FEBRUARY 2010 Pension Plan tip of the month...

Preparing For a Retirement Plan Audit

If you receive notice that your retirement plan is going to be audited by the Internal Revenue Service (“IRS”) or Department of Labor (“DOL”), you may be concerned with the time and inconvenience involved in gathering the requested information. Rest assured that The Paragon Alliance Group, LLC (“Paragon”) can help you stay organized! The annual package we send you (formerly a binder, now a CD) contains much of the information the IRS or DOL will ask to see. In addition, we maintain an electronic copy of your plan document, opinion and determination letters, amendments, signature pages and summary plan description. It is important to remember that audits are designed to verify proper execution of documents, aid in remedying mistakes in plans, and prevent fiduciary violations to plan participants. The IRS and DOL both perform audits of retirement plans, and, while they seek much of the same information, there are also some differences.

Information Requested

The IRS is primarily looking to find that a plan has been completely compliant with all tax laws, while a DOL investigation is focused more on fiduciary prudence.

Both agencies typically require:

· Plan document (including adoption agreement and prototype document) and trust agreement, and all amendments with all items timely and completely signed and dated

· Copy of the most recent determination letter or opinion letter and other determination letters that apply to the years under examination

· Copies of Forms 5500, schedules, financial statements

· Current fidelity bonds and riders/endorsements

· Trustee’s or administrator’s reports, ledgers, journals, financial reports, investment analyses, Required Notices (e.g. Safe Harbor, Auto Enrollment)

· Enrollment Forms

· If your plan requires an independent audit (generally 100 eligible employees or more), accountant’s opinion, management letters, certified audits

The IRS seeks to ensure the tax qualified status of the plan and determine that participants are properly covered and receiving appropriate benefits under the plan, The IRS usually requires:

· Copies of Forms 5500 for the year subsequent to the year(s) under examination

· Copies of Forms 1120, U.S. Corporation Income Tax Return

· Copies of employer’s Forms W-2P and Forms 1099-R

· Cancelled checks verifying contributions for the years under examination

· Payroll records used to determine employees’ eligibility

· Statements to review that vesting and service have been properly credited

· ADP and ACP testing

· Coverage Testing

· Top Heavy Testing

· Census

· Allocation schedules

· Spousal consent statements for beneficiary designations and waivers

The DOL’s focus is on the conduct of plan fiduciaries and prohibited transactions. The DOL usually requires:

· Summary plan description

· Summary annual reports

· List of plan managers and service providers with contracts and agreements

· Most recent statements for participants and beneficiaries

· Reports which show employee contribution amounts due to the 401(k) plan for each payroll date and evidence of timely receipt of these monies by the plan’s trust .

· Loan promissory notes and amortization schedules

Paragon-Provided Documents

Your hard copy Form 5500 will be in the folder accompanying the CD any other documents can be printed directly from the CD for the auditor’s review.

Generally, depending on the type of plan and the investment provider you are using, your CD will contain:

· Introductory Reports – including plan summaries

· Census – which shows date of birth, date of hire, hours worked, years of service for vesting and plan entry date in a consolidated report

· Contribution – applicable reports for contribution analysis, which can assist in providing contribution proof documents and verification of IRS contribution limits

· Compliance Testing – includes ADP and ACP Tests, Coverage Tests, Top Heavy Test

· Summary of Accounts – participant account statements including contributions, distributions, and earnings; summary account of all participants by money source; vesting balances

· Government Forms – all tax forms applicable to your plan, as well as the Summary Annual Report

While an audit can be a daunting experience, keeping your plan documents and reports organized, and maintaining your own internal records will enable you to provide the auditor with all required items very easily. Please contact your Paragon Account Executive with any questions you may have in preparing for an audit or if you are notified by the IRS or DOL of an upcoming audit