IRS Employee Plans

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IRS Employee Plans

  1. 1. IRS Employee Plans How to Survive a Visit From the IRS Steven R. Sherman IRS Revenue Agent, Employee Plans Exam
  2. 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. 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 3 www.IRS.gov / retirement
  4. 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 4 www.IRS.gov / retirement
  5. 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. IRS – Employee Plans Examinations 5 www.IRS.gov / retirement
  6. 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 6 www.IRS.gov / retirement
  7. 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 7 www.IRS.gov / retirement
  8. 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 8 www.IRS.gov / retirement
  9. 9. What areas would IRS audit? (c) Prohibited transaction • Participant loans • Transactions between the plan and employer • Self-dealing by fiduciaries IRS – Employee Plans Examinations 9 www.IRS.gov / retirement
  10. 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 IRS – Employee Plans Examinations 10 www.IRS.gov / retirement
  11. 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 IRS – Employee Plans Examinations 11 www.IRS.gov / retirement
  12. 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 IRS – Employee Plans Examinations 12 www.IRS.gov / retirement
  13. 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 IRS – Employee Plans Examinations 13 www.IRS.gov / retirement
  14. 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 IRS – Employee Plans Examinations 14 www.IRS.gov / retirement
  15. 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)? IRS – Employee Plans Examinations 15 www.IRS.gov / retirement Not available (upon notice of audit receipt)
  16. 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 IRS – Employee Plans Examinations 16 www.IRS.gov / retirement
  17. 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 IRS – Employee Plans Examinations 17 www.IRS.gov / retirement
  18. 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 IRS – Employee Plans Examinations 18 www.IRS.gov / retirement
  19. 19. IRS – Employee Plans4324 Publication Examinations 19 www.IRS.gov / retirement
  20. 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 IRS – Employee Plans Examinations 20 www.IRS.gov / retirement
  21. 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 IRS – Employee Plans Examinations 21 www.IRS.gov / retirement
  22. 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 IRS – Employee Plans Examinations 22 www.IRS.gov / retirement
  23. 23. IRS – Employee Plans Examinations 23 www.IRS.gov / retirement
  24. 24. IRS – Employee Plans Examinations 24 www.IRS.gov / retirement
  25. 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 IRS – Employee Plans Examinations 25 www.IRS.gov / retirement
  26. 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 IRS – Employee Plans Examinations 26 www.IRS.gov / retirement
  27. 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 IRS – Employee Plans Examinations 27 www.IRS.gov / retirement
  28. 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 IRS – Employee Plans Examinations 28 www.IRS.gov / retirement
  29. 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 IRS – Employee Plans Examinations 29 www.IRS.gov / retirement
  30. 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 IRS – Employee Plans Examinations 30 www.IRS.gov / retirement
  31. 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 IRS – Employee Plans Examinations 31 www.IRS.gov / retirement
  32. 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 IRS – Employee Plans Examinations 32 www.IRS.gov / retirement
  33. 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 IRS – Employee Plans Examinations 33 www.IRS.gov / retirement
  34. 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 IRS – Employee Plans Examinations 34 www.IRS.gov / retirement
  35. 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 IRS – Employee Plans Examinations 35 www.IRS.gov / retirement
  36. 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 IRS – Employee Plans Examinations 36 www.IRS.gov / retirement
  37. 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 IRS – Employee Plans Examinations 37 www.IRS.gov / retirement
  38. 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 IRS – Employee Plans Examinations 38 www.IRS.gov / retirement
  39. 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 IRS – Employee Plans Examinations 39 www.IRS.gov / retirement
  40. 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 IRS – Employee Plans Examinations 40 www.IRS.gov / retirement
  41. 41. Analysis of Records • Large amounts of data in electronic format • Use of computer audit specialist • Stratification and sampling used extensively IRS – Employee Plans Examinations 41 www.IRS.gov / retirement
  42. 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 IRS – Employee Plans Examinations 42 www.IRS.gov / retirement
  43. 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 IRS – Employee Plans Examinations 43 www.IRS.gov / retirement
  44. 44. Use of Specialists • TEGE Actuary • TEGE Field Counsel • Computer Audit Specialists (CAS) • Engineers • Financial Product Specialists IRS – Employee Plans Examinations 44 www.IRS.gov / retirement
  45. 45. • Section 6 – Resolution of Issues and Closing the Examination • Section 7 - Appeals IRS – Employee Plans Examinations 45 www.IRS.gov / retirement
  46. 46. IRS – Employee Plans Examinations 46 www.IRS.gov / retirement
  47. 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 IRS – Employee Plans Examinations 47 www.IRS.gov / retirement
  48. 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 IRS – Employee Plans Examinations 48 www.IRS.gov / retirement Yes
  49. 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 IRS – Employee Plans Examinations 49 www.IRS.gov / retirement CAP Yes
  50. 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 IRS – Employee Plans Examinations 50 www.IRS.gov / retirement
  51. 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 IRS – Employee Plans Examinations 51 www.IRS.gov / retirement
  52. 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 IRS – Employee Plans Examinations 52 www.IRS.gov / retirement
  53. 53. Impact of New EPCRS Revenue Procedure 2013-12 IRS – Employee Plans Examinations 53 www.IRS.gov / retirement
  54. 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 IRS – Employee Plans Examinations 54 www.IRS.gov / retirement
  55. 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 IRS – Employee Plans Examinations 55 www.IRS.gov / retirement
  56. 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 IRS – Employee Plans Examinations 56 www.IRS.gov / retirement
  57. 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 IRS – Employee Plans Examinations 57 www.IRS.gov / retirement
  58. 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 IRS – Employee Plans Examinations 58 www.IRS.gov / retirement
  59. 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 IRS – Employee Plans Examinations 59 www.IRS.gov / retirement
  60. 60. Other Exam Process Guide Sections • Overview • Compliance Monitoring Procedures • Audit Guidelines • Customer Education and Outreach • Participant Rights • International Issues Affecting Retirement Plans IRS – Employee Plans Examinations 60 www.IRS.gov / retirement
  61. 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? IRS – Employee Plans Examinations 61 www.IRS.gov / retirement
  62. 62. How Can Plan Sponsors Improve Compliance? It is crucial to have good internal controls!! IRS – Employee Plans Examinations 62 www.IRS.gov / retirement
  63. 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 IRS – Employee Plans Examinations 63 www.IRS.gov / retirement
  64. 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 IRS – Employee Plans Examinations 64 www.IRS.gov / retirement
  65. 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 IRS – Employee Plans Examinations 65 www.IRS.gov / retirement
  66. 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 IRS – Employee Plans Examinations 66 www.IRS.gov / retirement
  67. 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) IRS – Employee Plans Examinations 67 www.IRS.gov / retirement
  68. 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 IRS – Employee Plans Examinations 68 www.IRS.gov / retirement
  69. 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 IRS – Employee Plans Examinations 69 www.IRS.gov / retirement
  70. 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 IRS – Employee Plans Examinations 70 www.IRS.gov / retirement
  71. 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 IRS – Employee Plans Examinations 71 www.IRS.gov / retirement
  72. 72. IRS – Employee Plans Examinations 72 www.IRS.gov / retirement
  73. 73. IRS – Employee Plans Examinations 73 www.IRS.gov / retirement

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