Continuing our series of posts reporting on the recent TE/GE meetings, today we focus on the audit trends and issues that the IRS officials in attendance identified. In addition to providing insight on the IRS’s focus, the list serves as a good compliance checklist for plan sponsors. Are you making these errors? If so, you can (and should) fix them now before the IRS comes knocking.
Areas of Focus. At the outset, it’s helpful to know where the IRS is looking for trouble, so you can have some idea where agents are coming from when you get the dreaded audit letter. The officials at TE/GE gave these insights:
- Most audits are focused on 3 or 4 particular issues depending on the market segment (i.e., the business of the employer) and the size of the plan (generally less than 100 participants is a small plan while other plans are considered large). The IRS did not give examples of the issues on which they are focusing, but to the extent you or your advisors are aware of other IRS audits in your market segment and for plans of your size, you may be able to identify them.
- There is no current targeted audit project for governmental plans.
- 403(b) plans will be an area of focus going forward.
- With regard to 401(k) audits, there will be a heavy emphasis on internal controls. They mentioned this multiple times, so it’s a good idea to review and document your internal controls now so that you are prepared when the IRS audits.
- For defined benefit plans, they said they will focus on “issues around [the Pension Protection Act].” They did not elaborate, but presumably this will involve a focus on operational compliance with PPA changes.
Audit Trends. The IRS also identified a few common audit trends. Most of these are unsurprising, but again, serve as a good checklist for plan sponsors.
- First, they identified the following general trends:
- Failure to timely amend documents for law changes
- Failure to follow plan terms
- Using the incorrect definition of compensation for contribution, benefit calculation, or testing purposes
- Eligibility compliance issues, such as failing to exclude ineligible employees or include eligible ones
- On a more specific note, they identified the following as issues that were particularly prevalent in 401(k) plans:
- Failing to have internal controls (did we mention that they thought this was important?)
- Increases in plan loan defaults due to administrative errors (see our prior post about doing a quarterly checkup)
- Failing to make the top heavy minimum contribution in a top heavy plan (this is a bigger issue for smaller plans)
- In the 403(b) area, they reported that the following issues were common:
- Deferrals exceeding the 402(g) limit ($17,500 for 2013)
- Failure to comply with the universal availability rules
- Contributions in excess of the maximum limits under 415 ($51,000 for 2013)
- Plan loans that violate the loan rules on maximum loan amounts or maximum repayment periods (and, in some cases, have no documentation at all for the loan)
- Hardship distributions where insufficient documentation is obtained to demonstrate the hardship.