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The Internal Revenue Service recently announced that it will be conducting detailed audits on “large” qualified retirement plans, which will include defined contribution plans, defined benefit plans and collectively bargained plans of both types.

If you are a benefits advisor, and your client has a large qualified retirement plan, you need to be able to talk to your client about the new audit program.

The IRS informally defines “large” plans as plans that have at least $50 million in assets and cover 2,500 or more active, retired and separated participants.

The reason for the new focus on auditing large plans is simple: IRS and other governmental statistics reveal that 60% of all plan participants and 70% of all plan assets are in these “large” plans. By concentrating auditing efforts on the big plans, the IRS hopes to maximize its results.

One new aspect of this audit is that the IRS audit team will be larger and more specialized.

The typical IRS Employee Plans Team Audit Program team will have 6 to 8 agents, including a benefits attorney, a benefits specialist, a computer audit specialist, an actuary and other specialists as needed. (Example: an employment tax specialist.) The typical EPTA exam budget for a large plan is expected to use 200 to 300 IRS staff days. This staffing budget will help the EPTA team drill down to a very detailed technical level.

Plan sponsors of targeted plans can take 2 courses of action.

The “head in the sand” approach is to blithely ignore new IRS auditing program. The problem with this approach is that the IRS imposes severe monetary sanctions on plan sponsors when its auditors discover disqualifying defects.

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.