RSM Resources

While federal law requires qualified retirement plans with more than100 participants to receive an annual financial audit, nothing forcescompanies to regularly review the operational elements of their plans.

But,with at least 10 major changes in laws governing pensions and qualifiedretirement plans in the past 25 years, experts say short-term gainleads to potential long-term pain.

"The major downside tofalling out of compliance with the regulations is that a plan couldbecome disqualified, which would result in all plan participants beingtaxed on their vested amounts," says Jan Jacobson, director ofretirement policy for the American Benefits Council in Washington, D.C."While the IRS doesn’t usually disqualify plans, because it’s such aheavy burden on employees, it will often hit the company with asubstantial fine."

When it comes to mistakes in retirement-planadministration, time is big money. For example, you can often correctan error caught in a regular review without any government penalties.On the other hand, if a mistake recurs year after year, its eventualdiscovery can lead to monetary sanctions, or civil or criminalpenalties for plan fiduciaries.

According to the IRS, the biggest issues that can lead to disqualification of a retirement plan include:

Documentation failure.This usually centers on the company’s plan document, which governs allaspects of a qualified retirement plan. Plan documents that are notcontinually updated with the latest legal, regulatory or corporatechanges are at high risk of being noncompliant.

Operational failure.In this case, the plan document complies with all applicable rules, butthe company is not operating its retirement plan in accordance with thedocument’s stated regulations.

Demographic or eligibility failure.All qualified retirement plans maintain rules governing participanteligibility, contribution limits, vesting timelines and distributionprocedures. Without regularly sampling the employee pool, a company hasno way to know if it complies with those key issues.

To helpcompanies comply, the IRS created the Employee Plans ComplianceResolution System (EPCRS), which provides several tools to helpcompanies correct errors in their retirement plans.

Forexample, under the agency’s Self-Correction Program, a company can takesteps to correct an identified plan qualification issue without IRSreview or penalty, provided the company documents its procedures toensure ongoing compliance. More-serious deficiencies — caught eitherthrough a self-review or by the required outside financial audit of theplan’s Form 5500 — route through the EPCRS Voluntary Correction Program(VCP) or Audit Closing Agreement Program (CAP). Unlike theSelf-Correction Program, both the VCP and Audit CAP require the companyto report deficiencies to the IRS, outline corrective procedures andpay any appropriate fines.

Getting an outside opinion

Forsome businesses, self-assessments may be enough to keep things ontrack. However, given the fiduciary responsibility on companies tooperate retirement plans in the best interests of participants, it canbe smart to seek out an objective, third-party review. Most often,those assessments take the form of a compliance audit or an operationalreview.

Compliance audits are often a sound option when twocompanies have come together after a merger or acquisition, or whenretirement-plan oversight has changed. This review typically includesan assessment of the plan document against federal law and regulations,as well as a check that all related plan procedures are in compliance.

Jacobson says well-designed compliance audits can quickly identify common problems in qualified plans.

"Considerthe scenario where you have a person with assets in more than onequalified retirement plan, and that person had a loan from each one,"she says. "Because the rules on loan size and duration are so strict,it wouldn’t be hard for that to become a ’prohibited transaction,’especially if the plan administration is not well-monitored."

Unlikecompliance audits, which focus on how plans meet current requirements,operational reviews dig into the nuts and bolts of retirement planadministration. This type of study seeks to identify system, staffingor workflow weaknesses, with the goal of providing recommendations thatwill improve efficiency while reducing costs.

Does yourcompany need a qualified plan checkup? If so, consider the followingtips from the retirement-plan section of the IRS Web site:

Whatyou don’t know can hurt you. Hoping that your retirement plan isoperating according to its terms and within the law isn’t enough. Youmust regularly review and analyze the plan document and its operationto keep the plan healthy. Problems in plan administration are easier —and cheaper — to fix when they’re small and haven’t continued over along period. Without regular oversight and review, retirement plans canstumble into big trouble.

A fresh set of eyes may see problems — and opportunities —you don’t. An independent review of a plan and its operation may turnup not only hidden problems but opportunities for process or financialimprovement.

Ensure that your retirement plan delivers what’spromised. Mistakes in plan operation can take away from the significantemployee morale boost a company-sponsored retirement plan provides. Byfailing to follow the plan’s terms and legal compliance obligations,plan fiduciaries open themselves to significant risk. An ongoingindependent review of plan operations will identify mistakes and reducethat risk.

By launching regular reviews of your qualifiedretirement programs, you can maximize the value — and minimize the risk— of this valuable employee benefit.