IRS Announces FY 2021 Examination Priorities

RMDs in large DB plans and participant loans are among the items the agency says it will target in compliance initiatives.

The IRS Tax Exempt & Government Entities Division (TE/GE) has a released a new 2021 Program Letter to update its compliance initiatives for its fiscal year.

The agency says it will continue to pursue its compliance program described in the 2020 Program Letter. The letters for both years are available on a webpage the IRS will use to share information about other initiatives at the end of each quarter during the fiscal year, as well as findings from recently completed actions.

Among others, the IRS revealed the following examination initiatives:

  • Small Exempt Organizations that Sponsor Retirement Plans: The IRS says it will review retirement plans of small exempt organizations to determine whether their plan investments are properly administered, whether there are any party-in-interest transactions in the plan trust and whether any participant loans violate Internal Revenue Code (IRC) Section 72(p).
  • Worker Classification: This strategy will focus on retirement plans of employers that were determined to have misclassified employees as independent contractors. These retirement plans will be reviewed to determine if coverage requirements of the IRC are satisfied.
  • Required Minimum Distributions (RMDs) in Large Defined Benefit (DB) Plans: The agency says it will perform examinations to ensure retirement plan sponsors comply with IRC Section 401(a)(9) to begin distribution of benefits by April 1 following the calendar year when an employee reaches the required age.
  • Participant Loans: This strategy is to ensure that participant loans comply with IRC Section 72(p) rules on maximum loan balances and IRC Section 72(t) repayment rules for early distributions before age 59.5. The IRS says it will verify whether participant loans of retirement plans that hold a high percentage of participant loans to total assets of the trust are being repaid timely if the loan balance remains consistent or increases for more than one year.
The IRS also announced compliance checks it plans to initiate, including one about partial plan termination and partial vesting. The agency has identified employers whose Form 5500, Annual Return/Report of Employee Benefit Plan, indicates their plan has had a significant decrease in plan participants. It will review these plans to determine compliance with IRC Section 411(d)(3) vesting requirements and accuracy of other information on the employers’ Form 5500.