Finding the needle in the haystack.

• Author: Davis, Debra
• Position: Retirement Plans; tax laws

Many retirement plans do not comply with the Internal Revenue Code and ERISA, as evidenced by the estimated 10,000 submissions the IRS has received under its voluntary correction program in the past decade.

Countless other plans have self-corrected under the portion of the program that does not require an IRS submission. And many plans also have used the U.S. Department of Labor's correction program for ERISA violations.

Many companies rely on accountants and administrators to identify and correct violations in their plans. But where do you begin the search for violations and what are some common problems found during plan audits?

Penalties for ERISA violations can reach hundreds of thousands of dollars--and possible imprisonment. Businesses should audit their plans now, rather than risk an IRS or DOL audit later.

TARGET AREAS

The IRS has identified various target areas for retirement plan audits.

Deposit of Deferrals. Many companies do not realize that 401(k) deferrals must be deposited as soon as reasonably possible after the pay date. For many plans, the DOL would likely determine that the deferrals should have been deposited no later than five days to one week after the pay date. For periods longer than one week, the DOL is likely to consider the deferrals late, unless companies can provide business reasons for the delay.

Services Performed Through Employment Agency. Companies are required to give participation and vesting credit to employees for the time they performed services for the company through an employment agency before becoming a regular employee. However, many companies do not.

Employees as Independent Contractors. Many companies improperly classify employees with non-traditional roles as "independent contractors." As a result, these employees may be denied benefits to which they are entitled.

ERISA Sec. 404(c). Most plans do not comply with 404(c). As a result, the plan's fiduciaries are not given protection for participants' investment decisions. The most common causes of noncompliance include the failure to provide participants with the identity and contact information of the 404(c) fiduciary; prospectuses immediately before or after their initial investments in particular options: and a description of the additional information the participants may request.

Improper Correction Method. Some plans calculate earnings using the rate of return for a money market account, rather than the rate of return for the participant's...