Post on 27-May-2020
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What to Expect When an IRS or DOL 401(k) Auditor Comes Knocking
Kim Schultz, CPAManaging Director
Compensation & Benefit SolutionsGreenwood Village, Colorado
Patrick Blanchard, JD, LLMManaging Director
Compensation & Benefit SolutionsGreenwood Village, Colorado
6B-1
• ExaminationStatistics
• ExaminationStepsandTipsforManagingtheExaminationProcess
• TopIssuesDiscoveredDuringtheExaminationProcess
• Questions
Agenda
6B-2
• Todate,theEmployeePlansComplianceUnit(“EPCU”)hasconductedover41,000compliancechecks1
• Affectedsome$105millionincorrections
• Assessedover$16millionintaxassessments
• Estimatedtohavehad9,100examinationsin2014
IRSExaminationStatistics
Source: Tax Exempt & Government Entities: Employee Plans, “EPCU Updates August 2016.1 This represent EPCU contacts and does not represent IRS audits as a whole.
6B-4
• 2,335examinationsclosedinFY16
• 1,431examinationsclosedwithresultsinFY16
• $777.5millionintotalrecoveriesinFY16
DOLExaminationStatistics
6B-5
• Participantquestionsorcomplaint• OftenbasedonForm5500information
– Specificresponse
– FocusedprogrambyIRS/DOL
– Random
• Referralsfromotheragencies• Media• Other
BasisforExamination
6B-6
• Notification
• PhoneCall
• IDR
• Document/datareview
• AdditionalIDRs
• Conclusion
ExaminationSteps—Asof4/1/2017
6B-7
• Designateaclear“chainofcommand”forrespondingtoauditnoticesandothercommunications
• Retainexpertadvisors
• Closelymanagetheaudittimeline
• Setspecificmilestonestoensuremutualaccountability
ManagingtheExaminationProcess
6B-8
• WaittoreceiveanIDRbeforeprovidingplanmaterials– Onlyprovidedocumentationthatisspecificallyrequested
– DonotvolunteeranydocumentationthatisNOTrequested
• Establishacooperativeapproach– RespondtoIDRsinatimelymanner
– Itisabalancingact
ManagingtheExaminationProcess(continued)
6B-9
• Failuretoincludeand/orexcludecertaincompensationtypes:– Imputedcompensationelements(e.g.,grouptermlife)
– Equitycompensationandothernon‐cashelements
– Bonuses
– Overtime
• Compensationfromentrydates
• 401(a)(17)CompensationLimit
CommonCompensationErrors
6B-13
• Planprovidesforemployermatchingcontributionof50%ofdeferralsof6%ofcompensationin2016,withatrue‐up
• Benmade$100,000inregularsalaryfor2016andreceiveda$10,000bonus
• Bendeferredatarateof10%theentireyear
Example
6B-14
• Iftheemployerexcludedbonusesfromcompensation,Ben’sdeferralsandmatchwouldbeasfollows:– Deferrals=$100,000*10%=$10,000
– Match=$100,000*6%*50%=$3,000
• Iftheemployerincludedbonusesincompensation,Ben’sdeferralsandmatchwouldbeasfollows:– Deferrals=$110,000*10%=$11,000
– Match=$110,000*6%*50%=$3,300
Example(continued)
6B-15
• IfthePlanincludedbonuses,buttheywerenotincludedinpractice,therequiredcorrectionwouldbe:
• Deferrals—½theamountBenwould’vedeferred=$500
• Match– theamountBenwouldhavereceived=$300
• Totalcorrection=$800
Example—Whydowecare?
6B-16
• Absentanaffirmativeelectiontothecontrary,participantsmustbeenrolledintheplan
• Iftheyarenottimelyenrolled,itisafailure
• Autoenrollmentfailurescanbeverycostly
• Example—3%automaticenrollmentrate;Katemakes$100,000andiserroneouslynotenrolledintheplanforoneyear:
• DeferralCorrection=$100,000*.03*.5=$1,500
• MatchCorrection=$100,000*.03*.5=$1,500
FailuretoAuto‐Enroll
6B-18
NondiscriminationTesting
• Thenondiscriminationtesting(NDT)rulesarecomplicatedandrequireaccuratedata
• Recordkeepersrelyonthedataprovided(almostblindlyinsomecases)
• Recordkeepersoftenusethemost conservativeapproach
6B-20
Loans
22
• Doestheplandocumentpermitloans?• Howmanyoutstandingloansdoestheplanpermit?
• Havedelinquentloansbeenproperlydefaulted?• Loansaretypically5years...• Ifover5years,istherepropersubstantiation
6B-22
Hardships
• Doestheplanpermithardshipdistributions?
• Istheresufficientdocumentation?
• Weredeferralssuspendedfor6months(andreinstatedthereafter)?Forallplansoftheemployer?
• TheIRSisnotahugefanof“self‐certification”
6B-24
LateDepositof401(k)DeferralsandParticipantLoanRepayments
• Mustbedepositedasoftheearliestdateonwhichsuchamountscanreasonably be segregated
• Haveapolicyandmakesureallpartiesinvolvedworktogethertofollowit
• Smallplansafeharbor—7businessdays
• Currentlythereisno safe harbor forlargeplans
• ExciseTaxes
6B-26
Vesting
• Calculatingvestingpercentages
• Permissiblevestingschedules
• Calculatingparticipantservice
6B-28