The Internal Revenue Service (IRS) recently announced its focus on internal controls as the basis for determining the scope of the audit when a benefit plan is selected for audit. The IRS has indicated that they will be concentrating on the various policies and procedures that are intended to govern the plan. A few of the areas that they intend to look at are:
- Participant loans and proper defaulting of loans that reach this status;
- Employee contributions and their timely remittance;
- Fees and other compensation paid to service providers and the controls surrounding approval of these monies;
In anticipation of the investigation of these areas, some common documents that the IRS auditor will request include the following:
- Letters and other communication from financial statement auditors
- Periodic internal reconciliations
- Minutes of meetings of the governance committee
- Agreements with TPAs and other service providers
- Since these spell out who is responsible for what with respect to plan administration, the IRS will be attempting to ensure this is occurring
- Internal checklists and other procedural manuals
In the review of these documents, the IRS is essentially attempting to ensure that there are specified procedures and that they are being adhered to. Some best practices with respect to these controls include:
- Plan Document Controls
- Ensure that there is a written or documented procedure describing how payroll changes are communicated to other departments within the organization to determine if they affect the benefit plans.
- Maintain a general flowchart or other document which indicates how information flows between the Committee, the third-party administrator, and finance/accounting.
- Related Party Transactions
- There should be a procedure to describe how service providers are being monitored to ensure that a prohibited transaction is not triggered
- Filings & Notices
- Maintain an internal calendar or other planning device by which it is easy to document how the various reporting and notice documents are being filed or distributed in accordance with applicable deadlines
A good system of internal controls functions most effectively when it is documented and accountability is stressed within the organization. Maintaining this kind of procedural narrative and other tools will help satisfy the IRS’ inquiries and can help minimize the interruption to your personnel and other resources.
Contact Brian Dunfee to discuss your Plan’s internal control structure or if you have questions concerning the implementation of any of the suggestions offered above.
Other Benefit Plan Posts by Brian:
ADP/ADC Safe Harbors: Does Your Plan Really Fit Inside the Harbor?
Benefit Plan Compliance Alert 2014: Are You Ready?