Internal Controls, Good Communications Key To Reducing Plan Errors, Consultant Says


Retirement plan sponsors need to have internal controls and good communications between all relevant departments to reduce typical problems that would prompt an investigation from the Internal Revenue Service that could lead to disqualifying their plans, a consultant said at the American Institute of CPAs employee benefits conference.         

“Every plan has problems,” Karen M. Field, national partner-in-charge in the Washington National Tax office of KPMG LLP, said May 15 at the conference, held in Las Vegas.         

The IRS wants sponsors to find and fix plan errors on their own, put in procedures to prevent further errors and document the procedures they have taken, Field said.         

If a sponsor can document that it has addressed its plan's errors internally and has documented the process by which it tackled those problems, the IRS may shift its focus to other plans, Field said.         

Defining Compensation          

The number one source of plan defects arises from definitions of compensation, because there are so many ways of defining the term, Field said.         

“I read a plan a few years ago that had three different definitions of compensation. This is stupid,” she said.         

Within the area of compensation, bonuses pose a particular problem, Field said.         

If the plan documents say that bonuses are included in compensation, but the administrator failed to include them in the plan, the sponsor will be found to have taken that money away from the employees, Field said.         

“If you gave an employee an amount, you're not going to be able to retroactively amend the plan to take away a right that the plan gave to the employees,” she said.         

Overtime also presents difficulties, especially with nondiscrimination testing, she said. “Personally, if I see a plan that says it excludes overtime, it probably shouldn't. That's probably a discriminatory definition because who gets overtime? Nonhighly compensated” employees. “So if they're excluding overtime, they're probably going to fail.”

Excerpted from a story that ran in Pension & Benefits Daily (5/19/2014).