Skip to main content
A Better Partnership


Jun 2015
June 11, 2015

Not Your Father’s Internal Controls: A Checklist

Long gone are the days when plan operation and compliance can be handled competently by the owner of the plan sponsor or another member of management on a seat-of-the-pants basis.  Even though there are many helpful checklists, fix-it guides and other tools available today on the IRS website and elsewhere, maintaining the qualified status of a retirement plan is too difficult and complex to be managed on a hit or miss basis.  Compliance practices and procedures are critical to proper administration and fiduciary responsibility. 
If your retirement plan is selected for an Employee Plans Examination by the IRS (usually linked to the filing of one or more Form 5500 Annual Reports) or is selected for an investigation by your regional office of the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor, an early stage of the process will include interviews of those responsible for administering and operating the plan.  The number and length of the interviews will depend on the size of the plan and the number of administrative personnel and may include representatives of outside service providers.  Part of an interview by a Revenue Agent will include questions and a discussion of your “internal controls” for the plan.  A DOL interview may not refer to internal controls as such but frequently will get to the same questions.  As we recommend, your legal counsel should be present at these interviews.  Also, if you discover a plan compliance failure that is eligible for self-correction (SCP) under the IRS correction procedures, your ability to self-correct is conditioned on the existence of formal or informal practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements.  In other words, eligibility for SCP also depends on the maintenance of adequate internal controls. 
Although being ready for agency audits and self-correction is very important, there is a more general need for internal controls as well.  Internal controls should be the basis for an annual compliance self-audit of your plan.
So what are internal controls?  On one page of the Retirement Plan portion of the IRS website, internal controls are defined as “business processes designed to detect and prevent mistakes in your retirement plan.”  On another page they are defined as “policies and procedures designed to help you detect and prevent errors.”  On that same page they are described as “important to provide a reasonable level of assurance that your plan is operating properly.” 
Based on the IRS website and other resources, here are some of the important operational issues that should be part of the internal practices and procedures for your plan:
Plan Document:  Always know and follow the terms of the plan.
  • Who is responsible for knowing the terms of the plan?
  • Are questions about the plan terms regularly noted and discussed with counsel or another advisor
  • Is there a regular annual or more frequent review of the plan document and compliance with its important terms?
  • The broadest category of compliance failures is failure to follow the terms of the plan.
  • Common mistakes that we hear frequently:
  • "We exclude part-time employees."
  • "On re-hire, employees start over for eligibility and vesting."
  • "He/she terminated so that year doesn’t count."
  • "Our definition of 'compensation' says what?"
  • Failure to initiate mandatory cash-outs of small balances specified in the plan.
  • Failure to follow plan terms limiting distributions to lump sums.
Eligibility:  Who is in the plan?  When?
  • Who is responsible for determining eligibility?
  • How is the effective date of participation confirmed?
  • If there is a service requirement how is it confirmed?
  • How are dates of birth determined?
  • What and how are personnel records maintained?
  • Is it determined whether the employee worked for the company in the past?
  • How are employees notified of eligibility to participate?
  • Does the plan have automatic enrollment and is the automatic enrollment process, including required notices, fully understood and correctly implemented?
  • Have employees been included in the plan before meeting eligibility requirements?
  • Are elective deferral contributions being handled correctly and timely?
  • How are elective deferral payroll deduction employee contributions and employer contributions integrated with the company’s payroll process and are they being handled properly?
  • Are elective deferral payroll deduction employee contributions being remitted to the plan on a timely basis under applicable DOL guidelines?
  • Are automatic or elected changes in elective deferral employee contributions being handled correctly?
  • Do you understand the plan requirements for treatment of forfeitures?
  • Are forfeitures being allocated or otherwise applied in accordance with the terms of the plan on a timely basis?
  • Are good records of the handling of forfeitures being maintained?
  • What is the definition of compensation in the plan?  Are there different definitions for different purposes?
  • Are the definitions of compensation understood and being properly applied?
  • Failure to apply compensation definitions correctly is the most common plan error.
Vesting Service and Crediting:  Errors frequently occur.
  • Who is responsible for determining vesting and vesting service credits?
  • Are the vesting service credit rules of the plan understood and being applied correctly?
  • Is vesting service being credited for employment prior to becoming a plan Participant?
  • Is the prior service of rehired Participants being credited?
  • Are the distribution requirements of the plan understood and being properly implemented?
  • Are some distributions from the plan limited to lump sum payments?
  • Are mandatory, automatic cashouts of small balances occurring when required by the plan?
  • Are installment distributions permitted for those who have attained age 70 ½ or older?
Classification of Contingent Workers:  
  • Do you have employees provided by a leasing organization?
  • Do you have employees provided by a professional employee organization or PEO?
  • Do you have employees that are classified as independent contractors?
  • Have some or all of these employees changed status recently?
  • Have you hired employees provided by a leasing organization (including a PEO) as common-law employees?
  • Frequently, the classification of an employee as a leased employee or independent contractor can be wrong under applicable guidelines for the common-law employee relationship.
  • There are special rules that apply to the crediting of past service as a leased employee when the employee is hired as a common-law employee, whether that occurs during or after the first year of service.
  • These situations present complex legal and compliance issues.
  • Obtain expert guidance from your counsel or other appropriate advisor concerning these situations.
Rollover Contributions:  
  • Does the plan accept rollovers?
  • Who determines whether a rollover is permissible under the plan?
  • Who determines whether the rollover meets the qualifying rollover requirements?
  • Is the plan following the rollover procedures in Revenue Ruling 2014-9?
Participant Loans:  
  • Does the plan authorize Participant loans?
  • Are loans processed internally or by an external provider?
  • Who is responsible for determining eligibility for and the amount of loans?
  • Who is responsible for proper documentation and preservation of plan loan documents?
  • Who monitors timely payment and other compliance with individual loan requirements?
  • What are the procedures for handling loan delinquencies?
  • Expect full scrutiny of plan loans in the event of an IRS examination or in the event of termination of a plan. 
Hardship Withdrawals:  
  • Does the plan allow hardship withdrawals?
  • Who is responsible for understanding and applying the hardship withdrawal rules of the plan?
  • Is the plan following applicable IRS guidelines concerning hardship withdrawals and related documentation?
Special Controls Needed When Acquisitions or Mergers of Entities or Plans Occur:
  • If your company is acquiring or being merged with another company that has other plans, special issues are presented.
  • It is very important to address the implications of these changes well in advance of the closing.
  • Obtain expert advice on the alternatives for dealing with the plans of acquired or merged companies.
  • Similar rules apply if your company and your plan is being acquired by or merged into another.
Participant Communications:  
  • Do you have good knowledge of notices and other communications that are required to be provided to Participants with respect to your plan?
  • Do you have a good checklist or calendar for required Participant communications?
  • Are these requirements being fully met?
  • Are you maintaining good records of compliance with Participant communication requirements?
Records Retention:  
  • Do you have a clear understanding of records retention requirements for your plan?
  • Are policies and procedures in place?
  • DOL rules generally require retention of all information necessary to establish and confirm the amount of benefits payable to each plan Participant. 
Fee and Expense Disclosures and Monitoring: 
  • Are you receiving required fee and expense disclosures from outside service and investment providers under the applicable DOL regulations?
  • Are you properly providing fee and expense disclosure information to plan Participants on a timely basis under applicable DOL regulations?
  • Are you continuously monitoring fees and expenses?
Form 5500 Annual Report:  
  • No matter who prepares your Form 5500 Annual Report, it should have a second review by counsel or another independent consultant before it is filed. 
  • Information and errors on the Form 5500 Annual Report often determine the selection of plans for IRS examinations and DOL investigations.
  • Obtaining a second review is good, low-cost reduction of the risk of being selected for examination or investigation.
  • Internal controls are not just for IRS examinations and DOL investigations or SCP corrections.
  • Internal controls should be part of a regular self-audit of plan compliance that should be conducted as frequently as annually.
  • Questions about plan operation and compliance should be reviewed with counsel or another appropriate advisor when they occur.
  • Internal controls are not just for large plans; small plans frequently have as many or more compliance issues.
  • Compliance is the responsibility of the plan sponsor, the administrator if different, and other plan fiduciaries.  Reliance on a TPA or other outside service provider may be misguided and based on a misunderstanding of the extent to which the outside service provider has agreed to assume responsibility and liability.
Who Are the Responsible Parties?  
  • Internal controls often involve dual responsibility with one party (internal or outside) reviewing the work of another internal or outside party.
  • Are you sure you know the agreed responsibilities and liabilities of outside service providers?
Obtain Expert Advice When Needed:
  • Fiduciaries are not required to be experts in all aspects of plan operation and administration. 
  • However, plan fiduciaries must engage and reasonably compensate experts who either accept and assume fiduciary responsibilities or provide expert advice to plan fiduciaries.
Additional Resources
Individual articles and alerts on many of the foregoing operational issues may be found on the following web page and scrolling down through the Publications.
The members of our Employee Benefits and Executive Compensation Practice Group can help you establish appropriate internal controls and make them work effectively.

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.



+ -