Long gone are the days when plan operation and compliance can be handled competently by the owner of the plan sponsor or another member of management on a seat-of-the-pants basis. Even though there are many helpful checklists, fix-it guides and other tools available today on the IRS website and elsewhere, maintaining the qualified status of a retirement plan is too difficult and complex to be managed on a hit or miss basis. Compliance practices and procedures are critical to proper administration and fiduciary responsibility.
If your retirement plan is selected for an Employee Plans Examination by the IRS (usually linked to the filing of one or more Form 5500 Annual Reports) or is selected for an investigation by your regional office of the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor, an early stage of the process will include interviews of those responsible for administering and operating the plan. The number and length of the interviews will depend on the size of the plan and the number of administrative personnel and may include representatives of outside service providers. Part of an interview by a Revenue Agent will include questions and a discussion of your “internal controls” for the plan. A DOL interview may not refer to internal controls as such but frequently will get to the same questions. As we recommend, your legal counsel should be present at these interviews. Also, if you discover a plan compliance failure that is eligible for self-correction (SCP) under the IRS correction procedures, your ability to self-correct is conditioned on the existence of formal or informal practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements. In other words, eligibility for SCP also depends on the maintenance of adequate internal controls.
Although being ready for agency audits and self-correction is very important, there is a more general need for internal controls as well. Internal controls should be the basis for an annual compliance self-audit of your plan.
So what are internal controls? On one page of the Retirement Plan portion of the IRS website, internal controls are defined as “business processes designed to detect and prevent mistakes in your retirement plan.” On another page they are defined as “policies and procedures designed to help you detect and prevent errors.” On that same page they are described as “important to provide a reasonable level of assurance that your plan is operating properly.”
Based on the IRS website and other resources, here are some of the important operational issues that should be part of the internal practices and procedures for your plan:
Plan Document: Always know and follow the terms of the plan.
Eligibility: Who is in the plan? When?
Contributions:
Forfeitures:
Compensation:
Vesting Service and Crediting: Errors frequently occur.
Distributions:
Classification of Contingent Workers:
Rollover Contributions:
Participant Loans:
Hardship Withdrawals:
Special Controls Needed When Acquisitions or Mergers of Entities or Plans Occur:
Participant Communications:
Records Retention:
Fee and Expense Disclosures and Monitoring:
Form 5500 Annual Report:
Self-Audits:
Who Are the Responsible Parties?
Obtain Expert Advice When Needed:
Additional Resources
Individual articles and alerts on many of the foregoing operational issues may be found on the following web page and scrolling down through the Publications.
The members of our Employee Benefits and Executive Compensation Practice Group can help you establish appropriate internal controls and make them work effectively.