While most Internal Revenue Service (IRS) audits are selected at random, there are certain audit triggers that exist that all employee benefit plan sponsors need to be aware of. Regardless of your culpability, if the IRS suspects noncompliance of any sort, your chances of being audited will increase substantially.
To help mitigate your risk of an IRS inspection and any subsequent penalties, the best thing you can do is learn what to do, and—more importantly—what not to do in this situation. To that end, here are four tips for avoiding an IRS audit of your employee benefits program in 2023.
1. Educate yourself on the IRS' employee plans examination process
The IRS’s Employee Benefit Audit Program is used to audit and enforce retirement plans and other qualified benefits. The IRS’s emphasis—with respect to defined contribution plans—is on compliance with the requirements of the Internal Revenue Code, the plan’s tax qualification, and the administration of all plan documents.
In the event of non-compliance with regulations, the IRS can impose taxes, penalties, interest, and other punitive actions. To help avoid that possibility, we recommend you read through the IRS Employee Plans (EP) Examination Process Guide.
In addition to a thorough explanation of the examination process from initial contact through completion, there is an abundance of helpful resources, such as required minimum distributions, downloadable forms, and step-by-step guides for how to correct plan errors.
2. Ensure all your plan documents are up to date and compliant
The most frequent red flags in employee benefit plan documents have to do with compliance deficiencies in terms of operation and administration. Full compliance with any newer regulations is also likely to be reviewed since many companies fail to implement these changes in a timely manner.
The most common issues the IRS finds in its audits of retirement plans include:
- Plan documents are not up to date
- Participant deferral deposits are untimely
- Plan operation doesn’t follow the plan document
- Plan definition of compensation is not being followed
- Matching contributions are not made to all eligible employees
- Plan definitions for eligibility to participate or employer matching are not being followed
- Improper administration of participant loans (including defaults), hardships, QDROs, etc.
- Delinquent filing of Form 5500 or answers to certain questions therein
- Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) test errors
- Your deferral limits are exceeded
- Top-heavy requirements are ignored
3. Conduct a self-audit to ensure your benefits plan is consistent
Plan administration is complex and plan documents are not always simple to interpret. As a result, it is not uncommon for plan sponsors to discover correction issues at some point.
Many errors that occur and corrections that need to be made arise out of a triggering event. These may include payroll staff turnover, system changes, one-off processing events, annual limits, or business reorganizations. If you’ve had or have this type of event, you may want to conduct a self-audit to ensure your plan’s operation continues to be consistent with all plan documents and laws.
Performing regular self-audits will give you greater protection against potential compliance breaches. If you identify a problem during the self-audit, you may be able to self-correct your plan, document the corrections for the file, and move forward without a formal filing with the IRS or the DOL.
More significant issues—such as failing to amend the plan or not depositing employee deferrals in a timely manner—generally require filing for and obtaining approval of the self-correction methodology.
4. Partner with an experienced employee benefits team
Most prudent plan sponsors hire a plan advisor to help them adhere to the IRS and ERISA’s rigorous standards and decrease their audit liability. Fortunately, this is the easiest step you can take.
As a 100% Employee Stock Ownership Plan business, the Employee Benefits team at Christensen Group Insurance knows first-hand the importance of a well-crafted and well-protected retirement plan. We provide our clients with full audit assistance, compliance checklists, bi-weekly updates, legal and HR hotlines, and much more.
If you’re ready to experience the highest level of care in the employee benefits industry, connect with one of our friendly and knowledgeable employee benefits team members today.