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Time for a Plan Compliance Review?

There are any number of actions (or non-actions) that can cause problems for retirement plan fiduciaries, but a plan compliance review can help head off future problems, according to a new analysis.

Stated simply, a plan compliance review is a process in which a plan sponsor reviews the design and administrative operation of the plan in an effort to identify any issues or errors that could create risk for the plan sponsor and/or plan fiduciaries. The goal is to identify and self-correct problems before they become larger and more costly — and, according to the analysis by Greensfelder Hemker & Gale PC, before a governmental agency or plaintiff brings claims in connection with the situation.

The motivations for undertaking such a review are clear; if a plan is not designed and operated in compliance with all applicable laws, the plan’s sponsor and/or fiduciaries can be required in some circumstances to pay losses, interest and penalties in connection with any errors that have occurred, in addition to potential litigation risks.

The analysis suggests that at least once a year plan sponsors should review their plans with legal counsel to ensure that any legally required plan design changes (and any other design changes that the plan sponsor elects to make during the plan year) have been properly incorporated into the plan documents. Other aspects should be performed regularly, but can be less frequently.

Self-Detect and Self-Correct

The analysis says that it’s always better to self-detect and self-correct — before outside parties discover an error. First, when compliance reviews are performed frequently, errors do not remain outstanding as long, and the magnitude and cost of the errors that are detected are not as great. Secondly, the analysis points out that many errors (especially those that are detected within a couple of years) can be corrected via self-correction without any formal disclosure to or approval of any governmental authority. There is no “fee” or “penalty” associated with self-correction. However, when errors are detected during an audit or via an enforcement action, the IRS and DOL seek to impose penalties. Those penalties can be very large in some cases.

Finally, the compliance review process itself raises awareness of all of the rules and requirements that apply to the plan, and this increased awareness alone can decrease the chances of an error occurring in the first place.