Compliance November 22, 2016

New IRS Document Request Process to Affect Employee Plan Examinations

The agency says the updated process will reduce plan sponsors’ burden and provide consistent treatment of them, and allow the IRS to secure more complete and timely responses to Information Document Requests.
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The Tax Exempt and Government Entities TE/GE Division of the Internal Revenue Service (IRS) has announced a new process for issuing information document requests (IDRs), which will affect Employee Plans (EP), as well as other, examinations.

Under the new process:  

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  • Plan sponsors will be involved in the IDR process;
  • Examiners will discuss the issue being examined and the information needed with the plan sponsor prior to issuing an IDR;
  • Examiners will ensure that the IDR clearly states the issue and the relevant information they are requesting;
  • If the plan sponsor does not timely provide the information requested in the IDR by the agreed upon date, including extensions (two extensions are allowed), the examiner will issue a delinquency notice;
  • If the plan sponsor fails to respond to the delinquency notice or provides an incomplete response, the examiner will issue a pre-summons notice to advise the plan sponsor that the IRS will issue a summons unless the missing items are fully provided; and
  • A summons will be issued if the plan sponsor fails to provide a complete response to the pre-summons letter by its response due date.

The IRS says the new process requires the examiners’ managers to be actively involved early in the process and ensures that IRS Counsel is prepared to enforce IDRs through the issuance of a summons when necessary.

The agency says the updated process also will:

  • Provide for open and meaningful communication between the IRS and plan sponsors;
  • Reduce plan sponsors’ burden and provide consistent treatment of them;
  • Allow the IRS to secure more complete and timely responses to IDRs;
  • Provide consistent timelines for IRS agents to review IDR responses; and
  • Promote timely issue resolution.

The changes reflect the agency’s commitment to the Taxpayer Bill of Rights.

Data & Research November 22, 2016

Eligibility and Vesting Policies Curtail Savings

GAO also says requiring participants to be employed on the last day of the year to receive matching contributions also lowers potential retirement savings.

 

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Plan sponsors impose eligibility, vesting and matching policies on their participants in order to lower costs and reduce turnover, but these policies limit people’s ability to save, according to the Government Accountability Office (GAO).

GAO examined the policies of 80 401(k) plans and found that 41% do not permit those younger than age 21 to participate in their retirement plan. Twenty-four percent required participants to be employed on the last day of the year to receive company matches for that year, and 71% had vesting policies that require people to be employed for specific periods of time before their company matches are vested.

While the Employee Retirement Income Security Act (ERISA) permits employers to set these rules, GAO notes, 401(k) plans have become the primary retirement savings vehicle for Americans, who change jobs frequently. GAO says these policies could potentially reduce people’s retirement savings by significant amounts.

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“For example, assuming a minimum age policy of 21, GAO projections estimate that a medium-level earner who does not save in a plan or receive a 3% employer matching contribution from age 18 to 20 would have $134,456 less savings by their retirement age of 67 ($36,422 in 2016 dollars),” GAO says. In addition, “GAO’s projections suggest that if a medium-level earner did not meet a last day policy when leaving a job at age 30, the employer’s 3% matching contribution not received for that year could have been worth $29,297 by the worker’s retirement at age 67 ($8,150 in 2016 dollars).”

As far as vesting is concerned, GAO continues, “if a worker leaves two jobs after two years, at age 20 and 40, where the plan requires three years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars).”

GAO is suggesting that Congress look into the minimum age required to participate in 401(k) plans and plans’ use of a last-day policy. In addition, GAO is asking the Treasury Department to “reevaluate existing vesting policies to assess if current policies are appropriate for today’s mobile workforce.”

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