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Enforcement Initiatives: Whats Ahead From the IRS and DOL and How You Can Prepare

What's Ahead From the IRS and DOL and How You Can Prepare

Scott Matheson, CFA®, CPA
Senior Director | CAPTRUST Defined Benefit Practice Leader

Phyllis Klein
Senior Director | CAPTRUST Head of Professional Services

Trillions of dollars are stowed away in America’s retirement plans — more than $3 trillion in 401(k) plans alone.1 Most of that money consists of pre-tax contributions and tax-deferred earnings, which is a significant amount of deferred tax revenue. The Congressional Budget Office (CBO) estimates these deferrals will cost the federal government an average of $240 billion a year in lost revenue over the next 10 years. Given the aggregate savings in these plans and the tax implications of their deferrals, the Internal Revenue Service (IRS) clearly wants to ensure that the retirement plans that benefit from these incentives follow the tax-qualification rules, such as passing certain compliance tests and meeting contribution and deduction limits. The Department of Labor (DOL) is also on the lookout, ensuring that plan sponsors meet their fiduciary responsibilities to manage the plan and plan assets properly in order to protect the interests of the employees who participate in these plans. 

In this article, we highlight some of the current IRS and DOL enforcement initiatives and identify steps plan sponsors can take to assess their plan’s “compliance health.” We also provide references to a number of helpful resources. Plan sponsors who proactively invest time to self-audit their plans will be in the best position to ensure their plans meet business objectives and provide their employees opportunities to save for a financially secure retirement.

The IRS has an aggressive enforcement strategy aimed at identifying and correcting noncompliant plans. If a plan is not in compliance, the IRS’s primary goal is for the plan sponsor to make the necessary changes to bring the plan back into compliance. However, the IRS also has the authority to assess penalties, taxes, and interest charges, and even to invoke plan disqualification. The IRS Employee Plans Examinations (EP Examinations) group oversees compliance with the retirement plan provisions of the Internal Revenue Code. In addition to enforcing the rules, EP Examinations publishes a number of resources — ranging from descriptions of current examination projects to compliance trend data to help with 5500s — on the IRS website at
A list of some of the top recurring plan mistakes identified by the IRS during examinations is provided below:
This list, along with more detailed information on examination trends located on the IRS website can be used by plan sponsors to identify compliance risks in their own plans.
• Missing plan document amendments
• Not using the plan’s definition of compensation
• Excluding eligible employees
• Violating the plan’s loan provisions
• Exceeding annual contribution limits
• Failing nondiscrimination tests
• Not making the required contribution in a top-heavy plan
• Not following the plan’s formula for allocating plan contributions
• Impermissible in-service or hardship distributions
• Not making required minimum distributions (RMDs)
Another project that plan sponsors should anticipate in the coming months is further analysis and follow-up on the 401(k) Compliance Project conducted by the Employee Plans Compliance Unit. Initially launched in May 2010, this project required 1,200 randomly selected 401(k) plans to complete a lengthy questionnaire. The IRS is using the responses to gauge the overall compliance level in 401(k) plans and identify ways in which it can best use its resources to provide additional support and improve compliance.
In early 2012, the IRS published an interim report summarizing findings from the questionnaire responses. A copy of the interim report is available at www. Compliance-Check-Questionnaire- Interim-Report. The IRS will continue to analyze the data received as part of this project and will release a final report that can be used by plan sponsors to help identify and prevent common 401(k) plan compliance mistakes. The IRS has made it clear that overall plan compliance will continue to be a priority and encourages plan sponsors to use the original 401(k) questionnaire —available at questionnaire.pdf — as an internal control tool for evaluating their own plan.
Another ongoing IRS enforcement initiative is the Learn, Educate, Self-Correct, and Enforce (LESE) examination project. The IRS uses the LESE examinations to assess compliance levels for randomly selected retirement plans with similar characteristics that they believe may reveal common problems. Examples of recent LESE examinations include topheavy 401(k) plans that failed to make the required contribution, and plans that exceeded the annual additions limit.
Given the success of these targeted examinations, they will likely continue as part of the IRS’s enforcement initiatives. Plan sponsors who regularly self-audit their plans and use IRS outreach programs to keep their plans on course can avoid or reduce potential penalties for noncompliance. The IRS has developed self-audit and self correction tools to aid in plan sponsors’ voluntary compliance efforts.
The DOL, through its Employee Benefits Security Administration, is responsible for enforcing the fiduciary rules and participant protections set forth in the Employee Retirement Income Security Act of 1974 (ERISA). Under its authority to both issue regulatory guidance and enforce these rules, the DOL has been extremely active. Examples of current projects include the fee transparency rules that became effective during 2012 and ongoing efforts to ensure timely deposits of employee contributions.
Plan sponsors have undoubtedly spent a great deal of time over the past year interpreting and complying with the DOL’s fee disclosure requirements. It is not unreasonable to think that compliance with these new rules will be a DOL audit and enforcement focus over the next few years.
Plan sponsors should assess their current process for collecting and analyzing the required service provider information to ensure they can withstand DOL scrutiny. Plan sponsors may find it helpful to work with their plan advisors to ensure they have properly identified all covered service providers who should be providing fee disclosure notices—and ensure they are using an appropriate, disciplined process for reviewing the information. Plan sponsors should also ensure that all participant fee disclosures contain the required information and will be delivered in a timely manner. As with other fiduciary functions, plan sponsors should maintain records of the steps taken to satisfy their responsibilities under the fee disclosure regulations.
Plan sponsors may also find it helpful to tap into some of the support materials developed by the DOL and others to help them understand and comply with the new service provider fee disclosure requirements. A few specific resources from the DOL include:
• Understanding Your Retirement Plan Fees —
• Getting It Right: Tips for Selecting and Monitoring Service Providers for Your Employee Benefit Plan —
Of course, your CAPTRUST Financial Advisor can provide additional resources regarding covered service provider fee disclosure that may be helpful.
Ensuring the timely deposit of employee deferrals is also likely to continue as a primary DOL audit focus. Plan sponsors should work with their internal payroll group or payroll service to ensure all employee deferrals and loan repayments are deposited as soon as administratively feasible. If plan sponsors identify late deposits, the DOL offers a Voluntary Fiduciary Correction Program (VFCP) to enable plan sponsors to self-correct the mistake. The DOL website includes an online VFCP calculator that automatically calculates the correction amounts that must be paid to the plan related to a late deposit. The calculator is available at In summary, the IRS and DOL are certain to continue their focus on ensuring plans operate in compliance with the latest laws and regulations by balancing compliance guidance projects with aggressive enforcement activities. Plan sponsors are encouraged to proactively review their plan operations to ensure they are in compliance. It is essential to tap into a support network that includes the plan’s advisors and other retirement professionals. Plan sponsors who establish and follow sound procedures to ensure they are monitoring the appropriate issues and documenting their actions will be in the best position to face the IRS and DOL enforcement initiatives ahead. 
1 The U.S. Retirement Market, Third Quarter 2012, Investment Company Institute,