Thursday, May 6, 2021

IRS outlines priorities for 2021

The Internal Revenue Service’s Tax Exempt and Government Entities division issued a “Program Letter” that outlines its priorities for the 2021 fiscal year. The letter supplements the “Fiscal Year 2020 Compliance Program Letter,” which outlines the IRS’ examination initiatives.

While the letters list several initiatives, among particular interest with respect to retirement plans are the following:

Internal Revenue Code Section 403(b)/457 Plans: Examine 403(b) plans for universal availability, excessive contributions and proper use of catch-up contributions under IRC Section 414(v); and examine 457(b) plans for excessive contributions and proper use of the special three-year catch-up contribution rule. This strategy began in FY 2020.

Small exempt organizations that sponsor retirement plans: Review retirement plans of small exempt organizations to determine whether the plan investments are properly administered, whether there are any party-in-interest transactions in the plan trust and whether any participant loans violate IRC Section 72(p).

Worker classification:
  • Tax-exempt entities: Review worker classification to ensure taxpayers aren’t reducing their tax burden by incorrectly treating workers as independent contractors instead of employees.
  • 401(k) focus: Review retirement plans of employers that were determined to have misclassified employees as independent contractors, to determine if coverage requirements of the IRC are satisfied.
Retirement plan participant loans: Ensure that participant loans comply with IRC Section 72(p) rules on maximum loan balances and IRC Section 72(t) re-payment rules for early distributions before age 59½ and verify whether participant loans of retirement plans that hold a high percentage of participant loans to total assets of the trust are being repaid timely if the loan balance remains consistent or increases for more than one year.

Required minimum distributions in large defined benefit plans: Ensure retirement plan sponsors comply with IRC Section 401(a)(9) to begin distribution of benefits by the required beginning date.

The IRS will utilize the examination process to check these areas. Once a plan is selected for audit, if any error found is deemed “significant,” generally the only recourse is to enter into an Audit Closing Agreement Program with the IRS. The Audit CAP not only requires the plan sponsor to make the correction but also imposes a sanction payable to the agency. While the plan sponsor may negotiate the amount of the sanction, the best recourse is to be proactive, ensure your plan is in compliance with all rules and regulations and make any corrections if needed ahead of any examination by the IRS.

If you have any questions or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (800) 388-1963.

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