The Department of Labor (DOL) has found numerous violations in retirement plan audits, often because plan sponsors do not regularly self-audit their plan operations. To avoid major correction costs and penalties, it is essential for plan sponsors to self-audit their retirement plans before the IRS or DOL identifies any mistakes, according to law firm Cohen & Buckmann P.C.
Self-Audit Requirements
Gretchen Harders, a partner at Cohen & Buckmann, explains that IRS regulations require fiduciaries to self-audit their plans to qualify for self-correction. The DOL’s recent Audit Quality Study found a 30% deficiency rate in plan audits, highlighting the need for regular self-audits to avoid violations.
Benefits of Self-Auditing
- Lower Penalties: Self-auditing helps identify and correct issues before the IRS or DOL discovers them, reducing penalties.
- SECURE 2.0 Act: This act expands the ability for plans to self-correct “eligible inadvertent failures” without filing with the IRS, giving plan sponsors more flexibility.
- Timely Corrections: Plan sponsors must self-correct within a reasonable time, typically 18 months, to avoid higher penalties.
Role of Service Providers
Harders notes that increased reliance on outside service providers can lead to missed mistakes if providers are not thoroughly evaluating plans. Consolidation among service providers has sometimes resulted in less trained evaluators, potentially harming plan sponsors.
Legal Assistance
Mamorsky recommends using an independent attorney for self-auditing due to attorney-client privilege. This ensures confidentiality until errors are corrected. Formal correction programs are also available through the IRS and DOL to get regulatory approval for corrections.
Regular self-auditing of retirement plans is crucial for compliance and avoiding costly penalties. Plan sponsors should review their plan operations, consult with legal advisors, and use available correction programs to ensure their plans meet all regulatory requirements.
