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.

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.

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).