IRS Employee Plans Exam Projects
Rev. 02/05/10; E-mail Alert 2010-2

EP Examination Projects - Learn, Educate, Self-Correct and Enforce (LESE) Projects
These examinations are small and quick projects wherein returns selected for audit contain issues of interest in a particular segment.

Form 5500 returns selected for LESE examinations are based on “judgment sampling.” These examinations do not involve selection of returns through statistical sampling methods, but involve the random selection of approximately 50 examinations.

The goal of this program is to apply the focused examination concept to LESE examinations to test and measure plans’ compliance levels. The acronym "LESE" stands for:

• Learn - Discover all we can about the compliance issues using small examination case samples.
• Educate - Let the targeted groups know what we learned and what we expect them to do to correct, using Outreach and EPCU soft contact notices.
• Self-Correct - Give those groups the chance to correct using EPCRS. Correction choices will be given through outreach activities and soft contact notices.
• Enforce - Re-examine the groups, taking a firm position on those who have not corrected.

LESE PROJECT #1
About 50 examinations of Form 5500 filings. Criteria for the plans selected:

• DC plans with between $100,000 and  $250,000 in assets and
• a plan effective date of January 1, 1997 or earlier and
• which disclosed plan distributions.

Two most common issues discovered:

• Failure to secure adequate bonding per ERISA Section 412
• Failure to timely amend to comply with current law and regulatory guidance.

A variety of other issues were found:

• Failure to timely file Form 1099-R
• Failure to allocate contributions and forfeitures per plan terms
• Top-heavy failures
• IRC 416 top-heavy minimum contribution failures
• Joint and survivor failures
• Impermissible distributions
• Failure to fully vest upon a complete discontinuance of contributions
• Failure to include into income IRC 72(p) “deemed distributions”
• Failure to properly run ADP test
• Failure to timely deposit elective deferrals into the trust

LESE Project #4
Approximately 50 401(k) plans examined with between three to eight participants. Obviously, these were expected to potentially be top heavy. Top six issues revealed:

1. Failure to secure adequate bonding per ERISA 412
2. Failure to satisfy IRC 416 top heavy requirements
3. Failure to deposit elective deferrals timely into the plan
4. Failure to properly recognize and distribute excess contributions timely
5. Failure to properly cover all employees per IRC 410
6. Failure to provide for the required Safe Harbor contributions for all eligible employees in a designed safe harbor 401(k) plan

Regarding the Top heavy failures:

• Failure to test for top heaviness
• Improper exclusion of an eligible employee
• Omission of the top heavy allocation to an eligible employee
• Allocation errors

On the subject of compliance and audits, we have recently heard from a Midwestern client who informed us that one of the focuses of the DOL Midwest audits seems to clearly be on the payment of fees by custodians to the TPA firms and subsequent disclosure by the TPA firms to their clients.

For more on these subjects come to either our Retirement Plan Insights or Practitioner seminars.