It is often too late to correct 401(k) plan document or operation errors once an audit letter is received without incurring significant penalties from the IRS. A new IRS pilot program provides advance notice of an audit to employers who sponsor 401(k) plans, and a 90-day window to correct any errors.
There are currently IRS programs in place to correct 401(k) errors but an employer must do so voluntarily before being audited. If an audit does uncover an error, the opportunity to self-correct or to file under an IRS correction program is lost and potential penalties increase exponentially. Typical plan errors include a failure to keep the plan document up to date, excluding eligible employees or improperly administering plan loans. Many employers play the “audit lottery,” particularly for minor plan errors.
The pilot program represents a “free pass” for employers that would otherwise be audited without an opportunity to correct. For errors that cannot be self-corrected, the employer can work with the IRS to correct and apply for a “closing letter” but subject to a flat fee otherwise applicable under the voluntary correction process.
An employer that receives a letter from the IRS granting the 90-day window should do everything possible to identify and correct any 401(k) plan errors and otherwise comply with the pilot program. It could mean a savings of tens of thousands of dollars in IRS penalties. Others should perform regular reviews and correct voluntarily under one of the established IRS programs. Employers who have not reviewed plan compliance should not assume advance notice of audit will be provided or that the pilot program will become permanent.
For questions regarding 401(k) plan compliance or correction, or any other employment law matter, please contact a Kerr Russell attorney.
About the Author:
Liam K. Healy helps clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. His broad range of experience is in business law and business tax matters. Liam’s experience includes: choice and formation of business entities, partnership and shareholder agreements, buy sell agreements, franchise agreements, mergers and acquisitions, business succession planning, real estate, tax free exchanges, non-profit organizations and tax audits. Liam counsels business owner clients through every stage, from formation to the sale of the business.
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