Although the Internal Revenue Service (IRS) is engaged in a variety of ongoing qualified plan compliance, education and audit projects, it is targeting certain types of retirement plans and activities in 2013. According to a presentation by Mikio Thomas, IRS Employee Plans Examinations, and Richard Hochman, McKay Hochman Company, Inc., during the recent 26th Annual Cincinnati Employee Benefits Conference (sponsored by the Cincinnati Bar Association Employee Benefits Committee and the IRS), the targets include: plans that are qualified pursuant to Section 401(k) and Section 403(b) of the Internal Revenue Code (Code) and international plans.

Section 401(k) Plans

Section 401(k) plans are the most popular retirement plans currently in use. As a result, compliance with tax-qualification rules is a key priority. The IRS recently completed its "401(k) compliance check questionnaire" project through which general operations and compliance were assessed by sampling 1,200 Section 401(k) plans through a questionnaire provided to certain plan sponsors that were identified through the 2007 Form 5500 annual report filing. A final report discussing the findings of the questionnaire project was issued in March 2013. (The full final report is published on the IRS website.) In addition to using the questionnaire results to improve guidance and compliance tools, the IRS identified certain key issues of concern for additional audits and review, including:

  • Defaulted plan loans -- increases in the number of loan defaults and outstanding plan loans may indicate that plan loans may not be administered properly,
  • Top-heavy plans -- failure to provide the required three percent minimum contribution, and
  • Small employers with multiple retirement plans -- the appropriate aggregation of limits, plan testing and administration issues with multiple plans.

Section 403(b) Plans

Sponsors of Section 403(b) plans, such as public schools, colleges and universities, hospital and other tax-exempt organizations, have all seen an increase in audit activity. The main issues of concern include:

  • Written plan document failures,
  • Universal availability compliance,
  • Excess contributions over the permitted "catch-up" and other applicable limits, and
  • Improper hardship distributions.

International Plans

The IRS is focusing on international plans in 2013 and is specifically looking at U.S.-based plan sponsors that have an increasing number of employees located in U.S. territories. The targets of the current exam focus include:

  • Foreign pension expense deductions,
  • Late deposits of deferred contributions,
  • The special rules that apply
    to Puerto Rican retirement plans maintained by U.S. sponsors, including fidelity bond requirements, late amender issues, lack of a "determination letter" by the Hacienda (the Puerto Rican equivalent of the IRS) and incorrect employer aggregation for nondiscrimination testing, and
  • The special rules that apply to Virgin Island retirement plans maintained by U.S. sponsors, including fidelity bond requirements, late amender issues, late deposits of deferred contributions, excluding eligible employees from the plan, incorrect vesting provisions and defaulted plan loans.
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Each of these issues could lead to additional operational and compliance reviews by the IRS or other agencies such as the Department of Labor.