What You Need to Know: The New IRS Audit Initiative for Retirement Plans

The better, proactive approach is to hire experienced technical experts to perform a private operational compliance review. The technical experts should know what the IRS auditors will ask and what operational problems might crop up. A proper operational compliance review can help a plan sponsor identify and correct plan operational violations on its own.

Private auditors occasionally do operational reviews after the IRS has notified the plan sponsor of its intent to audit the plan, but ideally, the sponsor should schedule the review before it receives any hint of an IRS audit. A sponsor that identifies violations before an IRS audit either can correct the problems itself or correct the problems with the blessings of the IRS through the IRS “Voluntary Compliance Program.”

An operational compliance review also can reduce the risk of private civil litigation brought by plan participants and their attorneys. These lawsuits are becoming more frequent and more expensive. The press has reported that some plan sponsors have paid millions of dollars to settle plan-related class-action lawsuits.

Plan sponsors also should recognize the intrinsic value of offering a well-run plan. A well-run plan can contribute to good employee morale and cut employee turnover rates. In some cases, a well-done review can help a sponsor improve plan administration and benefits without significantly increasing the sponsor’s costs.

The IRS initiative to audit large plans puts all plan sponsors and their advisors on notice that, going forward, the IRS will be expecting them to do regular, independent reviews. Even plan sponsors of smaller retirement plans are not immune. It is likely that the IRS EPTA teams will eventually shift their focus to smaller plans. At that point, the EPTA teams will have a better grasp of what issues should be examined more closely.

Insurance companies in the retirement services market must be prepared to work with clients that either face IRS audits or are taking steps to assess their own operations. Insurers can play a vital role by providing both technical and administrative support.

If, for example, a plan sponsor is conducting an independent review, the insurance company that provides plan administrative services should discuss its role in the audit with the plan sponsor as early as possible, in order to continue to maintain goods relations. The insurer also should consider whether to list such services in the administrative services contract.

is the human resources risk management leader in the human capital practice at Ernst & Young L.L.P., New York.

Reproduced from National Underwriter Edition, April 19, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.