Nonprofit Accounting Basics

Retirement Plans: Are You in Compliance?

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.


Your company’s compliance with U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) regulations is critical, as noncompliance penalties can be severe, and can potentially result in a plan disqualification.

Do You Need An Audit?

One area where there continues to be confusion among plan sponsors is the question of when a plan audit is required.

If a plan has over 100 eligible participants as of the beginning of the plan year, an audit is required. However, there is the 80-120 rule whereby a plan could forego the audit requirement. If the plan filed a Schedule I (eye) the prior year as a “small plan,” and the number of eligible participants as of the beginning of the current year is under 120, the plan may elect to file in the current year as a “small plan,” which means no audit is required. Once the number of eligible participants as of the beginning of the plan year exceeds 120 then the plan must have an audit. The plan would complete a Schedule H in its form 5500 for the current year as a “large plan.”

Eligible participants as defined by the IRS in its form 5500 instructions, include the following:

  1. active participants--individuals currently employed by the plan sponsor, covered under the plan, and receiving credited service [this includes those eligible, even if they are not actually participating];
  2. retired or separated participants--individuals no longer working for the plan sponsor and are either receiving benefits or are entitled to receive benefits and
  3. deceased participants--individuals who have died and have one or more of their beneficiaries either receiving benefits or entitled to receive benefits.

We have seen a number of plan sponsors performing the count of plan participants using only those current employees actually participating in the plan. This is not correct, so be very careful when counting your eligible participants.

Follow Your Plan Document

Employees at the plan sponsor who are responsible for the plan’s operations and compliance with the DOL and IRS regulations should maintain a copy of the plan agreement (including any plan amendments) and be familiar with all the provisions in the agreement. Those individuals in the HR and payroll departments should fully understand the plan provisions including eligibility, definition of compensation, distributions, loans, and so on. The actual operations of the plan need to mirror the provisions spelled out in the plan agreement. If operations do not mirror the provisions, or if any provisions are vague or unclear, we recommend the plan sponsor consult with an ERISA attorney.

What If You Are Noncompliant?

If you believe your plan might have operational defects or noncompliance issues, prompt attention is warranted. Our experience with the DOL and IRS is they expect plan sponsors to be proactive both in identifying operational defects or noncompliance, and then in correcting such occurrences in a timely manner. The IRS offers a system whereby a plan sponsor may voluntarily correct operational defects and noncompliance issues.

First, under this Employee Plans Compliance Resolution System (EPCRS), mistakes can be corrected in the following ways:

  1. Self-Correction Program (SCP)--permits a plan sponsor to correct certain plan failures without contacting the IRS;
  2. Voluntary Correction Program (VCP)--permits a plan sponsor to, any time before agency audit, pay a limited fee and receive IRS approval for correction of plan failures; and
  3. Audit Closing Agreement Program (Audit CAP)--permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.

There are certain eligibility requirements to be met in order to use the SCP, but if you are able to use this program there is no fee. If the plan sponsor enters the VCP, there is a fee and certain documents have to be prepared and submitted to the IRS to obtain IRS approval. The fees vary, but for a plan with plan participants of between 101 and 500, the fee is $5,000.

We strongly encourage any plan sponsor that believes it might have operational defects or noncompliance issues to contact an attorney who specializes in retirement plans and ERISA. Additionally, a CPA firm that specializes in audits of retirement plans should be contacted to assist with efforts to determine the extent of any operational defects and noncompliance that might have occurred.