Would your company pass an IRS benefits audit?
August 19, 2009 by Bill MeltzerPosted in: Pay and benefits, Special Report - Benefits
The IRS has never looked kindly on tax-withholding errors in benefit plans – even accidental ones.
But the agency offers some guidance to make it a bit easier and cheaper for sponsors of retirement plans – including 401(k), 403(b) and SIMPLE plans – to fix common minor errors before the feds impose penalties.
Here are some common errors, and suggestions on how to fix them before the IRS lowers the boom.
Discrepancies between written policy and actual practice
Innocent errors can happen in the best-run firms and usually stem from disconnects between what’s written in plan documents and the actual system for carrying them out.
The three most common errors:
- 401(k) eligibility. Look at your system for checking eligibility against an employee’s start date. Who makes sure the pre-tax contributions have actually come out of the employee’s paycheck?
- Plan loans. There are tax consequences when employees take out loans against their retirement accounts or cash out early. Your plan documents must spell out the exact method you use for processing such distributions and making sure the proper taxes are deducted.
- Rollovers. Your plan documents must match your system of moving funds to an IRA or another employer’s plan when an employee leaves.
Race against time
Under the IRS’s Employee Plans Compliance Resolution System, you’re in a race against time to correct these types of accidental errors. For “significant errors” (those which affect taxes, eligibility and/or benefit levels), you have two years to:
- request a determination letter from the IRS
- certify in the request that your firm made an honest mistake and wasn’t trying to get around tax laws
- outline your proposed corrections
- receive a favorable IRS ruling, and
- implement the changes.
If you follow this process, it’ll only cost your firm a fixed $250 fee – no penalties. And it really pays to check your retirement plan documents ASAP and make any needed corrections. Otherwise, things can start to get very expensive in a hurry.
Your firm wouldn’t be eligible for a penalty-free fix if the IRS finds the accidental plan error in a random audit – even if you discover it in preparation for the audit and then voluntarily report it to the IRS agent.
Tags: benefits taxation, compliance
August 20th, 2009 at 1:11 pm
We have an outside service that handles all of the administrative activity for our 401k plan. I certainly hope that we have it all covered. We spend this fee yearly because monitoring the plan and the activity is are tasks better done by plan administrators.
August 20th, 2009 at 2:13 pm
It makes me wonder………..if Unions want to come into our business and “organize” our workers, why do we need to offer any benefits? Let the Unions do it. What else do they do? The Government sets the wages (minimums here to fore, and maximums down the road if they get their way, and probably every one in between also.) Government says what we can and can’t do as far as vacation, family leave, personal day, sick day……..If the Unions had to supply the benefits, it would give them a legitimate reason for BEING.
August 20th, 2009 at 2:21 pm
Jagger:
I work for a Union Contractor and the Unions do supply the benefits and the management of those benefits – - all we do is withold from the employee checks what the Union tells us too and then we send it off to the Union. — We also have some non union office workers who we supply benefits for and I oversee all of that – but if you are in the Union you are not elgible to be in any of our “office” benefit plans.
August 20th, 2009 at 3:07 pm
The union doesn’t supply benefits anymore than congress supplies money. It is paid in the form of dues expenses and passed on to the customer in terms of cost of goods and services rendered.
August 20th, 2009 at 4:06 pm
401 (k) loans do not have tax consequences unless there is a default. They are to be paid back with after-tax dollars to their own account. Payment in full has no tax consequence. Hardship withdrawals have tax consequences, as well as penalties. It is important to differentiate between the two.
P.S. How did this article turn into a discussion of union benefits?!
August 20th, 2009 at 4:43 pm
Benefits for union employees are paid by the employer – make no mistake! You deduct for the dues and vacation and they make sure that they negotiate that health & welfare and retirement benefits are all part of the wage package. Then the employer gets to pay all of the admin. costs, training, supplemental retirement, the wages for the union business manager and many other things too. My company has always been union and I’ve been doing this for 25 years. The employer pays for everything and it’s not cheap! The more the union guys get, the greedier and more self-serving they get!
August 21st, 2009 at 12:01 pm
Union dues pay for the operation of the union – their salaries etc. and their political activities, lobbying etc. The employer pays the negotiated benefits costs – insurances, retirement, vacation et al. Hopefully, the union employee will have to start to pay more of the insurance cost and learn what a good ( and unrealistic) thing they have had.
August 21st, 2009 at 12:25 pm
The insurance is ridiculous! $12/hr. at our local here. Retirement is at $10/hr. Then there is the hourly wage…which is raised every six months by dollars – not cents…
Yes, the employer really DOES have to pay a lot for trained labor. The nice part is that if they don’t produce we just send them back to the hall and we don’t have to give a reason.