The Inspirational Story of Julio Herrera Velutini - Global Finance Leader
IRS Employee Plans
1. IRS Employee Plans
How to Survive a Visit
From the IRS
Steven R. Sherman
IRS Revenue Agent,
Employee Plans Exam
2. Introduction
• Steps you can take to make sure the
reality of a visit from your auditor is
not nearly as bad as the anticipation
IRS – Employee Plans Examinations
2 www.IRS.gov / retirement
3. 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.
IRS – Employee Plans Examinations
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4. What are we looking for, anyway?
• 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
IRS – Employee Plans Examinations
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5. What are we looking for, anyway?
• 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.
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6. 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?
IRS – Employee Plans Examinations
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7. What areas would IRS audit?
(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)
IRS – Employee Plans Examinations
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8. What areas would IRS audit?
(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
IRS – Employee Plans Examinations
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9. What areas would IRS audit?
(c) Prohibited transaction
•
Participant loans
•
Transactions between the plan and employer
•
Self-dealing by fiduciaries
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10. What areas would IRS audit?
(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
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11. What areas would IRS audit?
(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
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12. What areas would IRS audit?
(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
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13. What areas would IRS audit?
(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
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14. 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
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15. 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
Available
CORRECTION
(VCP)?
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Not available (upon
notice of audit
receipt)
16. 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
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17. FY 2014 Exam Focus areas
• 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
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18. FY 2014 Exam Focus areas
• Continued 401(k) Questionnaire follow-on
projects to address:
•
•
•
•
concerns with defaulted loans,
top heavy issues,
Roth compliance, &
401(k) risk modeling
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20. Your retirement plan is selected for audit
• 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
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21. 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
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22. Your retirement plan is selected for audit
• 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
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25. Resource – Examination Guide
• EP main page – www.irs.gov/retirement
Examinations and Enforcement
Audit guide, compliance check letters and other programs
EP Examination Process Guide
To help customers through the examination process
Eleven sections of materials to assist you
through the audit process
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26. Letter sent requesting review of plan records and documents
• 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
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27. 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
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28. Letter sent requesting review of plan records and documents
• 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
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29. Letter sent requesting review of plan records and documents
• 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
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30. Appointment date set between Employer/POA or
Authorized Representative and IRS Agent
• Exam Process Guide links
• Section 3 – Initiation of an Examination
Place and Time of Conducting an Audit
An article from the Retirement News for Employers
that clarifies the EP position of conducting audits
at the taxpayer’s place of business
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31. • 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
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32. • 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
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33. 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
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34. Tips for a Smooth & Efficient Audit
• Be prepared to:
• Provide applicable test results w/ supporting details
• Coverage
• ADP/ACP
• Top-heavy
• Explain:
• Terms of the plan
• Operation of the plan
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35. Tips for a Smooth & Efficient Audit
• 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
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36. • Exam Process Guide links
• Section 3 – Initiation of an Examination
Audit Efficiency Guide
Helps 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
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37. • Exam Process Guide links
Section 4 – Communications During Exam
Provides 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
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38. 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
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39. 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
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40. 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
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41. Analysis of Records
• Large amounts of data in electronic format
• Use of computer audit specialist
• Stratification and sampling used extensively
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42. 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
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43. 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
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47. Comparison of Corrective Programs
Program SCP
Feature
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
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48. Comparison of Corrective Programs
Program SCP
Feature
VCP
CAP
File with
IRS:
Required
Required
Available
if plan is
under
exam:
Not required
Yes, to correct No
insignificant &
some
significant
failures
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Yes
49. Comparison of Corrective Programs
Program SCP
Feature
VCP
IRS
requirements:
Correction for
all years
required
Correction for
Correction
all yrs required. verified when
IRS Compliance CA executed
follow-up
Correct
by plan
amendment?
In limited
circum-stances
Yes
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CAP
Yes
50. Comparison of Corrective Programs
Program SCP
Feature
VCP
CAP
Use for
No
egregious
failures?
Yes
In limited
circumstances
Correct
No
diversion
of assets?
No
No
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51. Comparison of Corrective Programs
Program SCP
Feature
VCP
CAP
Favorable Yes, if failure
letter
significant
ruling
required?
No
No
Established Yes
procedures
required?
No
No
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52. Comparison of Corrective Programs
Program SCP
Feature
VCP
CAP
Fee or
No
Sanction?
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
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53. Impact of New EPCRS
Revenue Procedure 2013-12
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54. 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
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55. 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
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56. Top 10 Common Identified Issues
• 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
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57. Top 10 Common Identified Issues
• 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
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58. Top 10 Common Identified Issues
• 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
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59. Top 10 Common Identified Issues
• 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
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60. Other Exam Process Guide Sections
• Overview
• Compliance Monitoring Procedures
• Audit Guidelines
• Customer Education and Outreach
• Participant Rights
• International Issues Affecting Retirement
Plans
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61. 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?
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62. How Can Plan Sponsors
Improve Compliance?
It is crucial to
have good
internal
controls!!
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63. Internal Controls
• Key message – need strong internal controls
• Examiners analyze internal controls in preaudit, 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
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64. 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
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65. 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
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66. 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-(EPTA)-P
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67. 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)
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68. 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
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69. 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-ComplianceTrends-and-Tips
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70. 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
• Find them under EPTA Program www.irs.gov/Retirement-Plans/EP-ExaminationGuidelines
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71. A Plan Sponsors' Responsibilities
• Internal Control Tips
• Many discussed today
• Related IRS and DOL publications
• Find them under EPTA Program www.irs.gov/Retirement-Plans/Plan-Sponsor/APlan-Sponsor’s-Responsibilities
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