Business owners face a number of regulatory and compliance
requirements that add to the difficulty of operating a profitable
business. Although these requirements do not necessarily contribute to
the bottom line, to ignore them or, equally as bad, not be aware of
them, puts the business in as much peril as insufficient revenue.
An example of a burdensome but important IRS requirement pertains to
qualified retirement plans ("Plan"). When a company sponsors a Plan,
such as a 401(k) Plan, it must do annual maintenance to ensure it
remains compliant with the IRS rules and regulations. Often clients and
business owners struggle to keep up with the IRS rules in two primary
1) timely adoption of IRS-required Plan amendments; and 2)
operational failures, such as when elective deferrals and matching
contributions are neglected on bonus payments as may be required by the
Issue 1) arises when the business owner fails to implement
IRS-required Plan amendments or restatements. Business owners often
ignore plan documentation provided by the Plan document provider. The
consequence is the Plan is not timely amended and no longer qualified.
This is corrected by adopting the applicable amendment or restatement
and submitting an application with payment of the IRS compliance fee to
the IRS under its voluntary correction program. Failure to submit under
the IRS voluntary correction program subjects the employer to greater
penalties if noncompliant issues are identified in an IRS audit.
Issue 2) arises where the Plan is required to, but does not, account
for an employee's voluntary or elective deferrals and employer matching
contributions on bonus payments. Business owners often fail to either
(i) ensure that the Plan document has been properly written to reflect
the employer's intentions or (ii) the Plan document is not being
properly interpreted by HR personnel, payroll/third party administrators
or accounting service providers.
The consequence is that deferrals and matching contributions are not
being made on bonus payments when they should be. This is corrected, at
the employer's expense, by making restorative deferrals and matching
contributions for years of omission, plus earnings and interest. A
submission to the IRS is also required under its voluntary correction
program if the failure is significant. As with Issue 1), failure to file
under the IRS voluntary correction program may subject the employer to
greater penalties if these type of operational failures are identified
in an IRS audit.
The IRS is improving its identification of noncompliant Plans. Over
the past five years, 64% of audits have resulted in IRS required changes
at the employer's expense. Given these rates of success, we expect the
IRS to continue to monitor qualified plans for compliance issues.
Our firm routinely assists employers with Plan maintenance and
oversight as well as IRS submissions under the Employee Plans Compliance
Resolutions System, which covers self-correction, voluntary correction
and audit corrections initiated by the IRS.
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