IRS Audits of Defined Contribution Plans

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IRS Audits of Defined Contribution Plans

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Presenters

• Robert Architect, Internal Revenue Service
• Ed Salyers, Internal Revenue Service
• Mindy Harris, Multnomah County, OR, Moderator

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Topics

• What is new in the IRS audit process
• Audit selection
• Initial Contact
• How to prepare for an audit
• Audit process-Issues/Records
• How 403(b) Regulations may impact audits

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Whats new in the IRS audit process Focused
Exams

• Good News
• IRS is trying to shorten the audit process
• Lessen audit burden for the Plan
• Focused examinations
• Try to limit the plan exam to 4-5 main issues
• limits the amount of records you have to provide
• Very detailed internal control review
• Not so Good News
• Enables IRS to provide more exam coverage

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Audit Selection

• How did our plan get so lucky?
• Random selection
• Joint examination or referral from other IRS
  functions
• Federal State and Local Government
• Employee Plans Compliance Unit
• May receive non-audit questionnaires
• Initial Contact from IRS
• Generally by telephone
• Followed up by letter

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How To Prepare for the Audit

• Inform heads of payroll, human resources, etc.
• Those areas that may be involved in the audit
• Decide who will be the primary contact for the
  IRS audit
• Contact your vendor
• so they will be aware that records may be
  requested
• Contact counsel
• if you desire their participation

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Audit Begins

• Initial meeting
• Identify types of records and who maintains
• Establish lines of communication
• Establish work space for auditors
• Introduction to Information Document Request
  IDR
• Schedule walk-through (orientation) of records
  Review of Internal Control

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Keys for a Successful Audit

• Open Communication with IRS
• If information on IDR does not seem to be best
  approach to obtain results, talk to the auditor
• Influence on length of audit
• IDR turnaround time
• Clear communication between IRS and employer

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Commonly Requested Records

• Plan documents Contracts
• Benefit Handbooks employment contracts Union
  contracts
• Payroll HR files
• 1099-R W-2 records
• Participant account records
• Includes loans and distributions

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Audit Issues/Records 403(b)

• Ineligible Employer
• Excess Elective Deferral contributions
• Review of payroll records HR records W-2
• Universal availability
• Review of payroll records and HR records
• Plan Loans violate IRC 72(p)
• Review of account records 1099-R
• Impermissible distributions
• Review of account records HR records 1099-R
• Contract provisions
• Review of contract

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Audit Issues/Records 457(b)

• Failure to establish Trust or follow plan
• Review of documents
• Failure to pay FICA taxes
• Review of payroll records
• Excess contributions
• Review of payroll records, HR Records, W-2s
  Account records
• Impermissible distributions
• Review of account records, HR Records 1099-Rs
• Failure to monitor loans
• Review of account records 1099-Rs

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Audit Issues/Records 457(f)

• No substantial risk of forfeiture or risk has
  expired
• Review Employment contacts
• Review of benefits handbook
• Inadvertent 457(f) arrangements
• Review of union contracts
• Announcement 2000-1
• Review of benefits handbook
• Severance pay arrangements

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Severance Pay 409A

• What is a valid severance pay plan
• Tomorrows potential big exam issue
• 409A of the Internal Revenue Code
• 457(f) of the Internal Revenue Code
• Very common in public schools
• Governmental employers are subject to 457(f)
  409(A) rules
• Generally 457(f) will tax first

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Audit Issues/Records 401(a)

• Failure to comply with required Internal Revenue
  Code language requirements
• Review of plan document
• Failure to follow plan document
• Review of document
• Review of payroll HR files
• Review of W-2s 1099-Rs

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Sick Vacation Pay Issues

• Sick Vacation Payments
• Avoiding constructive receipt
• Payroll records Benefits Handbook Union
  Contracts
• Elective Deferrals to 403(b), 457(b), or 401(k)
  Timing 415 regulations

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Sick Vacation Pay Issues (cont)

• Contributions to 401(a) plan
• If have cash option Impermissible CODA
• Contributions to 403(b)
• If subject to a cash option
• treated as elective deferral and not eligible
  for special 5 year post-retirement contributions
• Converting to employer contributions
• Attempts to avoid FICA
• Seek expert advice many pitfalls

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Closing or Expanding Audit

• Discuss issues and reach agreement
• Adjustments might require expansion of audit
  Additional Issues
• Evaluate adjustments under Employee Plans
  Resolution System
• Issue closing letter

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How 403(b) Regulations may impact audits

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Plan In Form Operation

• Must be maintained pursuant to a written DC plan
• Both form and operation
• Future timely amendments
• Audit Steps
• Will review plan provisions for form and compare
  to plan operation

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Universal Availability 20 hour requirement

• ER must reasonably expect employee to work hours for ensuing 12-month period
• Subsequent plan year or 12-month period the
  employee actually worked preceding 12-month period
• Audit steps Must track hours

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Universal Availability (cont)

• Permissive exclusions - not allowed
• Collective bargaining employees
• Visiting professors
• Employees who have taken a vow of poverty
• Employee with a one-time election to participate
  in a governmental non-403(b) plan

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5 Year Post-Severance Contributions

• No CODA must be employer contributions
• Audit steps
• Will review plan
• Will review employment contracts
• Will review all documents for any cash options
• Will review for guaranteed payouts

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Form Requirements -Contract

• 401(g) Transferability of annuities
• 401(a)(30) Elective deferral limit
• 401(a)(31) Direct rollover
• 401(a)(9) Required minimum distribution
• Incidental benefit requirement
• Audit Issue
• Current audit issue first 3 above
• Now plan form requirement

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Timely Payment of Elective Deferrals

• Contribution amounts must be transferred to
  providers within a period no longer than is
  reasonable for proper plan administration 15
  day example
• Audit Review operation

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New Elective Deferral Requirement

• 401(k) Hardship suspension
• Effective opportunity to make cash or deferred
  election
• Anti-conditioning
• Audit Steps
• Will compare form and operation

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Life Insurance

• No separate life insurance contracts
• Incidental death and disability permitted
• Audit steps
• Will review contract provisions

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Non-Taxable Contract Exchange

• In the past Rev. Proc. 90-24
• Potential changes
• Transfer language must be in plan
• Transfer must be related to the plan
• Audit Steps
• Will review the form the operation

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Excess Contributions IRC 415

• Old rules did not impact contract going forward
• Potential rules
• Must have separate account
• No separate account
• Contract does not qualify for exclusion in
  current and future years.

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Publications Available

• 4406 Comparison Chart 403(b)/457
• 4482 403(b) for Participant
• 4483 403(b) for Sponsor
• 4484 Chart of Retirement Plans for Tax Exempt
  Governmental Entities

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Visit - www.irs.gov/retirement
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