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Regulation and Compliance

The IRS began Plan audits in 2010 and has since continued to audit Plans. There are a number of areas that you must be aware of in order for your Plan to remain in compliance.

Key Areas of Focus for IRS Audits:


Employers should maintain copies of their Plan documentation, including the Plan document and all amendments to the Plan from inception.

Employers should maintain written procedures outlining the process for an annual review of each provider, which should include a review of:

  • Administrative forms, custodial agreements, and annuity contracts
  • Hardship or unforeseeable emergency distributions and loans
  • Distribution procedures, including periodic and non-periodic distributions
  • Procedures for tracking when participant reaches age 70 ½ for required minimum distribution (RMD), calculation of the RMD, and when the Form 1099-R is provided
  • Procedures for handling state withholding

Employers should maintain written procedures outlining the process for handling automatic distributions and rollovers of accounts under $5,000 in value.

Employers should maintain computer records to keep track of Forms W-2, W-3, and Forms 1099, 940, and 941 and master payroll files.

Employers should have written procedures for monitoring the multiple contribution limits under Plans, including the regular annual limits, 3-year catch-up (457(b) Plans), 15-year catch-up (403(b) Plans), and age 50 catch-up provisions.

Employers should have procedures on correcting excess contributions, excess deferrals, and documentation on those corrected and reported.

Employers should have a consistent procedure for counting of years of service for permanent part-time employees (partial years), substitute teachers, temporary employees, retired rehired full-time and part-time employees, and counting the hours if the Plan excludes employees under the "20 hour rule."

Employers should maintain written procedures outlining the process for submitting employee's deferrals to the vendor or third-party administrator and how often the deferrals are submitted.

Employers should have consistent policies to determine which employees are excluded from and eligible to participate in any retirement Plan offered by the employer.

Employers should maintain copies of all benefit booklets and/or enrollment materials available to employees from the Plan's inception.

Employers should maintain copies of all administrative forms, including salary reduction agreements, generally for seven years.

Employers, or their third-party administrators, should maintain written hardship or unforeseeable emergency distribution procedures, including records of participants who have received such distributions; copies of the applications for such distributions with back-up information to verify the participant's hardship or unforeseeable emergency; copies of any form 1099-R (for 403(b) Plans); copies of notification letters for employees for six month suspension and resumption of salary deferrals, following a hardship deferral.

If vendors are involved in the approval process, the employer must maintain copies of the vendors' procedures, distribution notices and forms also.

Employers should maintain written procedures for approving participant loans, tracking participant loans, and reporting of deemed distributions, along with copies of withholding notices and 1099-Rs.

Each employer should have procedures for monitoring Plan requirements and compliance with all Plan document provisions.

Employers should maintain written procedures outlining the process for handling Qualified Domestic Relations Orders and any administrative information associated with such distributions.

Employers should have a procedure for staying informed on regulatory and legislative changes affecting 403(b) and 457(b) Plans.

Employers should have procedures for complying with the Universal Availability rule for 403(b) Plans. This could include the process for providing Universal Availability notices and copies of the notices on lists of employees notified if mailed or emailed