April 12, 2021

IRS’s Compliance Programs and Priorities webpage includes several new initiatives affecting retirement plans. The Tax Exempt & Government Entities division (TE/GE) has new audit streams focusing on worker classification and required minimum distributions, as well as three new compliance checks for inflated plan assets, partial plan terminations, and activities giving rise to unrelated business income tax (UBIT).

Audit initiatives

The new audit initiatives are:

  • Worker classification. TE/GE will check whether employers have improperly classified workers as independent contractors instead of employees. Misclassifying employees as independent contractors may lead to underpayment of Social Security, Medicare and federal income taxes. When TE/GE finds an employer has misclassified employees, a separate audit initiative will examine whether the employer’s retirement plans properly met Internal Revenue Code coverage requirements.
  • Defined benefit plan required minimum distributions. TE/GE will audit large defined benefit plans to ensure they are beginning payments when required under Internal Revenue Code Section 401(a)(9) — generally age 70-1/2 for terminated participants born before June 30, 1949, and 72 for participants born after that date (active participants may have a later date). Failure to begin benefits on time can subject the participant to a 50% tax on undistributed amounts and could lead to plan disqualification.  

Compliance checks

In addition to performing audits — which generally review an organization’s books and records and may involve a determination of tax liability — TE/GE also conducts limited-scope compliance checks through correspondence. Compliance checks typically focus on whether an organization is adhering to recordkeeping and information-reporting requirements, as well as whether the organization’s activities are consistent with its tax-exempt purpose. TE/GE’s webpage includes three new checks relating to employee benefit plans:

  • Unrelated business income. TE/GE will reach out to plans sponsors that reported large, unusual or questionable liabilities on Form 5500. These liabilities might indicate that a tax-exempt trust engaged in taxable transactions unrelated to its primary purpose.
  • Inflated assets. This initiative will check whether plans reporting unreasonably large increases in assets on the Form 5500 series have completely and accurately filled out those forms.
  • Partial plan termination. This ongoing initiative has already identified employers that reported a significant decrease in plan participants on Form 5500 filings. TE/GE is now reviewing these plans to determine if a partial plan termination occurred and if so, whether participants were properly vested.

Related resources

Non-Mercer resources

Mercer Law & Policy resource

Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

Brian J. Kearney
by Brian J. Kearney

Principal, Mercer’s Law & Policy Group

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