Will subtle changes to IRS rules about defined contribution (DC) plan documents lead to more IRS audits? That’s the opinion of a noted benefits specialist in a recent regulatory report.
Rather than DC plan sponsors periodically requesting a determination letter from the IRS which indicates that their plan is in compliance, the IRS will rely more on audits. In the past, plans requested determination letters every five years – now, these letters will only be issued when a plan is restated or terminated.
The results? Without the ability to request a determination letter, an IRS audit may be the only way for plan sponsors to know if the amended plan is in compliance. Other changes by the IRS significantly decrease fees for Voluntary Correction programs and warnings that announced changes to the 550 form focused on discrimination testing are not ready to go into effect.
The move by the IRS is a result of constrained resources and a desire to streamline processes. Many DC plans use prototype documents and fewer are being individually designed which was common when these plans started growing in popularity. So the IRS will rely more on audits than periodic review of all plan documents but, at the same time, reducing fees if a plan sponsor or their provider want to correct a violation through the voluntary correction program. Remember that a determination letter only approves the form of the plan, not the plan’s operation.
Running a DC plan is complicated with lots or rules and sometime very unforgiving. That’s why most plan sponsors turn to experienced providers, especially local TPAs (third part administrators) for help. But just hiring an expert does not mean that a plan sponsor’s job is over. They need to make sure that the expert is qualified in the first place and then make sure they are effectively and competently doing their job. Just like hiring and managing employees.
