Good fundamental internal controls in the operation of retirement plans are the bedrock of fiduciary and compliance requirements. Retirement plan operations and internal controls are complicated, frequently ignored, and a potential source of significant compliance breaches. The administration of retirement plans must comply with both the regulatory requirements as well as the plan document in form and in operation to maintain their tax preferential status. Many of the mistakes that occur emanate from not following the terms of the plan document, failing to revise the terms of the plan document, or failure to adhere to regulatory requirements. Penalties which may result from a failure to comply can include: plan disqualification, and/or loss of tax deductions to the employer and employees.
The Internal Revenue Service (IRS) and Department of Labor (DOL) are focused on the plan’s operating policies and procedures, as well as compliance and reporting controls. The IRS in particular is taking internal controls very seriously. Monika Templeman, Former Director of Employee Plans Examinations at the IRS, stated in an Employee Plans Phone Forum:
“If a plan is selected for audit by the IRS, the EP agent conducting the retirement-plan examination will begin by evaluating the effectiveness of the plan's internal controls to determine whether to perform a focused audit – that is, just look at three to five issues – or expand the scope of the examination. In other words, based on the strength of the plan's internal controls, the agent will decide to examine more or less of the return than originally planned.”
The fundamental tenets of good internal controls are segregation of duties, reporting & reconciliation, and oversight of outsourced administration functions. These issues can become particularly complicated because so much of today’s plan operations are outsourced to third party service providers. Good internal controls can eliminate or reduce errors in plan operations and reduce the amount of time the administrator spends with any plan auditors or regulatory bodies examining the plan.
In this paper, we broadly discuss these fundamental tenets for a plan to be considered having strong internal controls.
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