Retirement plan audits by the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) are on the increase. Each agency has announced that qualified retirement and 403(b) plan audits will increase further in 2005. The IRS in particular believes that half of all qualified plans are not in full compliance with the law. Sooner or later, most plans will be audited.

The best way to prepare for a government audit is to perform a self-audit in advance of the agency's arrival. In fact, the IRS encourages self-audits. Many problems can be self-corrected without penalties, provided that they are discovered and corrected before the IRS or DOL steps in. Generally, a self-audit should review the plan's compliance with the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). A plan must also operate in accordance with its terms and provisions.

The following questions can help you begin the self-audit process.

Plan Documentation

Is the current plan document up-to-date? Have plan amendments been timely executed?
Is there a recent IRS determination letter for the plan? This point is very important.
Does the trust agreement reflect the current trustees and the current funding arrangement? Are the trustee fees reasonable?
Is the Summary Plan Description (SPD) up-to-date and consistent with the terms of the plan? Issues can arise if the SPD and the plan are inconsistent in any material respect.
Is the Summary Plan Description being distributed to participants in a timely manner? On average, an SPD should be redone and redistributed at least every five years.
Has a Summary of Material Modifications been prepared where necessary?
Are there written policies for loans, hardships, and in-service distributions, and are they consistent with the plan and being followed?
Is there a written procedure for reviewing qualified domestic relations orders? Who is dealing with the divorce lawyers?

Plan Operations

Are contributions being remitted in a timely manner? In general, 401(k) contributions are made periodically; pension plan contributions are made quarterly, and profit sharing contributions are made annually, based on deadlines in the law.
Are the plan's eligibility provisions administered correctly? Are any employees inadvertently excluded or included in the plan? Are part-time employees and any leased employees in or out of your plan?
Is the plan tested annually to determine if it complies with the nondiscrimi-nation, coverage and participation requirements?
Is your plan top heavy? If not, how close is it?
Are participant loans and hardship withdrawals made pursuant to the terms of the plan? Is a Form 1099-R issued to a participant who defaults on a loan?
Are administrative expenses paid from the plan? If so, do the expenses comply with DOL guidance on permissible expenses?
Is spousal consent obtained for distributions if required by the plan?
Are distributions made in accordance with the plan's vesting schedule? When are non-vested accounts forfeited? Are re-hired participants credited with the correct number of years when they are rehired?
Are you related by stock ownership or common control to another employer? If so, do the employees of the other entity participate in your plan?
If you have a pension plan, is the actuary using an appropriate interest rate?

Plan Investments

Are plan accounts participant-directed? If so, are participants receiving prospectuses and other investment disclosures as required by ERISA ?
Do you have a current Investment Policy Statement? Is it being followed?
Do you have an “investment manager” or an “investment advisor,” and do you know why it matters?
If plan assets are invested under a group annuity contract, is that in the best interest of participants?

Compliance and Reporting

Is the plan covered by a fiduciary bond as required by ERISA? Is the bond for the correct amount?
Who reviews the investments to ensure that they are not prohibited by ERISA?
Do you know what a “prohibited transaction” is, and whether your plan is involved in one?
Is there an annual plan audit by an independent accounting firm?
Does the plan hold employer stock? If so, is it appraised by an independent appraiser?
Has Form 5500 been filed every year?
If you have a pension plan, are PBGC premiums paid to date? Do you have exposure to withdrawal liability?

Now what? You've gone through this list and discovered that you comply with ERISA, the Code and the terms of the plan. Congratulations! Very few plan sponsors can make that claim. What if you discover that you missed an amendment, made a late contribution or failed to increase the amount of the fiduciary bond? Should you play the audit lottery or try to correct the problem on your own? We recommend the latter because it will benefit the plan participants and because the overall cost will generally be less.