What Are Internal Controls & Why Does My Plan Need Them? 

Internal controls refer to documented, formal procedures that are designed to review plan operations and assess compliance. These controls are created to prevent future errors and quickly detect any issues that may threaten a plan’s qualified status. Proper internal controls help ensure the plan complies with all relevant regulations and can correct mistakes in a timely manner.

Having sound internal controls is an important factor in determining whether a plan is eligible to use the Self-Correction Program (SCP) under the Employee Plans Compliance Resolution System (EPCRS), a program by the IRS that allows plan sponsors to correct errors. When plans are audited, the IRS evaluates the effectiveness of internal controls. The presence or absence of strong internal controls can impact the severity of sanctions if errors are found under the Audit Closing Agreement Program (Audit CAP).

Why Are Internal Controls Necessary?

1. Compliance and Prevention: Internal controls help ensure that the retirement plan remains compliant with IRS rules and regulations, preventing errors that could lead to penalties or disqualification.

2. Error Detection: Effective controls help detect errors early, allowing for corrections before they escalate into more serious issues that could result in costly penalties.

3. IRS Audit Consideration: During an audit, the IRS reviews internal controls to determine their effectiveness. If issues are found during the audit, having strong internal controls may reduce penalties under the Audit CAP. If errors are identified before the audit, the plan may be eligible to use the Self-Correction Program (SCP) or Voluntary Correction Program (VCP) to address issues at a lower cost.

Examples of Internal Controls

1. Salary Deferral Verification: Compare the elected salary deferral amounts from employee election forms with the amounts deducted from their wages.

2. Service Provider Accuracy: Verify that service providers receive accurate information, such as compensation amounts, to ensure correct contributions and distributions.

3. Contribution Limits: Monitor annual contribution limits to ensure employee deferrals do not exceed IRS limits.

4. Minimum Distributions: Ensure that plan participants are receiving the minimum distributions required by law.

Common Mistakes Due to Lack of Internal Controls

According to the IRS, the absence of internal controls can result in miscommunication between Plan Sponsors and Plan Administrators. Common Errors include:

• Failure to Amend the Plan Timely or Follow Plan Terms

During an audit, if the employer cannot provide documentation proving timely amendments to adhere to current law, an Audit Closing Agreement and sanction will occur. Had the error been found prior to the audit, the error could have been corrected using the Self-Correction Program (SCP) or the Voluntary Correction Program (VCP) for a substantially lower fee. Internal Control procedures also include changing the summary plan description and informing participants and any applicable service providers of changes.

• Failure to Count All Eligible Employees in Testing

If the Plan Sponsor fails to share employee information with the Plan Administrator or applicable service provider regarding employees eligible to make elective deferrals, including those terminated during the year, or employees of a company with common ownership interest, testing will be incorrect. Plan terms must be reviewed to ensure the proper definition of an eligible employee is being utilized.

For Assistance with Internal Controls

If you need help, contact Ekon Benefits at (314) 367-6555 or info@ekonbenefits.com.

Straight From the Source

This information is based on current IRS guidance, including Rev. Proc. 2021-30. https://www.irs.gov/pub/irs-drop/rp-21-30.pdf