Identifying and Correcting ERISA Plan Defects, Protecting Tax-Exempt Status, Audit Strategies and Gaining Admission to CAP
This webinar will provide employee benefits auditors with a practical guide to best practices and proper procedures in preparing for and responding to an IRS audit or disqualification action. The panelist will describe potential consequences of a plan disqualification, detail the steps to take to remedy deficiencies found in the examination, and outline the closing agreement program (CAP) process to correct benefit plan errors discovered during the audit.
IRS audits of qualified ERISA plans carry significant and potentially costly risks to plan sponsors. If the IRS discovers compliance failures not previously identified and corrected through one of the available voluntary correction programs, the plan could be disqualified and lose its tax-exempt status.
Section 401(a) specifies the language a plan must have to qualify as tax-exempt and requires that the plan operate according to the terms of this mandated language. Either a “form defect” or an “operational defect,” even a minor or inadvertent failure, can lead to disqualification of the plan, with significant and expensive consequences. If the IRS deems a plan to be disqualified, it becomes a non-exempt or taxable trust; participating employees must include in gross income any contributions made by the employer, and the sponsor may not deduct its contributions until included in employees’ gross income.
Once a plan is under IRS audit, the plan sponsor may no longer correct any defects through the IRS Voluntary Correction Program; any corrective action must go through the IRS’ audit closing agreement program (CAP). Gaining admittance to the CAP is not automatic - it purely in the discretion of the IRS. There are also several conditions in which the IRS may not allow sponsors whose plan defects have been discovered through an audit to participate. Advisers to plan sponsors must thoroughly understand the audit process and CAP procedures to avoid catastrophic consequences.
Listen as Marcia Wagner provides a practical guide to IRS audits and the CAP corrective processes.
- IRS audit process for qualified plans
- Preparing for an IRS audit
- Most common defects discovered during IRS examination of ERISA plans
- Potential defenses for operational defects
- Tax consequences of disqualification
- To employees
- To highly compensated employees
- To plan sponsor
- Trust income tax on earnings
- Retroactive treatment
- Audit CAP program
- Remedying defects
The panelist will discuss these and other important topics:
- Plan a strategy for responding to an IRS inquiry prior to the audit, including essential preparatory steps
- Recognize the most common form or operational defects that expose a plan to disqualification and loss of tax-exempt status
- List the potential tax consequences of a plan disqualification
- Discern the best way to gain admittance into the CAP
- Identify specific areas of risk within an existing plan
Faculty: Marcia S. Wagner, Managing Director, Wagner Law Group
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