How Self-Auditing the Retirement Plan Prevents Compliance Issues Down the Line

To avoid major correction costs and penalties, it is essential for plan sponsors to regularly self-audit their retirement plans before the IRS or Department of Labor catches any mistakes, according to law firm Cohen & Buckmann P.C.

Gretchen Harders, a partner at the firm, explains that under IRS regulation, there is a requirement for fiduciaries to self-audit their plans, and this must be done in order to qualify for self-correction.

According to the DOL’s most recent Audit Quality Study, conducted in November 2023, the DOL found a 30% overall deficiency rate for plan audits, and a rise in deficiencies for large plans. In 2023 alone, the DOL recovered $854.7 million from civil investigations and $444.1 million from resolving complaints.

This essentially means that the DOL found many violations that were not flagged in plan certified public accountant reviews or self-corrected by plan fiduciaries—likely because fiduciaries were not regularly self-auditing their plan operations.

“It’s both the IRS and DOL that govern these plans,” Harders says. “So, you need to have the controls in place for IRS tax qualification purposes, but as [a] fiduciary, you need to ensure the plan has been operated properly.”

Harders says if a fiduciary does not self-audit, they will experience higher penalties, and it often takes longer to make corrections. The highest penalties apply if the IRS or DOL finds the violation first.

SECURE 2.0 Expands Ability to Self-Correct

Fortunately for plan sponsors, the SECURE 2.0 Act of 2022 significantly expanded the ability for qualified retirement plans, 403(b) plans, SEPs and SIMPLE IRA plans to self-correct any “eligible inadvertent failure” to comply with the requirements of the IRS. The DOL also recently announced that expanded voluntary fiduciary correction guidance will come in the next few months. Similarly, updated guidance from the IRS is also expected by the end of the year.

Harders says SECURE 2.0 essentially gives plan sponsors more latitude to correct without filing with the IRS. In the past, if a sponsor had an error that was a “significant operational error,” they would have to file with the IRS and compete a whole application, which Harders says was a “heavy lift.” However, plan sponsors are still obligated to self-audit and find the errors.

Jeffrey Mamorsky, an ERISA and employee benefits attorney and partner at Cohen & Buckmann , adds that fiduciaries still need to self-correct within a reasonable time, which is typically within 18 months of the failure.

“I think the government wants to encourage plan sponsors to self-correct,” Mamorsky says. “And it’s really welcome news for plan sponsors and should be taken advantage of.”

Mamorsky says he recently helped a client resolve issues raised by a new plan auditor during the annual audit of the plan. The client had not done an audit in ten years, and the auditor found many issues with eligibility and enrollment, as well as the plan not paying employee contributions on a timely basis. He says there were also mistakes made in the Form 5500, spanning back to 2017.

“What the auditor does, when they find [mistakes], is they ask you to correct it, and if you can’t correct it on a timely basis, they will put a footnote in the financials, and that’s not good because everybody sees that, including the IRS and the DOL,” Mamorsky says. “So, it’s not only the IRS and DOL you need to worry about, it’s [also] the plan auditor because you want to correct mistakes before they find it.”

Plan sponsors generally cannot use IRS self-correction once an IRS audit has started, according to the law firm, unless the plan sponsor can demonstrate to the IRS that the plan has already made a commitment to correct the error. But under a new pilot program that has just been extended, the IRS will give plan sponsors 90 days after they receive notice of an impending audit to self-correct eligible errors they have found.

Service Provider Consolidation

A potential explanation for the rise in audit deficiencies in large plans could be an increased reliance on outside service providers, Harders argues. She says if outside providers and consultants are not looking closely at a plan, they will miss potential mistakes. Because of all the consolidation that has been occurring between service providers in the retirement industry, Harder says it is possible that the people who are evaluating the plans are not necessarily as trained as they should be.

“Even though employers think they’re covered, they really aren’t necessarily getting the coverage that they need,” Harders says. “I think the consolidation has hurt plan sponsors.”

Mamorsky says plan sponsors should have an attorney help with their self-auditing because of “attorney-client privilege.”

“You should have an independent lawyer [help with the self-audit], not the lawyer that normally represents the plan because … they’re really representing the participants in the plan,” Mamorsky says. “When [an independent] lawyer does it, it’s confidential. You want it to be that way until you correct the errors, and then you can issue a claim report.”

Harders adds that formal correction programs are also available. Even if a fiduciary cannot self-correct, they can make filings under IRS and DOL correction programs to get the regulators’ blessing for corrections, which is the equivalent of a “no action” letter. If the plan sponsor makes the agreed corrections, the IRS and DOL will not raise the issue again in an audit or investigation.

In addition to the IRS’ Voluntary Correction Program under the Employee Plans Compliance Resolution System, the DOL has a Voluntary Fiduciary Correction Program and a separate Delinquent Flier Voluntary Compliance Program for filing late Form 5500s and top-hat notices.