Failure to provide SPD and other disclosures

The IRS is auditing a plan client and requesting proof that SPD's were distributed to plan participants. Further IRS is requesting specific proof that other notices were sent such as benefit statements that are required for DB plans every 3years. This is a small plan and no such proof exists since in most cases the SPD's and other disclosures were hand delivered or sent by regular mail. Participants can't recall specific SPD receipt.   I don't see any requirements under ERISA or the tax code requiring specific proof of delivery of SPD or other disclosures to participants, such as by certified mail. Further, regarding SPD's, even if the IRS claims SPD's were never distributed, becasue of lack of proof, I don't see any penalties under the tax code or ERISA. The only penalty I am aware of  is failure to provide an SPD to a plan participant upon request. No such participant SPD requests were made.

At least since 1960, the Treasury department has a rule: “A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees[.]” 26 C.F.R. § 1.401-1(a)(2) (emphasis added) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(a)(2) The tax-law worry is that a plan isn’t really a plan if employees beyond the owner or top executives don’t know the plan exists. Whatever ostensibly non-discriminatory provisions a plan has aren’t practically real if employees don’t know they have legally enforceable rights.

Since the late 1970s, IRS examiners have looked to delivery of a summary plan description as a way (and perhaps a presumed normal way) to “communicate” a plan.

Also, an accrued benefit statement might be another way an employee could learn about a plan’s existence and her potential right under the plan.

The Internal Revenue Service might consider the quoted rule (and some related tax-law rules) as supporting some information requests that otherwise lack a particular tax-treatment hook. And even for unsupported information requests, your client will want your advice about whether it’s wise or unwise to object.

An ERISA rule confirms that “in-hand delivery to an employee at his or her worksite is acceptable.” 29 C.F.R. § 2520.104b-1(b)(1) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-1

If some SPDs, benefit statements, and other communications were hand-delivered, your client might want your help in drafting or editing an affidavit that states what your client did. And an affidavit might describe the employer/administrator’s regular practice for mailing communications not delivered in the worksite.

Interesting - those are typically issues addressed in a DOL audit rather than IRS audit. I can see the "communicated to employees" concern, especially if a relatively new plan or recently new participants - but if IRS wants proof plan sponsor handed out SPDs years ago then I think they may be overreaching. 

An affidavit, as Peter noted, certifying they have distributed SPDs might be the best they can do - how do you prove I handed you some papers a couple of years ago? Unless an employee can locate their SPD and attest to its receipt. 

If they were mailed, you might check expense records to see if there was a postage purchase from that time. 

Also review the Resolutions for your Plan Document and any Amendments, and any contribution or filing authorizations; many contain language that reference the distribution of the SPD, SMM, or other notices as part of the execution of the same.

The affidavit could be boot strapped if the employer could say I distributed the SPD along with a beneficiary designation form.  I have a stack of completed beneficiary forms.

Thank-you for all your helpful comments. I agree that its unusual for the IRS to be asking proof of distribution. Typically they only ask for a copy of the SPD.