The Internal Revenue Service (IRS) is focusing on internal control in auditing as the basis for determining the scope of the employee benefit plan audit. The IRS is concentrating on the various policies and procedures that are intended to govern the plan. A few of the areas being looked at are:
- Participant loans and proper defaulting of loans that reach this status
- Employee contributions and their timely remittance
- Fees and other compensation paid to service providers and the controls surrounding monitoring of these service providers and reasonableness of their fees
In anticipation of the investigation of these areas, some common documents that the IRS auditor will request include:
- Letters and other communication from financial statement auditors
- Periodic internal reconciliations
- Minutes of meetings of the governance committee
- Agreements with TPAs and other service providers
- Since these spell out who is responsible for what with respect to plan administration, the IRS will be attempting to ensure this is occurring
- Internal checklists and other procedural manuals
In the review of these documents, the IRS is essentially attempting to ensure that there are specified procedures and that they’re being adhered to.
Tips on Being Proactive
Plan Document Controls
- Ensure that there is a written or documented procedure describing how payroll changes are communicated to other departments within the organization to determine if they affect the benefit plans.
- Maintain a general flowchart or another document that indicates how information flows between the Committee, the third-party administrator, and finance/accounting.
Related Party Transactions
- There should be a procedure to describe how service providers are being monitored to ensure that a prohibited transaction is not triggered.
A good system of internal control in an employee benefit plan functions most effectively when it is documented and accountability is stressed within the organization. Maintaining this kind of procedural narrative and other tools will help satisfy the IRS’ inquiries and can help minimize the interruption to your personnel and other resources.