Top 10 Reasons Retirement Plans Fail an IRS Plan Examination

February 19th, 2008

According to EP Examinations at the IRS, most mistakes that will cause a retirement plan to fail a plan examination are mistakes that could be identified and fixed relatively quickly by a plan sponsor.  However, most plan errors are not found until an agent conducts an examination of the plan.  The top 10 reasons for retirement plan failure found during examinations are:

  1. Failure to amend plans for tax law changes within the time required by law
  2. Failure to determine contributions using the plan’s definition of compensation
  3. Failure to either include eligible employees in the plan or exclude ineligible employees from the plan
  4. Failure to satisfy plan loan provisions
  5. Allowing impermissible in-service withdrawals
  6. Failure to satisfy the minimum distribution rules
  7. Adoption of a plan which the employer is not legally permitted to adopt
  8. Failure to pass the ADP/ACP nondiscrimination tests
  9. Failure to properly provide the minimum top-heavy benefit/contribution to non-key employees
  10. Failure to adhere to the contribution limits of IRC 415

Employers should have their plan documents and their plan operations regularly reviewed and analyzed to ensure ongoing compliance and avoid possible future problems.  Problems with plans are easier – and less expensive – to correct when they are caught early.  However, without regular review, catching little problems before they grow into big problems is much more difficult, if not almost impossible.

As an added benefit, an independent outside review of the plan and its operations may not only identify existing problems, but may also assist in spotting opportunities for changes to the plan that will improve benefits for participants or decrease the costs of plan administration.

Errors in retirement plan design or operations almost never get resolved on their own. They usually persist year after year until they’re found and fixed, possibly compounding the original problem with each year that passes.  The IRS has several programs in place that allow employers to correct problems that they self-identify before an examination becomes necessary.  Employers should consult with their benefits counsel to arrange for an independent review of their retirement plans for compliance with recent legal changes and to ensure the plan is operating in accordance with its governing documents.  If an error is found, your benefits counsel can also assist you in working with the IRS to correct the plan before an examination becomes necessary.

Trackback URI | Comments RSS

Leave a Reply