IRS stresses importance of internal plan controls

In the latest issue of Retirement News for Employers, the IRS stresses the importance of having formal procedures in place to help find and prevent retirement plan errors. These formal procedures, which the IRS refers to as “internal controls,” will depend upon the employer’s organization, plan type, and features, but involve regularly reviewing the plan document and operations.

According to the IRS, an employer’s internal controls should include procedures that: (1) review the plan document for updates as necessary for new law changes, and (2) verify that the employer operates its plan consistently with the terms of the plan document.

For example, the IRS states, an employer should periodically:

• Compare its plan eligibility requirements with employment records to ensure that employees joined the plan once they met the eligibility requirements.

• Compare its employees’ salary deferral election forms with the amounts deducted as plan contributions from their wages.

• Verify that the plan is using the correct definition of employee compensation for each plan purpose.

• Ensure that it has transmitted accurate employee compensation records to its payroll processor and plan administrator.

• Monitor annual contribution and compensation limits.

• Compare terminated participants’ vesting years of service to the plan vesting schedule.

• Secure participant and applicable spousal consent for plan distributions over $5,000.

• Monitor participants’ ages to ensure that it makes required minimum distributions.

The IRS recommends that, at least once a year, an employer should check with its benefits advisor to see if it must amend its plan for law changes. It’s especially important to check for any updates a few months before the end of the calendar year or the beginning of the next plan year, the IRS states. If an employer misses the deadline, it must still update the plan document and can correct the failure to meet the deadline by using the Voluntary Correction Program.

An employer should have a periodic review of its plan operation throughout the year to ensure that it is following the plan’s terms. By doing this, the IRS notes, the employer can more quickly detect and correct any mistakes. An employer may correct insignificant operational failures and even some significant operational failures through the Self-Correction Program without paying any fees or even notifying the IRS if its plan had internal controls. Most significant operational failures may be corrected through the Voluntary Correction Program.

Source: IRS Retirement News for Employers, August 20, 2013 edition.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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