Who's eyeing your 401(k)?

• Author: Martin, Marjorie R.

You thought your company's 401 (k) plan was a model of Erisa compliance. But now the IRS is coming to audit you. What did you overlook?

Take heed of a recent blow - a double hit, actually - to Microsoft. When the Internal Revenue Service imposed heavy payroll tax obligations on the company as a result of what they claimed was a misclassification of independent contractors, workers followed through with a request for employee benefits based on their new-found employee status. The Ninth Circuit Court of Appeals in Vizcanino vs. Microsoft Corporation ruled for the workers, though the case is scheduled for rehearing. With tighter plan language and better documentation, Microsoft might have avoided the audit and the workers' claim altogether.

The goal of the IRS is compliance, not enforcement. Likewise, the goal of the CFO in a 401(k) audit should be prevention, not defense. The tone management sets sends a clear message to col. leagues directly involved with day-to-day plan operations that compliance is important - and critical to the bottom line.

To improve its examination program, the IRS is adding a fourth year of Form 5500 data to its Employee Plans Return Inventory Classification System. This tool allows the IRS to compare information from one year to the next, making it easy to identify patterns, inconsistencies and issues of concern. In addition, the IRS can use it to determine the compliance level of plans with common attributes and select specific returns for examination.

The IRS expects EPRICS will reduce the overall likelihood of an audit because examination efforts will be more focused. Plus, the IRS now educates its auditors about specific retirement plan issues, making them more savvy reviewers. If you do hear from IRS auditors, expect them to raise very specific concerns.

In two recent audits, the IRS told both plan sponsors precisely why it had targeted them. One had revealed a high turnover on Form 5500, the reporting form for 401 (k)s. The IRS auditor randomly selected the names of 50 terminees and asked to see benefit calculations for each. The IRS selected the second employer because it sponsored a 403 (b) program. These programs are audit triggers, having been identified as problematic during past audits that reviewed the tax-exempt purpose of sponsoring organizations.

All this doesn't necessarily mean the IRS is out to "getcha." On the contrary, the IRS would rather have plan sponsors discover their own errors and correct them than go to an audit and find mistakes. To help plan...