Internal Controls for Plan Sponsors

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MONIKA TEMPLEMAN: Hello.

I'm Monika Templeman, Director of Employee Plans Examinations.

The expression "an ounce of prevention is worth a pound of cure" is definitely applicable to keeping retirement plans qualified.

There are many examples in life where we prevent problems by taking preventative measures.

For example, we take our car for a tune-up so it will continue to run as we expect it to.

Most of us get yearly medical checkups to ensure we stay healthy and to detect problems early so that they are easy to treat.

It's important to treat your retirement plan the same way.

Strong internal controls provide reasonable assurance that the plan will remain in compliance throughout its life.

Once a company establishes a retirement plan, the employer sometimes takes the plan for granted, thinking it can run on its own.

That is far from the truth.

You should review your retirement plan at least once a year to ensure it is operating in accordance with the plan terms and the law.

Mistakes that are found quickly are easier and much less expensive to fix.

Some employers hire service providers or third-party administrators to assist in plan administration.

Just because they are hired does not mean you can place internal controls on the back burner.

Third-party administrators process the information received for the plan and sometimes do not monitor the plan for compliance.

In addition, a yearly checkup will confirm that the service provider received the proper information to administer the plan.

There are other benefits to having strong internal controls.

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.

Next, having formal or informal effective practices and procedures in place to prevent compliance problems is required to be eligible to use the IRS Self Correction Program under the Employee Plans Compliance Resolution System, or EPCRS, to fix operational errors.

In addition, the strength of internal controls usually plays into negotiations of the sanction payment amount under Audit CAP if the agent finds plan errors.

On our Website, we house a number of tools to assist you in strengthening your internal controls.

We have checklists by plan type that provide the most common errors found in particular plans.

If you answer any of the questions "No," there could be a problem with the plan and you should investigate to determine if an error exists.

For a 401(k) plan sponsor, the questionnaire used by our EPCU project contains many more questions to assist you in determining if there are possible errors in the plan.

The Retirement Plans Community Website also has Fix-It Guides for a number of plan types.

Each guide shows how to find, fix, and avoid the most common plan errors.

You can also find Trends and Tips pages that describe recurring errors by plan type or issue, plus trends seen in large case examinations.

Finally, upon completion of a plan examination, the IRS auditor will make every effort to ensure your internal control systems are running smoothly when the audit concludes.

It's important to invest the time now to set up proper internal controls.

Otherwise, you will be spending more time and money correcting mistakes later that could have been avoided.

For more information on internal controls and how to keep your plan in compliance, visit us on the Web at IRS.gov/retirement.