Plan sponsors have important obligations as ERISA fiduciaries to a retirement plan. They must follow ERISA’s high standards of conduct as they administer the plan and safeguard participants’ assets. The key to managing ERISA fiduciary responsibilities is developing and following prudent plan governance practices. Adopting policies and procedures to make certain they are handling plan assets properly and making prudent decisions will help plan sponsors demonstrate that they have met their fiduciary responsibilities.
This is the third in a series of posts about plan governance best practices for plan sponsor fiduciaries. Read the first post in the series.
Five Fiduciary Responsibilities
- Act solely in the best interests of the plan participants
- Carry out duties prudently
- Diversify investments
- Follow the terms of the plan document
- Pay only reasonable plan expenses
A Prudent Process
Conducting periodic plan check-ups is a critical step in making sure the plan is running properly. A pro-active self-audit will help plan sponsors identify any compliance missteps. That way, they can correct them before they pose a bigger risk to the qualified status of the plan.
For example, one common step in a self-audit is to confirm that each newly eligible employee had the option to enter the plan by the plan’s entry date. The audit may confirm that all eligible employees were properly offered the option to enroll at the appropriate time. Or, it may uncover that some employees who were eligible to enter the plan were not notified of their plan eligibility. Or, that some employees entered the plan before they were eligible. When you complete self-audits on a regular basis, plan sponsors can identify mistakes early. This can make it easier and less costly to correct those mistakes as compared to waiting years and having the IRS find the mistake during an audit.
Plan sponsors who discover operational errors during a self-audit can adjust their internal controls when we post this. They should link to internal controls blog (i.e., policies and procedures) to address the issue and prevent future mistakes. For example, the plan sponsor that finds eligibility errors might want to implement a new process. New processes could include reviewing the plan document to confirm eligibility criteria, adding training for in-house personnel responsible for monitoring plan eligibility, and defining the steps that will be taken when errors are identified.
The IRS believes that proactive self-audits and self-corrections are vital for operating a retirement plan in compliance with the tax code. They recommend that plan sponsors conduct regular reviews of their plans.
Self-Audit Tools | The IRS
The IRS has created a tool, the 401(k) Plan Checklist, to help plan sponsors conduct self-audits to find any mistakes that may have been made. This checklist presents a series of 10 questions. They design these questions to help plan sponsors assess a plan’s compliance by touching on the top plan mistakes made in 401(k) plans such as
- Missed document amendments
- Mishandled loans
- Plan entry errors
- Failure to timely deposit deferrals
- Nondiscrimination testing failures
- Errors in allocating contributions
As a companion to the checklist, the IRS has also developed the 401(k) Fix-It Guide. This interactive tool is designed to help plan sponsors understand the rules, so they can determine whether a compliance mistake has occurred and, if so, how to fix the mistake. They organize the information into sections that provide background on the law. Additionally, they include instructions on how to research or confirm whether someone has made a mistake. Once plan sponsors identify a compliance error, the Fix-It Guide also has links to instructions for fixing the mistake and for establishing internal controls to prevent future mistakes.
The IRS is aware that mistakes happen in retirement plan operations and wants to improve plan compliance. They do this by promoting voluntary corrections by plan sponsors who discover errors on their own. The IRS correction system, the Employee Plans Compliance Resolution System (EPCRS), allows plan sponsors to bring their plans back into compliance without losing the tax benefits provided to qualified retirement plans. Many errors can be corrected with either no penalty or at a significantly reduced cost as compared to corrections made after an IRS audit. The EPCRS consists of three subcomponents:
- The Self-Correction Program (SCP) permits plan sponsors to self-correct operational problems, such as not following the terms of the plan. There is no IRS application form and no fee for this program. Insignificant errors may be corrected at any time. You should correct significant errors within two years of the failure.
- The Voluntary Correction Program (VCP) allows plan sponsors to correct a qualification error if they discover the problem before the plan comes under IRS examination. The plan must submit a correction application and pay a user fee for this program.
- The Audit Closing Agreement Program (Audit CAP) is used if a failure is discovered during an IRS plan audit. This will involve a much higher sanction based on the extent and severity of the failure than if the plan sponsor corrected the error prior to the audit.
Finally, plan sponsors can use the IRS’s self-audit tools as part of their periodic plan check-ups to ensure the plan is up-to-date and operating in compliance with the plan documents and the current regulations. Plan sponsors may want to work through the checklist with their financial advisor or their recordkeeper or third party administrator to understand the full scope of plan operations. These service providers can also introduce corrections resources to help plan sponsors correct any compliance mistakes.
- 401(k) Plan Checklist: https://www.irs.gov/pub/irs-pdf/p4531.pdf
- 401(k) Plan Fix-it Guide: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide