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 Plan areas:
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 Plan document.
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.