Retirement Plan Rescue Story #3: Good Intentions Aren't a Compliance System
Sometimes retirement plan problems begin with bad decisions.
Other times, they begin with good intentions.
Our firm was contacted about two retirement plans that were being maintained by related family businesses. Both the businesses and the retirement plans had been operating for decades. The businesses had evolved over generations, and the family had largely handled the retirement plans themselves, with some assistance from outside financial professionals.
They weren't intentionally ignoring their responsibilities. In fact, they had made a genuine effort over the years to keep their plans running properly.
But retirement plan rules had changed. The businesses had also changed. And decades of do-it-yourself administration had created issues no one realized were there.
Then the IRS selected the plans for audit.
The Challenge
By the time we became involved, the plans had accumulated a long list of compliance and documentation problems.
Among the issues we identified were:
- Inaccurate information reported on Form 5500
- Plan assets not reflected properly in trust accounting
- Life insurance policyvalues not accounted for accurately
- Deeds of trust and other unusual plan investments requiring valuation
- Missing participant communications and annual notices
- Incorrect vesting provisions in the plan document
- Forfeitures not properly allocated
- Participant balances requiring reconciliation
- Contribution and allocation issues
- Historical rollover assets needing proper identification
Complicating matters further, the two separate retirement plans were associated with two family businesses with historical connections and shared employees over the years.
In other words, this wasn't one isolated mistake.
It was years of multiple, small administrative issues that had accumulated quietly in the background.
And now an IRS auditor was asking questions.
The Rescue
When a retirement plan receives an audit notice, one of the most important things an employer can do is understand the condition of the plan before responding.
So before submitting the requested information, we performed our own review.
We examined the plan documents, prior Form 5500 filings, trust accounting, participant records, investments, vesting, forfeitures, contribution history, and required participant communications.
Where problems could be corrected appropriately, we addressed them before responding to the auditor.
Because the audit could reach beyond the year initially under examination, that meant we ultimately reconstructed approximately three years of administration for each of the two plans.
We prepared proper trust accounting so every plan asset could be accounted for.
We obtained information necessary to value unusual assets.
We corrected plan document provisions.
We prepared participant statements.
We addressed forfeitures and contribution issues.
We provided required notices that had historically been overlooked.
And we amended prior Form 5500 filings to reflect accurate plan information.
By the time the requested materials were submitted, the IRS wasn't simply looking at the retirement plans that had existed when the audit notice arrived.
Rather, they were looking at plans that had already undergone an extensive internal review and correction process.
An Audit That Kept Starting Over
Over the course of the audit, another complication arose:
The case was reassigned, multiple times. Each new auditor essentially had to become familiar with the plans and the information that had already been provided to prior auditors.
That meant resubmitting documentation, re-answering questions, and repeatedly explaining years of historical plan administration.
What could have been a straightforward audit became a lengthy process.
But the work we had completed before and during the examination meant the documentation was there each time it was requested.
The Outcome
After years of accumulated administrative issues and an extensive IRS review, the plans ultimately received a no-change outcome (subject to acceptance of the corrected filings, plan documents, and other materials provided during the examination). Other potential audit outcomes can include additional taxes, penalties, required corrections, or plan disqualification in more serious cases.
For a plan that had entered the process with decades of DIY administration behind it, the ”no-change” was an excellent result.
Just as importantly, the cleanup didn't end when the audit did.
Once the audit was over, unusual assets were removed or addressed, historical accounting issues were resolved, plan administration was formalized, and the businesses transitioned from managing their retirement plans largely on their own to having ongoing professional administration.
The Lesson: Good Intentions Aren't a Compliance System
The employers in this story weren't trying to avoid their responsibilities.
They were doing what many business owners do: relying on the processes that had worked for them for years.
But retirement plans don't stand still.
Regulations change. Businesses evolve. Employees come and go. Plan documents are amended. New reporting and disclosure requirements arise. Investments change. And small operational inconsistencies can accumulate over time.
For years, none of those individual issues seemed catastrophic.
Then the audit letter arrived.
That's one of the hidden risks of poor or nonexistent retirement plan administration: a plan can appear to be running normally, while compliance problems quietly accumulate beneath the surface.
The time to discover those problems isn't after the IRS does.
Proactive administration means continually reviewing how the plan is actually operating, identifying inconsistencies, and correcting problems while they're still manageable.
Because when it comes to retirement plan compliance, doing your best isn't always enough.
Sometimes you need someone whose job is to know what you don't know.
