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IRS Audits of Defined Contribution Plans


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Title: IRS Audits of Defined Contribution Plans

IRS Audits of Defined Contribution Plans

  • Robert Architect, Internal Revenue Service
  • Ed Salyers, Internal Revenue Service
  • Mindy Harris, Multnomah County, OR, Moderator

  • What is new in the IRS audit process
  • Audit selection
  • Initial Contact
  • How to prepare for an audit
  • Audit process-Issues/Records
  • How 403(b) Regulations may impact audits

Whats new in the IRS audit process Focused
  • Good News
  • IRS is trying to shorten the audit process
  • Lessen audit burden for the Plan
  • Focused examinations
  • Try to limit the plan exam to 4-5 main issues
  • limits the amount of records you have to provide
  • Very detailed internal control review
  • Not so Good News
  • Enables IRS to provide more exam coverage

Audit Selection
  • How did our plan get so lucky?
  • Random selection
  • Joint examination or referral from other IRS
  • Federal State and Local Government
  • Employee Plans Compliance Unit
  • May receive non-audit questionnaires
  • Initial Contact from IRS
  • Generally by telephone
  • Followed up by letter

How To Prepare for the Audit
  • Inform heads of payroll, human resources, etc.
  • Those areas that may be involved in the audit
  • Decide who will be the primary contact for the
    IRS audit
  • Contact your vendor
  • so they will be aware that records may be
  • Contact counsel
  • if you desire their participation

Audit Begins
  • Initial meeting
  • Identify types of records and who maintains
  • Establish lines of communication
  • Establish work space for auditors
  • Introduction to Information Document Request
  • Schedule walk-through (orientation) of records
    Review of Internal Control

Keys for a Successful Audit
  • Open Communication with IRS
  • If information on IDR does not seem to be best
    approach to obtain results, talk to the auditor
  • Influence on length of audit
  • IDR turnaround time
  • Clear communication between IRS and employer

Commonly Requested Records
  • Plan documents Contracts
  • Benefit Handbooks employment contracts Union
  • Payroll HR files
  • 1099-R W-2 records
  • Participant account records
  • Includes loans and distributions

Audit Issues/Records 403(b)
  • Ineligible Employer
  • Excess Elective Deferral contributions
  • Review of payroll records HR records W-2
  • Universal availability
  • Review of payroll records and HR records
  • Plan Loans violate IRC 72(p)
  • Review of account records 1099-R
  • Impermissible distributions
  • Review of account records HR records 1099-R
  • Contract provisions
  • Review of contract

Audit Issues/Records 457(b)
  • Failure to establish Trust or follow plan
  • Review of documents
  • Failure to pay FICA taxes
  • Review of payroll records
  • Excess contributions
  • Review of payroll records, HR Records, W-2s
    Account records
  • Impermissible distributions
  • Review of account records, HR Records 1099-Rs
  • Failure to monitor loans
  • Review of account records 1099-Rs

Audit Issues/Records 457(f)
  • No substantial risk of forfeiture or risk has
  • Review Employment contacts
  • Review of benefits handbook
  • Inadvertent 457(f) arrangements
  • Review of union contracts
  • Announcement 2000-1
  • Review of benefits handbook
  • Severance pay arrangements

Severance Pay 409A
  • What is a valid severance pay plan
  • Tomorrows potential big exam issue
  • 409A of the Internal Revenue Code
  • 457(f) of the Internal Revenue Code
  • Very common in public schools
  • Governmental employers are subject to 457(f)
    409(A) rules
  • Generally 457(f) will tax first

Audit Issues/Records 401(a)
  • Failure to comply with required Internal Revenue
    Code language requirements
  • Review of plan document
  • Failure to follow plan document
  • Review of document
  • Review of payroll HR files
  • Review of W-2s 1099-Rs

Sick Vacation Pay Issues
  • Sick Vacation Payments
  • Avoiding constructive receipt
  • Payroll records Benefits Handbook Union
  • Elective Deferrals to 403(b), 457(b), or 401(k)
    Timing 415 regulations

Sick Vacation Pay Issues (cont)
  • Contributions to 401(a) plan
  • If have cash option Impermissible CODA
  • Contributions to 403(b)
  • If subject to a cash option
  • treated as elective deferral and not eligible
    for special 5 year post-retirement contributions
  • Converting to employer contributions
  • Attempts to avoid FICA
  • Seek expert advice many pitfalls

Closing or Expanding Audit
  • Discuss issues and reach agreement
  • Adjustments might require expansion of audit
    Additional Issues
  • Evaluate adjustments under Employee Plans
    Resolution System
  • Issue closing letter

How 403(b) Regulations may impact audits

Plan In Form Operation
  • Must be maintained pursuant to a written DC plan
  • Both form and operation
  • Future timely amendments
  • Audit Steps
  • Will review plan provisions for form and compare
    to plan operation

Universal Availability 20 hour requirement
  • ER must reasonably expect employee to work hours for ensuing 12-month period
  • Subsequent plan year or 12-month period the
    employee actually worked preceding 12-month period
  • Audit steps Must track hours

Universal Availability (cont)
  • Permissive exclusions - not allowed
  • Collective bargaining employees
  • Visiting professors
  • Employees who have taken a vow of poverty
  • Employee with a one-time election to participate
    in a governmental non-403(b) plan

5 Year Post-Severance Contributions
  • No CODA must be employer contributions
  • Audit steps
  • Will review plan
  • Will review employment contracts
  • Will review all documents for any cash options
  • Will review for guaranteed payouts

Form Requirements -Contract
  • 401(g) Transferability of annuities
  • 401(a)(30) Elective deferral limit
  • 401(a)(31) Direct rollover
  • 401(a)(9) Required minimum distribution
  • Incidental benefit requirement
  • Audit Issue
  • Current audit issue first 3 above
  • Now plan form requirement

Timely Payment of Elective Deferrals
  • Contribution amounts must be transferred to
    providers within a period no longer than is
    reasonable for proper plan administration 15
    day example
  • Audit Review operation

New Elective Deferral Requirement
  • 401(k) Hardship suspension
  • Effective opportunity to make cash or deferred
  • Anti-conditioning
  • Audit Steps
  • Will compare form and operation

Life Insurance
  • No separate life insurance contracts
  • Incidental death and disability permitted
  • Audit steps
  • Will review contract provisions

Non-Taxable Contract Exchange
  • In the past Rev. Proc. 90-24
  • Potential changes
  • Transfer language must be in plan
  • Transfer must be related to the plan
  • Audit Steps
  • Will review the form the operation

Excess Contributions IRC 415
  • Old rules did not impact contract going forward
  • Potential rules
  • Must have separate account
  • No separate account
  • Contract does not qualify for exclusion in
    current and future years.

Publications Available
  • 4406 Comparison Chart 403(b)/457
  • 4482 403(b) for Participant
  • 4483 403(b) for Sponsor
  • 4484 Chart of Retirement Plans for Tax Exempt
    Governmental Entities


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