401(k) Resource Guide - Plan Sponsors - What if You are Audited?

Authority and responsibilities of the Internal Revenue Service (IRS) and the Department of Labor (DOL). The Employment Retirement Income Security Act of 1974 (ERISA), as amended, provides the legal basis for the IRS Employee Plans (EP) compliance program. The jurisdiction over the rules for 401(k) plans is divided between the IRS and the DOL.

• The IRS has primary jurisdiction over the qualified status of 401(k) plans, which includes examining plans and processing requests for determination letters.
• The DOL has primary jurisdiction over the fiduciary standards, reporting and disclosure requirements and other rules that do not affect the qualified status of 401(k) plans.

The IRS’ EP examination program is the enforcement arm for the statutory and regulatory compliance requirements that apply to qualified 401(k) plans. The overriding objective of the EP examination program is to develop and integrate appropriate compliance and enforcement programs that will have the greatest positive impact on the retirement system. The EP examination program has a high stake in maintaining a successful private retirement system.

Overview of the IRS audit process. A notice of a plan audit can generate anxiety. Plan sponsors may wonder why their plan was selected for audit and what to expect.  In order to address these concerns, EP developed a document designed to provide the plan sponsor with an overview of the EP examination process. This overview is intended to give the plan sponsor a better understanding of EP’s compliance efforts. 

EP Examination Process Guide. In response to the results of the Customer Satisfaction Surveys, EP Examinations developed the EP Examination Process Guide to help customers through the examination process. The guide clarifies the various steps in the examination process and introduces available resources.

Internal Revenue Manual sections related to 401(k)/(m) rules. The Internal Revenue Manual (IRM) contains sections that describe the compliance rules relating to a plan that contains 401(k) and 401(m) features. A 401(m) feature permits employer matching and/or employee contributions. These sections also contain suggested examination steps to guide the EP examiner through the audit of a 401(k) plan and may help the plan sponsor or representative prepare for the examination. The 401(k) IRM section is included here. The 401(m) IRM section is also available.

Audit Closing Agreement Program. During the course of the audit, the EP examiner may identify areas of non-compliance that would jeopardize the plan’s qualified status. To the extent possible and consistent with the EP Compliance Resolution System (EPCRS),disqualifying plan defects discovered on audit should be corrected voluntarily by agreement between the IRS and the plan sponsor.