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How To Prepare for a Plan Audit

In most cases, the odds of receiving notice from the IRS or Department of Labor (DOL) stating that they plan to audit your retirement plan are slim. However, if that situation arises, it is important to be prepared for what lies ahead. Knowing what is involved can enable you to stay on top of your legal and regulatory obligations, as well as help you successfully navigate through a plan audit.

Related Read: Sign Your Plan Document, Warns the IRS

IRS versus DOL audit

There are differences between an IRS and DOL plan audit, as the IRS and the DOL have different areas of authority in policing retirement plans. Generally speaking, the DOL focuses on fiduciary breaches and “prohibited transactions” spelled out in ERISA. The audits may be triggered by a participant complaint, information provided on the annual Form 5500 or a participant inquiry to either agency regarding plan operation. The DOL can penalize and, in extreme cases, through the court system, jail offending fiduciaries.

On the other hand, the IRS focuses on tax code violations. In a worst-case scenario, the IRS can disqualify a retirement plan, causing it to lose all tax benefits. The sponsor could be required to pay taxes on funds contributed to the retirement plan and investment earnings on plan assets, plus penalties and excise taxes.

Audit documentation

In some cases, the IRS or DOL simply sends out questionnaires to plan sponsors in their effort to determine plan administration areas worthy of focus by auditors. “Failure to respond to an IRS questionnaire is comparable to sending the IRS an invitation to audit your plan,” according to one ERISA attorney.

If your plan is selected for an audit, you will be expected to produce a list of documents for the IRS or DOL to review, such as:

  • Plan documents, summary plan descriptions (SPDs) and summary annual reports;
  • Your plan’s investment policy statement, minutes of plan trustee and investment committee meetings, and a list of the trust’s receipts and disbursements;
  • A corporate organizational chart and board meeting minutes;
  • Service agreements and engagement letters with plan vendors;
  • A roster of parties-in-interest;
  • Participant statements;
  • Fee disclosure statements; and
  • Documentation of any fiduciary training the fiduciaries may have received.

It should be noted that the IRS or DOL might ask for extra documents in addition to their initial document request list. Therefore, it is recommended that you only send what has been requested. If you send additional information that has not yet been requested, you may be inadvertently asking the IRS or DOL to examine an area of the plan that has not yet been selected for the audit.

What errors are the agencies looking for?

Common mistakes include failure to enroll new participants on time or failure to properly administer plan loans. Another common error is failure to adjust deferral and matching amounts following a change in a participant’s pay or neglect to make required efforts to track down “lost” participants who have vested benefits in your plan.

The agencies’ reviews may result in the detection of an “operational error.” Common operational errors include using a definition of plan compensation to calculate employee deferrals or a percentage for the employer match calculation that is different from the plan document.   

You might believe you are administering your plan properly, but it is better to be safe than sorry. Even if you never face an audit, a participant may raise concerns about an operational error. The best way to head that off at the pass is to conduct an operational self-audit.

Related Read: SECURE Act: Changes to 401(k) Plan Eligibility and Vesting for Part-Time Employees

Conducting a self-audit

It is recommended to conduct routine operational self-audits of your plan. This can be accomplished by carefully reading your plan document and summary plan description, and then devising a set of questions about how certain tasks are being carried out. Use these set of questions and interview the people administering your plan to see if there are any inconstancies with your plan document. Additionally, you can sample participant records for compliance.

You might need to make adjustments retroactively to protect yourself and fulfill your fiduciary duties. In addition to fixing any errors, determine the cause of any errors and take steps to minimize the possibility that they will occur again.

A plan audit can be a stressful event. However, performing a self-audit of the plan to verify that the plan is operating in accordance with the plan document is a crucial step to show that you are prepared for the questions from the IRS or DOL auditor.

If you have any questions, please contact Ken Kobiernicki or your ORBA advisor at 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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