB&I and EP are conducting an examination at the same time

• Typically follow LB&I protocol with respect to issuance of IDRs and Notice of Proposed Adjustment

• Assist LB&I with analysis of foreign and domestic pension expenses


Use of Specialists

• TEGE Actuary

• TEGE Field Counsel

• Computer Audit Specialists (CAS)

• Engineers

• Financial Product Specialists


• Section 6 – Resolution of Issues and Closing the Examination

• Section 7 - Appeals



Comparison of Corrective Programs

Program Feature

SCP VCP CAP

Type of Failure:

Operational Operational, plan document, demographic, & ER eligibility failures

Operational, plan document, demographic, & ER eligibility failures

Initiated by:

ER or plan sponsor

ER or plan sponsor

IRS



Program Feature

SCP VCP CAP

File with IRS:

Not required Required Required

Available if plan is under exam:

Yes, to correct insignificant & some significant failures

No Yes



Program Feature

SCP VCP CAP

IRS requirements:

Correction for all years required

Correction for all yrs required. IRS Compliance follow-up

Correction verified when CA executed

Correct by plan amend-ment?

In limited circum-stances

Yes Yes



Program Feature

SCP VCP CAP

Use for egregious failures?

No Yes In limited circumstances

Correct diversion of assets?

No No No



Program Feature

SCP VCP CAP

Favorable letter ruling required?

Yes, if failure significant

No No

Established procedures required?

Yes No No



Program Feature

SCP VCP CAP

Fee or Sanction?

No Yes. Fee for qualified & 403(b) plans. Subject to VCP fee structure based on # of ptpts/ees

Yes. Negotiated penalty based on equivalent of total tax resulting from disqualification of Plan


Impact of New EPCRS Revenue Procedure 2013-12


Rev. Proc. 2013-12 – Major Changes

• Expanded to cover correction of 403(b) plan document failures in light of regulations now requiring written plan documents for 403(b) plans

• IRS letter forwarding program to locate lost participants no longer for plan sponsors

• New forms added to streamline VCP• Forms 8950 and 8951

• Changes to appendices

• Miscellaneous


Top 10 Common Identified Issues

• Termination/Partial Term• Potential vesting & distribution issues

• Large decrease in plan ptpts from beg of yr to eoy

• Safe Harbor 401(k) Plans• Failure to make required contributions

• Notices not timely distributed



• ADP/ACP Testing• Failure to properly correct excess contributions

• Improper exclusion of EEs

• Misclassification of HCEs and NHCEs

• Compensation• Definition of comp used to determine contributions

does not match one in plan document

• Failure to apply deferral % correctly due to bonuses, commissions, or overtime



• Plan Document Issues• Failure to timely adopt interim amendments

• Failure to operate in accordance with current law

• Plan document does not match the SPD

• Vesting & Eligibility• Failure to implement automatic enrollment

procedures

• Failure to include eligible EEs or to exclude ineligible EEs



• Distributions• Failure to follow hardship distribution rules

• Erroneously allowing in-service distributions

• Prohibited Transactions• Loans made that do not satisfy the PT exemption

• Failure to timely deposit EE elective deferrals



• Compliance with limits• Exceeding 415 limits when ptpts are participating

in multiple employer plans• Exceeding Section 402(g) limit when ptpts are

participating in more than 1 plan allowing deferrals

• Miscellaneous• Lack of, or inadequate, fidelity bond• Delay in allocating forfeitures• Failure to properly make minimum top-heavy

benefit/contributions to non-key EEs


Other Exam Process Guide Sections

• Overview

• Compliance Monitoring Procedures

• Audit Guidelines

• Customer Education and Outreach

• Participant Rights

• International Issues Affecting Retirement Plans


Unresolved Issues

• What is the procedure when the parties cannot come to an agreement?

• What does it mean to ask for “Tech Advice?”

• What is the procedure for requesting an appeal of an audit finding?


How Can Plan Sponsors Improve Compliance?

It is crucial to have good internal

controls!!


Internal Controls

• Key message – need strong internal controls

• Examiners analyze internal controls in pre-audit, focus exam on detected weak areas

• Formal review procedures can help you find and prevent mistakes in plan administration

• Mistakes left uncorrected could endanger a plan’s tax-favored status


Internal Controls

• In a nutshell, internal controls are:• processes and procedures put in place to make sure

errors do not occur in your retirement plan• The exact procedures will depend on your

organization, your plan type and its features


Internal Controls

• Internal controls should include procedures for:• Plan operations review

• verify that plan operates according to its written terms• Regular reviews enable timely detection and correction of mistakes

• Plan document updates • determine if the plan document needs updating for law

changes and changes in plan operations• A few months before your next plan year, check with

your benefits advisor


Internal Controls

• Internal Control Questionnaires available for:• HR Personnel, • payroll, • plan administration, and • internal control impact

• Find them under EPTA Program -• http://www.irs.gov/Retirement-Plans/EP-Team-Audit-(EPT

A)-Program---Internal-Control-Questionnaire


Examples: Insufficient Internal Controls

• Third party reports frequently have inaccurate data• Dates of hire and termination• Employee age and service• Compensation, etc.

• Decentralized payroll systems w/out internal controls • Each subsidiary determines eligibility, HCE status, or what

constitutes plan “compensation,” result in incorrect coverage and allocations

• Data used for Form 5500 fails to conform to actual records (i.e., payroll data)


Examples: Good Internal Control

• Segregation of Duties• Ex.: Payroll, Human Resources

• Established Systems• Important to check that systems accurately verify the data

and processes to ensure plan compliance

• Good IT System

• Knowledgeable & Responsible Personnel

• Form 5500 accurately filed & reconciled


Trends and tips

• listed by:• Plan type• Issue• Voluntary compliance issues• Also, tips on how to prepare for an efficient audit

• Find them under EPTA Program -

www.irs.gov/Retirement-Plans/EP-Compliance-Trends-and-Tips


EP Exam Guidelines

• Provides guidance to EP agents

• Assists examiner with certain issues, including• Top heavy• IRC 403(b)• Prohibited transactions

• Cannot be cited as authority


www.irs.gov/Retirement-Plans/EP-Examination-Guidelines


A Plan Sponsors' Responsibilities

• Internal Control Tips• Many discussed today

• Related IRS and DOL publications


www.irs.gov/Retirement-Plans/Plan-Sponsor/A-Plan-Sponsor’s-Responsibilities



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