For most Americans, any letter from the Internal Revenue Service (IRS) or Department of Labor (DOL) sparks fear, especially a notice of a retirement plan audit.

Employer-sponsored retirement plans are required to satisfy disclosure and filing requirements. Unfortunately, a confluence of factors – including the pandemic-inspired business interruption, furloughs and other aspects – have made qualified retirement plan compliance that much difficult.

Whether you’re a business or an organization offering a workplace retirement program, the best thing you can do when it comes to government compliance is to review your plan on an ongoing basis. When you self-audit your plan or instead have a specialist do it for you, the chances that you will hear from the IRS or DOL go way down.

Thousands of retirement plan sponsors get audited every year. So what are the red flags that can have the government come knocking on your door? Although a plan audit is generally random, we have some idea what they may be.

6 IRS or DOL Plan Audit Culprits

1. Late Form 5500. Most qualified retirement plans are required to file IRS Form 5500 annual return report which reports participant count data and financial information. The form is due by July 31 (or Oct. 15 if extended) for calendar year plans. Filing this form late or not filing at all can trigger red flags.

2. Fidelity Bond Failure. 401(k) and 403(b) plans that are not ERISA-exempt are required to always have a fidelity bond coverage. Generally, the bond must be 10% of plan assets up to $500,000. The dollar amount of bond is required to be reported on the Form 5500 every year. Insufficient coverage or not having a bond at all can trigger red flags with the IRS or DOL.

3. Delinquent Contributions. Employee contributions are required to be deposited to the retirement plan as soon as feasible after the contributions have been deducted. Any late contributions have to be corrected using IRS’s guidelines, including giving lost earnings to the affected employees. The amount also must be reported on the Form 5500 filing.

4. Accountant’s Opinion Failure. Large retirement plans (generally, more than 100 participants) are required to attach accountant’s opinion/CPA audit financial statements with Form 5500 filings every year. Failing to include the audit report can lead to fines or penalties from the DOL and/or IRS.

5. Employee Complaint. It is often said that most DOL 401(k) or 403(b) audits are triggered by complaints from current and former employees. If an employee makes a formal claim of benefits, follow the Employee Retirement Income Security Act (ERISA) regulations. Check with your benefit specialist or an ERISA attorney any time you issue a claim denial to ensure it is consistent with the written plan terms. Also, make sure that you clearly explain the participant’s appeal rights and the reason for the denial. It’s not unusual for employees to become frustrated because they don’t understand the benefit plan. Regular training sessions can reduce these misunderstandings.

6. Blackout Notice Failure. By law, plan sponsors need to provide a blackout notice to existing and certain former employees when participants are unable to make changes to their accounts for a certain period of time. This typically occurs when retirement plans change recordkeepers. Failing to provide this important notice can trigger red flags.

Bonus Tips

7. Employee Deferral Elections Failure. A common failure in the retirement plan world, this is when an employee elects to begin deferring a percentage or dollar amount of their wages to the plan and the election is not applied at the wrong amount or not applied at all. When this occurs, the participant is adversely affected, and a correction may be required by the employer including funding a portion of what the employee should have contributed as well as funding the employer match and lost earnings on those contributions.

8. Eligible Compensation Error. One of the most common errors in administering a 401(k) or 404(b) plan is the misapplication of the plan’s definition of eligible compensation. The definition can vary from plan to plan, and a small clerical error in the payroll system can cause years of noncompliance and costly corrections by an employer.

Final Words

401(k)s and 403(b)s are a highly technical space. Mistakes happen. We are humans after all. The IRS and DOL provides many ways to correct errors depending on the type of problem. But the best situation is preventing blunders in the first place. This requires proactively managing your retirement plan and having proper policies and procedures in place. In today’s constantly changing regulatory environment, having a retirement plan specialist manage your plan can not only ensure your plan is fully compliant, but it can also be cost-effective and headache-free.

If you feel that your plan may not be in full compliance or are looking for some best practices to avoid these issues, NESA 401(k) and 403(b) Experts is here to help! Give us a call or send us an email.