By Jane Meacham, Contributing Editor

Retirement plan compliance priorities for Fiscal Year 2018 released September 28 by the Internal Revenue Service (IRS) indicated the agency’s Employee Plans (EP) unit will emphasize analyzing plan failure trends, refine outreach, and other communications about noncompliance, and enhance its knowledge management program. In an era of doing more with less, the IRS has shifted and consolidated several of its units to continue overseeing plan compliance.

“To a degree, this is a creative response to the IRS’s and [Tax Exempt and Government Entities’] TE/GE’s declining workforce, as well as our strategic imperatives. The centerpiece of this transition is our recent realignment of certain staff resources and the unveiling of a more centralized, sophisticated approach to compliance,” the commissioner of TE/GE, Sunita Lough, said in the letter that opens the FY 2018 Work Plan. The new federal fiscal year began October 1.

After Determination Letter Cutback

One of the most impactful changes made by the IRS in FY 2017 was the elimination of the determination letter process for most individually designed retirement plans. This included ending the five-year remedial amendment cycle system for such plans as of January 2017 to cut the number of determination letter applications the IRS must review. (See, IRS Guidance Updates Determination Letter Procedures.)

In a determination letter, the IRS rules on a retirement plan’s qualification after reviewing the employer’s plan and other documents and information. A favorable ruling indicates that the plan meets the tax qualification requirements under Code Section 401(a) and the underlying trust document meets the requirements of Code Section 501(a).

Although a plan sponsor is not legally required to obtain one, a favorable determination letter ensures that a plan meets the federal tax code’s requirements and thereby qualifies for tax benefits. IRS changes in this area are seen adding to the risks employers face if their unreviewed plans are found to be noncompliant.

In the priorities outlined in the FY 2018 Work Plan, the IRS said its EP unit will provide guidance online about ways to close Voluntary Compliance Program (VCP) applications quickly, in the hope that more taxpayers and practitioners will use the information to perfect their applications before submission. The work plan also mentioned an enhanced knowledge management system, which already offers plans issue snapshots to study as well as audit tools.

The agency said it plans to produce more public education materials on topics including qualification requirements for defined contribution church plans; the application of new regulations regarding qualified nonelective and qualified matching contributions; the availability of single-sum distribution options; and the use of all three segment rates to credit interest in a cash balance plan.

Examination Focal Points

Examinations for plan compliance by the IRS in the 2018 Fiscal Year will include plans that:

• Have transferred their assets or liabilities to another plan as the result of a merger or acquisition;
• Failed to comply with the gateway test or the exception under Section 1.401(a)(4)-8(b) of the regulations, failed both the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, failed to properly provide timely notice to participants, and/or failed to provide the required safe harbor contribution to all eligible participants;
• Failed to satisfy the minimum age and/or service requirements, met statutory requirements in form but failed eligibility in operation, and/or allowed ineligible participant(s) to participate;
• Failed to make required distributions under Internal Revenue Code (IRC) Section 401(a)(9), failed to distribute per plan terms (either in timing or form), and/or failed to distribute the correct benefit amount; and
• Made erroneous allocations of contributions and/or forfeitures due to the use of an incorrect definition of compensation or failed to make all matching contributions per plan terms.

In addition, the IRS said it will continue pursuing referrals from sources inside and outside the agency that allege possible non-compliance by a retirement plan, and requests for refunds or credits of overpayments already assessed and paid.

Compliance Checks Continue

The EP unit will keep using compliance checks to determine whether a plan is adhering to recordkeeping and reporting requirements, the new work plan said. These include plans with:

• Partial terminations;
• Nonparticipant loans;
• 403(b) plans;
• 457(b) plans with excess deferrals;
• Simplified Employee Pension (SEP) plans with required minimum distribution failures; and
• SIMPLE individual retirement account (IRA) plans sponsored by more than 100 employees.