We all have our cars serviced regularly because we want to make sure they are running properly and catch problems before they become more serious. It is just as important that employee benefit plans be reviewed regularly to determine whether there are compliance errors that need to be corrected before there are major correction costs and penalties.
The recent statistics released by the Department of Labor (DOL) on the results of last year’s compliance activities and reviews were eye-catching. In the DOL’s recent Audit Quality Study (November 2023), the DOL found a 30% overall deficiency rate for plan audits, and a rise in deficiencies for large plans. In 2023, the DOL recovered $854.7 million from civil investigations and $444.1 million from resolving complaints. That does not even take litigation recoveries into account or consider activities of the IRS or PBGC. The bottom line is that the DOL found many violations that had not been flagged in plan CPA audits or self-corrected by plan fiduciaries, and the likely reason is that the plan fiduciaries were not doing regular self-audits of their plan operations.
There are many reasons that doing self-audits of both tax and fiduciary compliance makes sense and provides retirement plan fiduciaries with protection. Here are four of them:
1. You need to find problems before the IRS or DOL does. The highest penalties apply if they find the violation first. You can be selected for audit at random, and many investigations begin with participant complaints. You can use IRS self-correction programs for failure to satisfy plan qualification requirements and the DOL has already proposed to permit self-correction of delinquent participant contributions and certain loan violations without a formal filing for relief.
The good news for plan sponsors is that SECURE Act 2.0 expanded the ability to self-correction operational violations under the DOL’s self correction guidance, as well as under the IRS employee plans compliance resolution system (currently EPCRS Rev. Proc. 2021-30, as updated by transition guidance IRS Notice 2023-43). The DOL recently announced that expanded voluntary fiduciary correction guidance will be forthcoming in the next few months and updated guidance from the IRS is also expected by the end of the year.
Despite the expanded availability of self-correction under SECURE 2.0, the period for correction is not open-ended. The correction must be made within a reasonable period following discovery of the violation, and the transition guidance provides a general safe harbor correction period of 18 months following discovery. Further, new SECURE 2.0 provisions on correction of overpayments limit corrective adjustments for overpayments of participant benefits to overpayments within the last three years.
Plan sponsors generally cannot use IRS self-correction once an audit has started, unless they can demonstrate to the IRS that they have already made a commitment to correct the error. Under a new pilot program that has just been extended, however, IRS will give plan sponsors 90 days after they receive notice of an impending audit to self-correct eligible errors they have found. This may not be enough time for plan sponsors who haven’t done self-audits to identify and self-correct problems.
If you have not self-corrected, the IRS will assess penalties to keep the plan qualified and the DOL may look to settlements from plan fiduciaries.
2. Formal correction programs also are available. Even if you cannot self-correct, you can make filings under IRS and DOL correction programs to get their blessing for your corrections, which is the equivalent of a no action letter. If you make the agreed corrections, they will not raise the issue again in an audit or investigation. In addition to the IRS’ Voluntary Correction Program under the EPCRS, the DOL has a Voluntary Fiduciary Correction Program and a separate Delinquent Filer Voluntary Compliance Program for filing late Form 5500’s and Top Hat Notices.
3. You need to find problems before the retirement plan’s CPA does. Plans with at least 100 participants are required to file an independent CPA audit along with their Form 5500’s. If the CPA finds operational violations during its review, the filing may be delayed pending correction. Otherwise, the issue will be noted in the audit and may invite follow-up from the agencies or in serious cases, might result in a qualified audit opinion. In light of the DOL’s findings that the audits themselves can be deficient, plan fiduciaries should not rely solely on the CPA’s audit findings.
4. Corrections get more expensive with time. Late contributions must be corrected with an earnings makeup, which can get expensive over time. The ability to recover overpayments from participants will be lost after three years. Apart from direct expenses, fiduciaries will be required to try to find participants who may have terminated years ago in order to make full correction.
Sometimes, self-audits get put on the back burner because they do not have a fixed deadline like Form 5500’s or returning excess contributions, but they shouldn’t be treated as low priority projects. In the long run, periodic checkups of plan operations can save plan sponsors both time and money. For information about correcting errors and our audit services, please see https://cohenbuckmann.com/fiduciary-audit or contact Jeff@cohenbuckmann.com or gretchen@cohenbuckmann.com.