Christine Hradsky No Comments

Retirement Plan ComplianceJust as having an outside expert prepare your company’s tax return doesn’t get you off the hook if you have problems with your financial systems, using professional retirement plan administrators and investment advisors doesn’t absolve you of responsibility for complying with IRS regulations.

Where problems typically crop up, according to Monika Templeman, IRS Director of Employee Plan Examinations, is when “there’s a communication gap between you and the plan administrator about what the plan document provides and what documentation is needed to ensure compliance.” The following are the most common communications breakdown-related mistakes her department uncovers in audits, as described on an IRS webpage on the importance of internal control systems:

Frequent Compliance Issues

  1. A failure to amend your plan’s basic documents on a timely basis to reflect new laws.“It’s common during examinations that an employer can’t locate documentation to prove the plan was timely amended for current law,” according to the IRS. It’s not enough just to amend the basic plan document to reflect changes in the law, however. Those changes must be communicated to plan participants and service providers.

Sometimes the ripple effects of a change may not be immediately obvious. An example offered by the IRS: A change in the definition of compensation. Knowledge of that change will of course be of interest to plan participants, but also to anyone involved in “determining deferral amounts, performing nondiscrimination tests or allocating contributions.”

  1. Failure to review in-service, termination and loan distribution forms to ensure consistency with plan documents.This issue crops up, according to the IRS, when plan service providers simply furnish standard distribution forms to all of their clients “despite the fact that individual plans may have different distribution options and requirements.”
  2. Failure to count all eligible employees in discrimination testing.Employers often fail to recognize that certain employees may still need to be counted, and therefore don’t provide their names to the administrator that performs the tests. Examples of overlooked employees include those who were terminated over the course of the year, and “employees of a related company with common ownership interests.”

Fixing The Problems

A myriad of other compliance glitches can — and often do — occur. The IRS offers pointers (on this page of its website) regarding how to address them as well. Perhaps some of these will sound familiar because at some point you have failed to:

  • Make a timely fix after your plan flunked the ADP/ACP tests that assess whether too much of the plan’s tax benefits are going to highly compensated employees,
  • Implement your plan’s automatic enrollment provisions,
  • Respond in a timely fashion to an employee’s deferral election, or
  • Prevent a hardship withdrawal from being processed when the basis for the withdrawal request did not satisfy the plan’s (and the law’s) requirements.

The IRS also offers a 401K plan checklist highlighting more potential compliance lapses, and how to make amends. The rundown offers pointers on how to prevent the common compliance lapses from recurring. For example, plans that fail the ADP and ACP discrimination tests might consider adopting a safe harbor design formula, the IRS suggests. But safe harbor designs may be too restrictive for some employers. At a minimum, the IRS suggests strengthening lines of communication with your plan administrator.

Getting Sympathy from the IRS

Given the volume and complexity of all the federal rules governing retirement plans and the frequency of changes to those rules, it would not be surprising to find an area in which your plan is out of compliance, or where an error exists. The IRS describes itself as sympathetic — to a point. The agency will be much more understanding, they say, towards employers that engage in routine self-audits, then fix any discovered deficiencies, and let the IRS know about it, instead of just playing the odds against being audited.

Having “effective practices and procedures to prevent compliance problems” can make you eligible for the IRS self-correction program, described here. The benefit of that program, says the IRS, is that it allows you to fix minor operational errors and preserve your plan’s tax-favored status and avoid penalties.  More serious operational errors that you find before the IRS does, such as a failure to bring your plan document up to date, might be remedied with a voluntary correction submission to the IRS. (Some of those procedures were addressed under IRS Revenue Procedure 2013-12.

A seasoned retirement plan administration firm with a strong compliance department also should be an important resource on all of these issues and help to provide a practical perspective on the IRS compliance advice.


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