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Receiving a Compliance Check Letter

Compliance checks conducted by the IRS Employee Plans Compliance Unit (EPCU) are not audits or examinations. Nonetheless, plan sponsors that receive a compliance check letter should take care to respond to the IRS and provide the requested information in a timely manner.

What is a compliance check? A compliance check is a plan review to determine whether recordkeeping and reporting requirements are being met. The IRS sometimes does a compliance check to resolve conflicts regarding information reported on various forms, such as Form 5500 or Form W-2. Plan sponsors with late or incomplete returns also could be contacted for a compliance check.

How does the IRS develop ideas for compliance check projects? The EPCU develops project ideas from various internal and external sources. If the EPCU finds that the issue affects a significant number of plan filings, then a compliance check may take place. An example of a project would be looking at plans reporting significantly higher end-of-year assets than beginning-of-year assets but with no contributions, transfers, or rollovers into the plan.

What happens during a compliance check? The plan sponsor will receive a compliance check letter stating that it is a review and not an audit. The letter may request that specific information be provided within a specified number of days. In its response, the plan sponsor can include any documentation or material to support the information provided. There is no penalty if a plan sponsor does not respond to a compliance check, but the plan may then be subject to an audit. (Note that the IRS might still choose to conduct a formal audit if a plan sponsor responds.)

If a plan is not in compliance, how can the problem be resolved? The plan sponsor may be able to correct any errors found during a compliance check by using the Employee Plans Compliance Resolution System (EPCRS).

The Self-Correction Program (SCP), which is part of the EPCRS, is available for correcting certain operational problems. To use the SCP, the plan must have practices and procedures in place designed to promote and facilitate compliance. If an operational mistake is “significant,” it must be corrected within two years of the end of the plan year in which the error occurred. There is no fee for self-correction. The SCP is not available for correcting problems with the plan document.

If the plan’s ability to qualify for tax-favored status is at risk and the plan is not being audited, the plan sponsor can apply for IRS approval of its proposed correction methods under the Voluntary Correction Program (VCP), another program available through the EPCRS. However, the IRS charges a compliance fee for using the VCP. The fee can vary based on the number of plan participants.

What kinds of compliance projects are currently underway? The projects cover a range of issues. For example, the asset mismatch project targets plans that may have misreported the dollar amount of assets in their Form 5500 filings. The data analysis verification project is aimed at plans for which the pension feature codes on Form 5500 were missing, inconsistent, or incomplete.

Are the results of previous compliance projects available? Information on EPCU projects is available at www.irs.gov/Retirement-Plans/Employee-Plans-Compliance-Unit-EPCU. In addition to providing details on completed projects, the IRS provides information about continuous projects, current projects, and projects approved for further development. Moreover, there is general background information on the EPCU and other material that plan sponsors may find useful.

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