Tips for Surviving an IRS Plan Audit

An HR director from Vanderbilt University shared tips from her IRS 403(b) plan audit experience with attendees of the NTSA 403(b) Summit.

Retirement plan sponsors may feel understandably panicked when they get a notice from the Internal Revenue Service (IRS) that their plan is being audited.

As soon as a plan sponsor gets notice, it should contact its third-party administrator (TPA), attorney and plan providers, Robert Ard, senior vice president and chief compliance officer at TSA Consulting Group, told attendees at the National Tax-Deferred Savings Association (NTSA) 403(b) Summit.

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Ard also suggested preparing individuals from human resources (HR), payroll and information technology (IT) groups. “But the fewer people you have talking to an agent, the better,” Ard said.

Terri N. Armstrong, human resources assistant director at Vanderbilt University & Medical Center, said its 403(b) plan was audited in 2010 for the 2008 plan year. One thing she learned is, as a company has turnover in HR or benefits, it should train new employees about audits.

When notified of an audit, the IRS will send one or more IDRs (information document requests). During the review by the IRS, additional questions may come up and result in more IDRs. Ard said the IDRs are supposed to be concise, but employers should make sure they understand what the IRS is asking and only give the agency what it asks for. He added that if old providers will not cooperate or are slow in providing information, plan sponsors should communicate that with the agent performing the audit.

Armstrong told summit attendees plan sponsors should keep up with all the IDRs received and retain copies of the information provided to the IRS, because new IDRs may reference old ones.

NEXT: Responding to agent requests and fixing errors.

Ed Salyers, owner of Ed Salyers CPA and former senior employee plans specialist with the Tax-Exempt and Governmental Entities Division of the Internal Revenue Service, said internal controls can make or break an audit. “Having internal controls will impress the agent,” he said. “An agent may ask about loans even if that is not on the IDR, and if the plan sponsor has no internal controls or internal controls are bad, loans will be added to the audit.”

As an example, Armstrong shared that when the agent auditing Vanderbilt’s plan asked about distributions, she had employees write down the process used for each distribution questioned. “I think that spared us from a more detailed audit,” she said.

According to Salyers, key internal control areas are:

  • Eligibility/discrimination;
  • Contributions/limitations;
  • Vesting;
  • Distributions; and
  • Reconciliations with providers or TPAs.

He said the IRS will look at plan documents, employee handbooks and company websites to make sure they all agree about plan features and processes. If not, the agent will add to the audit list.

Armstrong said the IRS found Vanderbilt had some language deficiencies in its document about certain contracts. It had to make plan amendments. Ard added that keeping up with required document language and required amendments is one of the reasons it is good to work with a TPA or attorney.

According to Armstrong, to comply with the universal availability requirement for 403(b)s, Vanderbilt includes retirement plan communications in the annual open enrollment communications for other benefits. It also puts notice of eligibility to participate in the plan in regular newsletters.

The IRS audit also found excess 15-year catch-up contributions in Vanderbilt’s plan. Armstrong said the university is now phasing out that plan feature. It has started tracking excess annual additions and sends notices to everyone, targeting those who may have other 403(b) accounts. Vanderbilt tracks those outside accounts about which it is notified.

She pointed out that Vanderbilt was able to fix errors found through the IRS’s voluntary correction program (VCP).

Plan Adviser Satisfaction Does Not Equal Loyalty

A survey finds retirement plan sponsors are very satisfied with their plan advisers, but that doesn’t mean they aren’t open to switching to a different one.

A survey of small plan sponsors by Security Benefit conducted in October 2014 found the majority (76%) have used their adviser from one to 10 years. Thomas J. Granger, assistant vice president, sales director for qualified retirement plans at Security Benefit in Topeka, Kansas, told attendees of the National Tax-Deferred Savings Association (NTSA) 403(b) Summit that satisfaction levels with key adviser services ranged from 88% to 95%.

Ninety-five percent of respondents said their adviser’s compliance and regulatory services meet or exceed their expectations, while 88% said the same about investment management services and 90% said the same about plan sponsor and plan participant communication and education services. These plan sponsors’ advisers may feel confident their relationships with plan sponsors are solid and strong, Granger said.                 

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However, the same survey found 74% of plan sponsors would consider or strongly consider switching to an adviser who could increase participants’ rates of return, 73% would consider switching to an adviser who could increase the plan’s overall investment returns, and 72% would consider switching to one who could lower plan costs by 25 or more basis points. “Satisfaction is not loyalty,” Granger noted.

NEXT: How to increase plan sponsor loyalty.

He said small plan sponsors are focused on plan cost and investment performance and always looking for a “better deal.” They are busy with other aspects of their businesses, and many are looking for a 3(38) investment manager so they can get out of the business of selecting plan investments, Granger contended. In addition, small plan sponsors are not spending a lot of time with their plans and are often not aware of problems until someone points them out—such as a potential new adviser.

Granger told attendees, “If advisers are not proactively nurturing that relationship, plan sponsors may leave.” He suggests advisers spend time getting to know what their competition is doing and what their plan sponsor clients want.

Advisers should meet with plan sponsors at least quarterly, Granger suggested, and they should use these meetings to highlight the value they have brought to the plan—i.e. participation increases, investment returns and asset growth. They should benchmark sponsors’ retirement plans every three years, and survey plan sponsors annually about their own performance.

Granger noted that participant retirement readiness is the new focus; plan advisers should have a strategy for boosting retirement readiness, and if they don’t have time or tools to provide education, they should partner with a provider that can help.

“Ask questions to differentiate yourself,” Granger said. “The adviser is largely responsible for how sponsors feel about their plans.”

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