Understanding the IRS Employee Plans Compliance Unit

The Internal Revenue Service (IRS) Employee Plans Compliance Unit (EPCU) focuses on identifying potential areas of non-compliance and educating plan sponsors.

Craig Chomyok, manager of the Employee Plans Compliance Unit at the IRS Office of Employee Plans in Chicago, explained during a webcast that the unit was established 10 years ago because field examinations staff was dwindling and the IRS wanted to maintain a strong presence in the retirement plan community. “We decided that ensuring compliance through compliance checks was the best way to go because it is less burdensome [than audits] for both employers and the IRS,” he told webcast attendees. “In addition, compliance checks are specific, so many plan sponsors can answer the questions themselves. But, even if they have to use a professional, it costs them less than a full-scope exam.”

Chomyok added that compliance checks allow the EPCU to contact a greater number of plan sponsors than to do actual audits. In addition, any errors found during a compliance check can be corrected using the Employee Plans Compliance Resolution System (EPCRS).

Carla Smith, manager of the Employee Plans Compliance Unit at the IRS Office of Employee Plans in Columbus, Ohio, told webcast attendees that, while compliance checks are not audits, they could lead to examinations, especially for plan sponsors that do not respond to a compliance check questionnaire. The contact is designed to determine if plans are complying with the Internal Revenue Code. Sometimes it is used to resolve conflicting information received on Form 5500, W-2, 1099R or 1098, she explained. For example, the plan name may indicate it is a defined benefit (DB) plan, but the Form 5500 may use codes for a defined contribution (DC) plan.

The EPCU also reaches out to plan sponsors with delinquent and incomplete returns.

According to Chomyok, ideas for compliance check projects can come from other sources than tax filings, such as retirement plan practitioners’ suggestions or questions for agents. He told the story of how one agent was on a plane. His seatmate, realizing the agent was with the EPCU, asked a question about a Simplified Employee Pension (SEP) that led the agent to suggest a compliance check project.

When the EPCU has project ideas, it evaluates them, prioritizes them from simple to complex, and develops them. One project under development is looking at plan sponsors that have significantly greater end-of-year assets than beginning-of-year assets, but no contributions, transfers or rollovers into the plan. Chomyok explained that if the EPCU finds only a few plan filings with that situation, there may be no need for a compliance check, but if they find many, a compliance check will be needed.

When project is started, the EPCU prepares a prospectus that details its scope and actions, develops an information request, and prepares a Web page for plan sponsors that get a contact letter to learn more about the project. The compliance check project is then submitted to directors for approval.

Once approved, the EPCU puts together procedures for support staff to follow for the compliance check. Chomyok said support staff can close easy projects early and can pass more complex projects for senior analysts to review.

During the compliance check, the EPCU tries to resolve any plan sponsor errors found by asking the plan sponsor to go through the Voluntary Correction Program or other EPCRS programs. Some cases may be referred for audit.

According to Chomyok, once a compliance check is completed, the EPCU does a quality review and analysis for a final report and recommendations, and updates the EPCU Web page. Information about projects can be found by going to www.irs.gov/retirement, selecting Retirement Plans A-Z then Examinations/Enforcement and EPCU.

Chomyok and Smith told webcast attendees about a number of completed, ongoing and future compliance checks.

A project about participant vesting at plan termination or partial termination focused on plans for which the last Form 5500 was being filed, but the plan still had assets in trust. Chomyok said the EPCU contacted these plan sponsors to see if the plan was really terminated or was the box for a final return checked in error. The project uncovered that many times plan sponsors weren’t able to administratively pay out participants, so there were two or three years in which the Form 5500 was checked as the final return. The EPCU was able to direct plan sponsors that couldn’t find participants about how to pay out the plan trust and have zero assets.

During that project, the EPCU also made sure participants involved in a plan termination or partial termination were 100% vested. In some cases, participants had part of their accounts forfeited, and the forfeitures had to be restored. In addition, Chomyok noted, if there are no contributions made to a plan for several years, it is considered a complete discontinuance, and participants should be 100% vested.

While the vesting at plan termination or partial termination project led to efforts to educate plan sponsors, Smith mentioned other projects that led to updated procedures or rules. The 403(b) universal availability compliance check led the EPCU to develop a method for K-12 public schools to make eligibility corrections on their own. The Form 5330 prohibited transactions projected led to prohibited transaction exceptions being revised in 2013.

According to Smith, ongoing projects include the funding deficiencies project, in which the EPCU is contacting plan sponsors that have a DB plan funding deficiency of at least $5,000. The focus is on securing funding, filing a Form 5330 for prohibited transactions and collecting excise taxes. The EPCU works with those plan sponsors that filed for a funding waiver or are going through a plan termination or other circumstance.

The multiemployer/actuarial certifications project is also ongoing. Smith explained that the Pension Protection Act (PPA) began a requirement that actuaries for DB plans file a certification that places a plan in a certain “zone” based on funding status. The IRS receives about 1,100 to 1,400 certifications annually, and uses the information to report to other agencies that can help plans. During this project, the EPCU contacted plan sponsors about missing certifications and validates whether a plan is truly a multiemployer plan.

Chomyok said, in the future, the EPCU is going to look into the possibility that a SEP plan sponsor’s employees are not covered under the plan. “A lot of times the owner only covers himself,” he noted.

In addition, the 401(k)/Roth project was started last summer, but was suspended for priority and staffing reasons. According to Chomyok, no information is asked about Roth on the Form 5500. This project was developed after the EPCU completed its 401(k) questionnaire. Chomyok said the EPCU came up with a basis for determining whether a plan should have a Roth feature and will check whether plan sponsors are complying with new requirements.

More information about ongoing and future projects can be found on the EPCU Web page.