Part One – Agency Jurisdiction and Focus

Employer sponsored retirement plans can be audited by either the IRS and DOL, depending on the type of compliance review. While the IRS and DOL have different areas of focus, both routinely examine plan operations, documentation, and internal controls. Here are common areas of emphasis during audits by each agency:

IRS Audits

The IRS has jurisdiction over a Plan’s tax qualified status. IRS audits focus on compliance with the Internal Revenue Code and ensure proper internal controls are in place to maintain compliance. The top areas investigated during the IRS audits include:

• Plan Compensation definition
• Suspension of benefits
• Plan Document updates and amendments
• Nondiscrimination testing
• Eligibility
• Required Minimum Distributions
• Plan loans
• Top-heavy testing
• In-service distribution rules
• QDRO procedures
• Distribution paperwork
• Automatic enrollment and escalation processes (if applicable)
• Timeliness of employee deferral deposits

DOL Audits

The DOL has jurisdiction over Fiduciary standards as well as reporting and disclosure requirements. DOL audits focus on compliance with the Employee Retirement Income Security Act (ERISA) and ensure that procedures and processes are followed. The top areas investigated during DOL audits include:

• Target date funds
• Participant notices
• Revenue sharing and 12b-1 fees
• Investment Policy Statements or investment guidelines
• Service providers
• Plan committee meetings
• Payroll deposits
• Changing Recordkeepers
• Fidelity bonds
• Cybersecurity policies and procedures

Plan Audits can elicit feelings of fear and worry in Plan Sponsors. Understanding each agency’s focus and jurisdiction allows Plan Sponsors to concentrate their preparation efforts.

Part Two – Planning & Preparation

Do NOT disregard the Audit Notice.

Whether it is from the IRS or DOL, an audit notice should not be ignored. Pay special attention to the deadline for submitting data to the respective agency. Deadlines may be extended if requested and deemed necessary.

Contact Service Providers

Service Providers that assist with the Plan’s compliance efforts should be contacted immediately. These providers may be able to supply many of the documents requested by the agency. Alerting Service Providers early in the process will give them time to prepare. Additionally, notify any individuals who are key to Plan operations. These individuals will likely be called upon to explain administrative processes.

Gather All Requested Documents

The audit notice should contain a list of requested documents. Typically, the request includes, but is not limited to:

• The Plan Document
• Plan amendments
• The Summary Plan Description
• Form 5500 filings for the years under audit
• Plan records pertaining to eligibility, vesting, and testing
• Payroll data and participant census information
• Service provider contracts
• Fiduciary committee meeting minutes
• Proof of timely remittance of participant deferrals

Conduct a Self-Audit

During the audit, you will be expected to explain Plan terms and operations, internal controls, testing results, and more. To better prepare for the actual audit, conduct a self-audit by reviewing Plan Records and Operations for each year under audit.

A self-audit also provides an opportunity to identify and correct any errors. If a compliance failure is discovered, do not attempt to conceal it from the auditor. Instead, review potential correction options under the Employee Plans Compliance Resolution System (EPCRS). Voluntarily disclosing and correcting known issues may reduce penalties or qualify the plan for reduced sanctions under Audit CAP.

The bottom line when it comes to DOL or IRS audits is that preparation is key. It is much better to be proactive than reactive!

Straight From the Source

This information reflects current guidance from the IRS, DOL, and EPCRS.
IRS: What if You Are Audited? https://www.irs.gov/retirement-plans/plan-sponsor/401k-resource-guide-plan-sponsors-what-if-you-are-audited