Be aware: IRS is starting to send letters to companies asking them to self-examine their retirement plans before selecting them for an audit.
The agency’s Employee Plans department recently announced a compliance pilot program beginning in June 2022. Plan sponsors could receive a letter saying that their retirement plan has been selected for review.
As part of the pilot program, notified employers would have 90 days to do a self-audit of their retirement plan’s operations and documentation. The goal of the review is to see if the plan meets all current tax requirements.
Some mistakes can be self-corrected, IRS says. These include failing to follow the retirement plan’s terms, inadvertently excluding eligible participants, failing to make contributions promised under the plan’s terms or any loan failures. They must be self-corrected in a specific time frame, depending on the significance of the error.
If participating employers find any mistakes that don’t fit into these categories, they may be able to correct them via IRS’ Voluntary Correction Program (VCP), which is part of the Employee Plans Compliance Resolution System (EPCRS), as long as IRS isn’t officially auditing them.
Using VCP to fix these plan errors allows you to maintain the tax-favored status for your company’s 401(k) and other qualified plans, including 403(b), SEP and Simple IRA plans.
Common mistakes that would be eligible for VCP include issues with how the plan’s been administered or the wording in the plan document, such as failure to:
- Maintain an up-to-date and valid plan document
- Follow the terms of the plan document while administering the plan, and
- Comply with federal tax law regs while administering the plan.
If any mistakes that can’t be self-corrected or resolved through VCP arise in an employer’s self-review, the employer can request a closing agreement from IRS. Once IRS agrees, the employer would pay the appropriate fine based on the VCP fee structure.
After the employer’s review, IRS will review submitted documentation to make sure the employer assessed its plan appropriately and corrected any mistakes present. Then, the agency will either issue a closing letter or perform a limited or a full-scope audit of its own.
Handling retirement plan review
IRS said the goal of this program is to see if it reduces administrative burdens on taxpayers and decreases the time IRS spends on retirement plan examinations. If it works well, IRS said it’ll incorporate these reviews into its compliance strategy.
The agency will contact any selected employers that don’t conduct their self-review after 90 days and skip straight to scheduling an audit. So, if your company receives a letter, it’s key to have your Finance team and your plan administrator set aside time for a review ASAP.