Plan Sponsors Need to Use Internal Controls

November 15, 2012 ( Effective internal controls are essential to prevent costly mistakes that can jeopardize a retirement plan’s tax-favored status.

Monika Templeman, director of Employee Plans Examinations at the Internal Revenue Service (IRS) says having effective practices and procedures to prevent compliance problems is a basic requirement to be eligible to use the IRS’ Self-Correction Program. Retirement plan sponsors can self-correct insignificant operational errors at any time and preserve the tax-favored status of the plan without having to pay any fees.  

According to Templeman, when auditing a retirement plan, the agent begins by evaluating the plan’s internal controls to determine whether to perform a focused or expanded audit. In addition, if the agent finds plan errors, the strength of internal controls is a factor in the negotiation of the sanction amount under Audit Closing Agreement Program (CAP). The agent will make every effort to ensure that the plan has internal controls in place when the audit concludes.  

Templeman warns that plan sponsors should keep in mind that hiring a service provider does not relieve them of the responsibility of keeping their plan in compliance. Problems typically occur when there is a communication gap between the employer and plan administrator about what the plan document provides and what documentation is needed to ensure compliance.  

Templeman shares common errors found in audits resulting from miscommunication as well as tools to help plan sponsors strengthen internal controls here.