Federal agency audits are never far from the minds of employer retirement plan sponsors and their third-party administrators (TPAs), but knowing which recurring errors and internal controls most interest the Department of Labor (DOL) and the Internal Revenue Service (IRS) right now can be helpful in avoiding or preparing for such inquiries.
Two employee benefits lawyers from law firm Winston & Strawn LLP, in an August 7 webinar for retirement plan practitioners titled “IRS and DOL Audit Issues for Retirement Plans: How Plan Sponsors Can Improve Internal Controls,” ranked the top 22 most significant issues employers should zero in on to ensure they maintain proper oversight of plan compliance.
Highest on the list of issues that will drive thousands of employee benefit plan audits by the DOL and IRS in 2018, according to Winston: treatment of missing participants and beneficiaries. Until last year, the firm’s lawyers said in the webinar, late payroll deposits had been the agencies’ biggest pet peeve.
One of these attorneys, Associate Abby Brothers, described how Winston developed its own “high-priority” audit list. The firm assembled IRS and DOL data requests appearing in recent years’ audit letters, and catalogued each by topic and frequency of occurrence. Then it reviewed agency seminars, speeches, and websites to boil down the particular plan audit issues that the DOL and IRS themselves identified most often among the top data requests.
At the outset, the webinar reminded busy plan sponsors why they should care about federal audits. Plan failures discovered on audit usually result in heavy fines or excise taxes—and can lead to plan disqualification in “extreme cases.” Voluntary correction options are available, but only before the plan is subject to an audit, they said.
What’s Gaining Attention?
In recent years, the prompt handling of missing participants has gained the attention of both the DOL and IRS. Both have sharpened their focus on plan procedures in place for follow-up when an employer has trouble locating missing or unresponsive participants and beneficiaries. In a world of highly mobile workers and retirees, it can be challenging to track and transact with terminated, vested participants, so the Winston lawyers stressed the importance of reviewing plan steps for this process.
More guidance is needed from the DOL beyond posted IRS recommendations in this area, Winston Partner Nancy Gerrie said on the webinar. But in the meantime, plans need to prepare for potential questions on missing participants, especially from regional DOL staff taking an “extremely aggressive” approach to this newly hot topic.
Gerrie recommended making sure as a plan sponsor, or confirming with the plan’s TPA, that a procedure for promptly locating missing participants is in place and being followed. “Consider annual sweeps, working with a third-party search service, [and] annual death [notice] sweeps. Document efforts to locate participants and maintain records to allow for reinstatement of benefits if the participant is later located,” she said.
Gerrie also suggested dovetailing the plan’s missing participants checklist with its procedures for small-balance lump-sum cashouts (usually amounts below $5,000) and the steps taken to handle returned mail or uncashed participant distribution checks sent out.
Minimum Distribution Focus
Second most likely to be audited, based on Winston’s rankings, are any errors arising from failing to make timely minimum required distributions (MRDs) for those in the plan at age 70½, Brothers told the webinar audience.
The webinar recommended, among other steps, that plans and their TPAs develop an MRD policy. They also should identify all terminated employees aged 70½ or older, keep track of beneficiaries of deceased participants who must take timely distributions from the late employee’s account, and consider generating letters to active participants nearing the ages of 60, 65, and 69 to prepare them for a compliant launch of their MRDs.
The lawyers said correspondence to participants that suggests MRDs and similar distributions to beneficiaries of a deceased participant be “requested” from those parties is insufficient in the eyes of the regulators. Instead, checks must be distributed by plans in these cases, even without participant consent.
In general, the attorneys emphasized documenting practices and procedures that prevent plan errors and quickly flag them before they result in huge financial consequences. Best practices they advocated include recording evidence of actual checks and balances, specific and tangible internal controls, and retention of records or proof that internal controls have been implemented. Examples of these activities include retaining copies of required notices sent and showing proof that communications were mailed to missing participants.
Rest of the top 22
The remaining 20 issues on Winston’s high-priority list for agency audit awareness are as follows (with dominant agency concern, if any, in parentheses):
|3. (IRS) Definition of compensation
4. Plan loans failures5. (DOL) Late payroll deposits (the DOL’s top audit focus until 2017, when missing participants took greater priority, according to Gerrie)
6. (DOL) Employee Retirement Income Security Act (ERISA) fidelity bonds
7. Employee eligibility
9. (IRS) In-service distributions
10. (IRS) Distribution paperwork
11. (DOL) Blackout notices
12. (IRS) Updating the plan document for tax law changes
|13. (DOL) Investment policy14. (DOL) Plan committee minutes
15. (IRS) Discrimination testing
16. (IRS) Top-heavy testing
17. (IRS) 410(b) testing and qualified domestic relations orders (QDROs)
18. Suspension of benefits
19. (DOL) “Float” received by plan trustee or custodian
20. (DOL) Consultants and investment managers
21. (DOL) Target-date funds (TDFs)
22. (DOL) Revenue sharing/12b-1 fees