Each year, hundreds of retirement plans are examined by the Internal Revenue Service (IRS) and Department of Labor (DOL).  The agencies also examine other kinds of employee benefit plans for compliance with statutes and regulations with respect to which they have enforcement authority.  In particular, the DOL has increased its examinations of group health plans in recent years in connection with the Employee Benefit Security Administration’s Health Benefits Security Project.  The agencies are particularly focused on compliance issues that pose the greatest potential risk to the largest numbers of employees.

Be Prepared

As with any situation you’d rather avoid, being prepared is always the best way to ensure that an examination isn’t any worse than your worst expectations.  With enough preparation, even your worst expectations shouldn’t be so bad.  A significant element of being prepared is self-auditing.  Regularly.

Focus particularly on the most common compliance issues.  For tax-qualified retirement plans examined by the IRS, these tend to involve failures related to (among other things) timely amending plan documents, administering compensation and eligibility rules consistent with plan terms, and making impermissible distributions.  Even if your plan financials are audited annually by a third party (for example, ERISA-covered retirement plans), do your own spot-checking for common trouble-makers like misinterpretations of eligibility rules and misapplication of the definition of compensation.

Both the IRS and the DOL publish self-audit tools.  The IRS’ compliance checklists, guide to common plan requirements, and “fix-it” guides are practical resources for 401(k) and 403(b) plan sponsors.  These include lists and explanations of specific Internal Revenue Code requirements for retirement plan tax-qualification and step-by-step ways to correct certain mistakes that could otherwise cause a plan to be disqualified.  The DOL’s self-compliance tool for group health plans may be especially helpful for plan sponsors who’ve not had a group health plan examination in the last couple of years.

Understand the Examination Process

Both the IRS and DOL publish examination guides.  The IRS’ examination process guide includes links to fairly detailed explanations of each of eleven stages of a typical examination.  The DOL’s initial investigation guidelines for group health plans are also readily available and will give group health plan sponsors some insight into the examination process.

Depending on whether your plan was selected for examination based on purely random selection, participant complaint(s), referral from another government agency, an anomaly in the plan’s annual report, or a particular market segment focus the agency’s national office has at the time, the examination process might veer significantly from the usual.  Also, if your plan has previously corrected failures under the IRS’s Employee Plans Compliance Resolution Program, be prepared to demonstrate that the full correction was made, including corrective action taken to prevent recurrence of the same failure.

Some examinations will involve on-site visits and others will not.  Also, some agents will want to communicate solely via fax or regular mail and others will permit email communication.  Many agents these days do not work out of an office every day and, therefore, will be difficult to reach by telephone.  Be prepared to be flexible and accommodating but do not hesitate to ask for the same from your assigned agent – for example, if you need more time to respond fully to an information or document request.

The examination will conclude with either a clean bill of health or (more likely) identification of one or more errors that need to be corrected.  Make sure you fully understand the error(s) identified as well as the proposed correction(s) and any penalties.  If you disagree with the agent’s conclusions, understand your appeal rights and those procedures.

Keep It In Perspective

The government’s objective in any plan compliance examination is to identify compliance failures.  It never pays to deliberately ruffle the feathers of a public servant whose job it is to find your mistakes.  Be professional and considerate and expect the same conduct from the agent.  Among other things, this means responding by whatever deadline is given (extended or otherwise) with documents and information organized in a way that makes it easy for the agent to do his or her job.

In any event, keep in mind that total compliance is virtually unheard of and every failure has a resolution.

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Photo of Monique Warren Monique Warren

Monique Warren is a Principal in the White Plains, New York office of Jackson Lewis P.C. Ms. Warren is a member of the Employee Benefits Counseling, Executive Compensation, Benefits Litigation and Workplace Privacy Practice Group.

Ms. Warren counsels employers on employee benefits compliance…

Monique Warren is a Principal in the White Plains, New York office of Jackson Lewis P.C. Ms. Warren is a member of the Employee Benefits Counseling, Executive Compensation, Benefits Litigation and Workplace Privacy Practice Group.

Ms. Warren counsels employers on employee benefits compliance and administrative matters, drafts plan documents and employee communication materials, and represents employers to government agencies and in employee benefit litigation. Her expertise includes health and welfare plans as well as retirement plans.

Ms. Warren has spoken at numerous client and professional association events including SHRM and WEB meetings. She also has presented numerous seminars on employee benefits compliance topics including benefits basics for human resource professionals, HIPAA privacy and security, 409A requirements, and annual legal updates.

Prior to joining the firm in 2006, Ms. Warren was a member of the employee benefits group of a large Chicago law firm and later maintained her own practice in Illinois, representing employers in employee benefits, employment and employment-related immigration matters. While attending law school, she was an intern in the tax clinic at Loyola University Chicago School of Law and was a judicial extern for the Honorable Blanche Manning, Federal District Court, Northern District of Illinois. As a law student, she received academic honors and was a member of the moot court employment law team.

During the ten years prior to attending law school, Ms. Warren directed human resource functions in manufacturing and research enterprises. She was certified as a Senior Human Resource Professional by SHRM in 1996.