Anatomy of an IRS Audit

1. Anatomy of an IRS Audit MASBO December 10, 2013

2. IRS Circular 230 Disclosure This information is provided for educational and informational purposes and is not intended to be used to avoid tax penalties or to render tax or legal advice. The taxpayer should seek advice from an independent tax and/or legal advisor.

3. Todays Agenda • Introduction • Know the Role of the Parties under the Plan • Hear from a MASBO member how their audit was conducted • How can you Prepare for the audit? • Hear from a Vendor who has been involved with getting the data for an audit • Update on IRS Audits on 403(b), 457(b) and 401(a) Plans and recent changes

4. A Real Life Example • The IRS Audit Story from the Employer’s Perspective • Collection of Data • Experience with the auditor

5. IRS Audits of 403(b), 457(b) and 401(a) Plans • IRS steps up audits • Compliance checks are being used to see where errors may be for audit purposes • Universities/Colleges • Public Schools • Same errors are occurring as before 2. Do a “Self-Audits” using both the IRS audit checklist and a copy of what is being asked for currently.

6. Most Common Errors Uncovered in IRS Audits • Excess Deferrals – violation of the 15 year rule – catch-up contributions not determined correctly • Universal Availability • Excess 415 – excess over lesser of 100% of compensation or $51,000 (2013) • Plan Loans – multiple vendor violations • Hardship – poor documentation and multiple vendors invalid amounts distributed

7. The Top 10 Failures Found Under IRS Audit for 403(b)/457(b) • 457(b) Unforeseeable Emergency – poor documentation; distributions exceed need • 457(f) – no substantial risk of forfeiture; non compete clauses • 457(f) cafeteria style benefits – does not contain “real” substantial risk of forfeitures

8. The Top 10 Failures Found Under IRS Audit for 403(b)/457(b) • 403(b) Annuity Contract Problems – Out dated contracts – have not been updated to reflect rollovers, 402(g) deferrals, 70 ½ distribution rules and new endorsements not provided to participants 10. Ineligible Employers NOTE: 95% of all 457(b) plan audits have employer errors.

9. So…What should your TPA, Vendor(s) and/or Recordkeepers be doing? 1. Not all TPAs are created equally! • Make sure your TPA is providing the services you think they are. • Is your TPA providing the correct information to the Vendors • Can they help you if you are audited? • Do you have a full service TPA or a recordkeeper?

10. So…What should your TPA, Vendor(s) and/or Recordkeepers be doing? 2. Not all Vendors are created equally! • Make sure all of your vendors are providing the services you think they are. • Participant Education • Extremely Important!! • What is your participation percentage? A low percentage could have the IRS question how you educate the employees about the plan and ask for more information on universal availability notices. • Do you see your vendor? Do they assist/communicate with your employees • Is the Vendor providing the correct information to your TPA? Or to the School?

11. Overview of Recent Changes • On March 28, 2013, the IRS released Revenue Procedure 2013-22 providing a timeframe for when Prototype 403(b) plans can be submitted for IRS approval, as well as the structure of such plans. • Opening Day – June 28, 2013! Deadline to submit April 14, 2014 • Estimated Restatement Date will be during the 2016 calendar year. • Important to keep track of any operational changes made from 2010 through 2016 • New form will be attached to show you, the employer who is responsible for what !!

12. A New “Administrative Appendix” • Under the new 403(b) Plan provisions there was a new addition referred to as an “Administrative Appendix” • The Administrative Appendix will include who is responsible for: • Authorizing transactions • hardships, • loans, • QDROs, • and other distributions • Reporting distributions to the IRS

13. A New “Administrative Appendix” (cont’d) • Annual review of vendors under the plan • Prepare and update plan documents for required IRS amendments • List of authorized vendors; list of deselected vendors • Written policies and procedures • Any item not outlined or where no name is indicated will be the responsibility of the Employer!

14. RAP Period • This is called the “Remedial Amendment Period”, which is the deadline to: • Restate Employer Plans • For vendors to amend the investment contracts to reflect the new rules • Put in place any written procedures that outline operations of the Plan • A TPA that has written procedures will satisfy this requirement for the Employer • Time to also re-evaluate vendors that do not satisfy the 403(b) rules

15. IRS Clarifies Some provisions… • Meeting on April 8th at the National IRS Office – • 30 IRS personnel in attendance • 1 person from Treasury • 9 Industry Individuals • The agenda consisted of 6 pages of discussion bullets • Clarification on the 20 hour rule • Entry date – 60 days not 90 days • Vesting

16. Updated 403(b) Correction Procedures…and the ½ Price Sale! • The IRS issued the new Employee Plans Compliance Resolution System (EPCRS) under Rev. Proc. 2013-12, and was generally effective April 1, 2013. • This is an update to the IRS program where Employers can correct defects in their plan documents and in the operations of their 403(b), 401(a), SEP and SIMPLE plans and also for some 457 plans.

17. The New EPCRS 403(b) Plan document failures If the Employer did not adopt an updated 403(b) plan by 12/31/2009, the new procedure contains an easy method to correct this by adopting a plan now. If you submit this to the IRS by 12/31/2013 it will only cost you ½ of the normal IRS compliance fee.

18. 403(b) Plan Document Failures [1] Reduced Fee only applies if the sole failure is the Plan Document Failure [2] Proceed cautiously, IRS has indicated that this does not always pass IRS audit. [3]The remedial amendment period allows sponsors to retroactively fix a written plan failure back to January 1, 2010.

19. 403(b) Plan Document Failures • Remedial amendment Safe Harbor for Adopting a Plan. Applies to Plans in existence on 12/31/2009 if: • Written Plan Document • Actually Adopted on or before 12/31/2009; or • A VCP compliance statement was requested; or • IRS audited Plan and Employer received closing agreement; and • During 2009, the plan was operated in accordance with a reasonable interpretation of the final regs; and • On or before 12/31/2009 the Employer made every effort to retroactively correct operational failures during 2009 to conform to the plan provisions; and • The Employer must adopt a prototype 403(b) by the end of the remedial amendment period

20. 403(b) Plan Document Failures – Correction Procedures Issued IRS VCP Fees

21. Vendors Assistance A new requirement for a 403(b) Employer that is correcting through EPCRS is a certification from all vendors that they will cooperate with the Employer in the correction of the failure(s) as outlined by the IRS. The certification also includes providing the needed data for the VCP application.

22. QUESTIONS?? Contact InformationSusan D. Diehl, PresidentPenserv Plan Services, Inc.215-444-9812 X 5041Sdiehl@penserv.comTamara Indianer, CFPRegional Vice President, New EnglandLincoln Investment Planning, Inc.781-647-3050tindianer@lincolninvestment.com