How to Prepare for a Retirement Plan Audit

Rosemarie Panico-Marino
September 13, 2019

Just eight short letters but something we all dread to hear: IRS Audit.

Your employee retirement plan is subject to potential audit just like your business or personal tax filings. The Internal Revenue Service (IRS) is granted authority and responsibility under the Employee Retirement Income Security Act (ERISA) for oversight of qualified retirement plans. Its main purpose is to ensure that plans continue to adhere to regulations that give them tax-qualified status. This is in addition to authority granted to the Department of Labor (DOL) under ERISA for regulatory oversight. The two government agencies often work side-by-side when reviewing retirement plans.

The most common causes that result in an audit are:

  • A complaint by a participant
  • An inquiry by a participant regarding plan operation
  • Information provided on the annual Form 5500

The IRS may also receive referrals from other government agencies. Generally, there is no random scenario that would initiate an IRS audit. Once your plan is pulled for audit, it’s important that you respond to the IRS’ request for data in a timely manner.

The IRS notice of audit will contain a list of required documents for review, the deadline for providing all documents, and a date for the examiner to meet with you. Requested documents generally include plan adoption agreement, plan amendments, last determination letter or opinion letter from the U.S. Treasury, trust agreement, Summary Plan Description, any summaries of material modifications, payroll records and census data.

Retirement Audit Paperwork
If you anticipate having difficulty obtaining documents, it’s important that you notify the IRS that you need an extension. Generally, the examiner may approve a short extension of time.

Areas of focus often include:

Failure to:

  • Amend the plan when required
  • Include eligible employees
  • Follow the plan’s definition of compensation to determine contributions
  • Make required minimum distributions
  • Correct failed non-discrimination tests
  • Properly include employers in a controlled group as participating employers

Violation of:

  • Plan loan provisions
  • Plan withdrawals and distributions
  • Protected benefit rules in plan mergers
  • Minimum top-heavy rules

This is not an exhaustive list but rather areas often reviewed in an IRS audit.

Today, many plans have a safe harbor matching contribution or a safe harbor non-elective profit-sharing contribution. The IRS will ask to see copies of notices sent to participants notifying them of the plan’s safe harbor status. Copies of these notices should always be contained in your plan records.

On occasion, the examiner may also ask for evidence of the fidelity bond on the plan. It’s important that as plan assets grow, the fidelity bond coverage is at least 10% of total plan assets (calculated at the beginning of the plan year) subject to the minimums and maximums as provided in the regulations.

The audit process and length of time varies with each case. As part of its closing process, the IRS may require action be taken based on errors found or changes needed. There may be sanctions that are imposed based on the errors they found and the steps the company is taking to ensure such errors will not occur again.

As a best practice, you may want to consider engaging an outside consultant to perform periodic internal audits to confirm plan documentation and operational compliance.

If you would like to learn more about how the members of the CIBC US Corporate Retirement Services group can help you through an IRS audit, please feel free to call us at 312.564.3806.

Rosemarie is the Retirement Plan Services group leader in the Corporate Retirement Services group at CIBC Bank USA, with more than 35 years of qualified plans and financial industry experience. As a national practice, the Corporate Retirement Services team works closely with CIBC commercial bankers and advisors throughout the country to bring expertise and co-fiduciary services to clients’ retirement plans. In this role, Rosemarie is responsible for providing consulting, investment advisory and consulting services to sponsors of qualified and non-qualified retirement plans.