Retirement plans come under new IRS scrutiny

Published: 10th September 2009
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Long Island Business News, June 15, 2007

Retirement plans come under new IRS scrutiny

Lance Wallach

Businesses should be aware that the Internal Revenue Service is increasing its examinations of companies' retirement plans, hoping to catch cheating their workers or the government, or both.

Pensions, profit-sharing plans and 401(k)s are all on the agenda.

The IRS intends to do about 9,000 of these focused examinations on companies of all sizes over the next nine months. Smaller businesses have more to fear; they are more likely to be out of compliance since they normally outsource set-up and administration.

Corporate pension plans have long been a target, but now the IRS appears to want to uncover more noncompliant and fraudulent plans. Knowing that smaller plans are more likely to be out of compliance, there has simply been a change in methodology. The agency no longer appears to look at all aspects of a given plan.

Instead, IRS agents now focus more on plan documents and internal controls (plan documents are examined to make sure they are current). Agents then focus on whether employers are properly handling various duties, including notifying workers of eligibility, matching employee contributions [in the case of 401(k) plans], calculating traditional benefits, investing, vesting workers and distributing benefits. By utilizing this somewhat streamlined approach, the IRS hopes to audit about 25 percent more plans this year than last.

Depending on circumstances and magnitude, those companies that are not in compliance could face sanctions ranging from fines up to closure.

Businesses should get an expert to review their retirement plans. This may also result in large cost savings, and recent changes in the law make more options available. Since the passage of the Pension Protection Act, for instance, cash balance plans have now been legitimized; these allow substantial contribution for owners and key executives while minimizing rank-and-file employee costs. In some cases, contributions can exceed salary for the key people.

Businesses should also consider a welfare benefit plan, which can yield large tax deductions and facilitate solutions to business succession and estate tax problems, among other things. Such plans often make items that are not normally deductible, such as life insurance premiums, tax deductible, and an employer can maintain a welfare benefit plan and a retirement plan simultaneously.

Lance Wallach is a frequent speaker at national conventions and writes for more than 50 national publications. Visit or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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