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Audit Your 401k or 403b Plan – Before The IRS or DOL do! Ask The Lawyer

Audit Your Own 401k or 403b

AUDIT YOUR 401K OR 403B PLAN–BEFORE IRS OR DOL DO. “Aren’t I just asking for trouble by looking for mistakes in how we run our 401k plan? Why should I do a self-audit?”  A client asked me this when I suggested that reviewing the company’s own plan operations was a good idea.  Here was my response:

While self-audits aren’t legally required by any specific rule, hidden mistakes that persist over many years can be very costly. If they are caught first on an IRS or DOL audit, you will not only have correction costs but potential penalties. In fact, IRS technically has the right to disqualify plans that have violated the technical rules, though it hardly ever does so.  If it catches mistakes on audit, it will be in the driver’s seat in determining your penalties.

If you catch the mistakes yourself, you are in a much better position because:

  • Qualification mistakes-such as counting vesting service incorrectly or making improper loans-can be corrected relatively inexpensively under IRS voluntary correction programs, but you are not eligible for the most favorable programs if the IRS catches the problem before you do. You may even be eligible to self-correct if you find the problem early.
  • The Department of Labor has its own corrections programs that you might want to use if you have prohibited transaction issues or failed to file Forms 5500 on time. If you don’t use the DOL’s late filer program, the penalty for a late 5500 can now be up to $2140 per day.
  • Enforcement activity continues to be robust. You could be targeted when you least expect it, for example, as a result of an employee complaint. The DOL just released a fact sheet indicating that it collected $1.1 billion as a result of enforcement actions in fiscal 2017.
  • Often corrections require tracking down terminated participants, and the longer you wait to make a correction, the harder it will be to find some of them and the bigger the lost earnings payments they are entitled to will be.
  • IRS looks to see if plans have good controls procedures for catching errors. IRS does less extensive audits if it sees good controls. Self-audits are part of such procedures and will help you develop better checklists and other controls to show IRS.
  • Your documents need review as well. Now that the IRS has cut back on issuing determination letters for ongoing plans, the responsibility is on plan sponsors to make sure that required amendments are adopted on time and auditors will be reviewing documents more carefully.  Many law firms, including mine, can review your documents for compliance and issue opinions about document qualification.

My final suggestion to that client was not to have the plan’s current administer do the self-audit. It will be too invested in defending what it did and may not be aware that it is doing something wrong. Many independent consultants and ERISA attorneys will be happy to assist you in a truly independent review.

Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues. 


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