In its initial report from the project results (see “29% Chose Deferral Higher Than Default”), the agency said it will use information gathered from the 401(k) Questionnaire, in conjunction with other data, to assess the need for further formal guidance and define some upcoming projects and enforcement activities, among other things. One area of concern to the IRS from the results of the project is defaulted participant loans, according to Jalena Baumgardner, Employee Plans Examination Group Manager of agents in Charlotte and Greensboro, North Carolina.
“The 401(k) Questionnaire final report showed 60% of plans saw an increase in the number of defaulted loans between 2006 and 2008,” she told attendees of the Retirement & Benefits Management Seminar, hosted by the University of South Carolina Darla Moore School of Business, and co-sponsored by PLANSPONSOR. She added that 47% of plans saw an increase in the number of outstanding loans from 2006 to 2008, but there was a decrease in the number loans originated during the same time period—an indication that older loans are not being repaid in a timely manner.
The agency is initiating a defaulted loan project under its Learn/Educate/Self-Correct/Enforce (LESE) program due to this concern.
According to Baumgardner, due to other areas of concern, future projects by the IRS will include a late corrective distribution project under its Learn/Educate/Self-Correct/Enforce (LESE) program, and projects for 401(k) plans with a Roth feature, small employers with multiple plans, and non-qualified 401(k)s under its Employee Plans Compliance Unit (EPCU). She explained that projects under the EPCU are different from other projects in that the agents look at actual records from plan sponsors and any errors may be fixed using the IRS’s Voluntary Compliance Program (VCP).
Michael Sanders, acting director of Employee Plans Rulings & Agreement for the IRS, told attendees that in 2012 the Employee Plan Team Audit (EPTA) program successfully piloted a systematic approach to more effectively identify compliance risks and determine “focused issues.” The pilot program included comprehensive “pre-audit analyses” and detailed evaluations of “Internal Controls” related to the various payroll/ personnel systems and business environments that effect the administration of all qualified plans sponsored by an entity. “This is how we are going to do business from now on; we are going to do audits based on these interviews,” he said.
Sanders also said plan sponsors can expect a change in the process for filing determination letters. “We cannot continue to accept the volume we are getting,” he noted.
Sanders added that having prototype plans organizations are able to adopt is not only better for them but for the agency as well because it will decrease the volume of determination letter requests for individually drafted plans the IRS receives. He said the agency is looking into starting a pre-approved plan program for employee stock ownership plans (ESOPs).
Sanders told attendees they can expect the agency to put out guidance to simplify fixes to automatic-enrollment errors, but he could not comment further on that when asked.
On the subject of errors, Baumgardner said having good internal controls may ensure plan sponsors if they get audited, the audit will be a limited-scope audit rather than a full audit. Examples of good internal controls include: segregation of duties (i.e., payroll separate from human resources); established systems (it is important to check that systems accurately verify the data and processes to ensure plan compliance); a good information technology (IT) system; knowledgeable and responsible employees; and accurately filed and reconciled Form 5500 returns.