Defined benefit plans may have markedly declined (44% since 1975 according to the Department of Labor), but they haven’t become any more understandable to employers.
Indeed, the IRS continues to find the same type of mistakes during audit examinations. Here are the ones that made the IRS Top Ten list:
- Failure to meet minimum funding requirements
- Inadequate or no fidelity bond
- Mistakes in determining vesting or benefit accruals
- Prohibited transactions
- Failure to meet participation and coverage requirements
- Discrimination in benefits
- Improper tax deductions
- Non-compliant plan documents
- Failure to make Required Minimum Distributions
- Violation of joint and survivor rules
Those of us in the retirement plan business use the term “audit roulette”. It refers to the belief by some employers that the odds of their retirement plan getting audited by the IRS are in their favor. Well, those odds are getting worse. The IRS is taking technology to the next level using “data driven decisions”.
With limited resources, the IRS is focusing on data-driven decision making. That is, using data to focus on issues where they believe there is a greater risk of noncompliance and therefore, a greater return on their investment of time. The aforementioned IRS Top-Ten list of defined benefit plan mistakes certainly meets those criteria.
Fortunately, the IRS has a program, Employee Plans Compliance Resolution System (EPCRS), that allows retirement plan sponsors to correct plan mistakes so that the employer and the employees continue to enjoy retirement plans on a tax-favored basis. EPCRS includes:
- Self-correction without IRS involvement (SCP)
- Voluntary correction with IRS approval (VCP)
- Correction during audit under a closing agreement (Audit CAP)
The takeaway is very simple. Voluntary compliance can be cheaper than playing audit roulette.
Courtoon Credit:
The Courtoon above was one of several drawn by Federal Appeals and Supreme Court Attorney David Mills, @MillsD.