IRS Focuses on Worker Classifications and RMDs in 2021 Tax-Exempt Retirement Plan Priority List

The IRS’ Tax Exempt & Government Entities Division (TE/GE) recently released an updated 2021 Program Letter regarding compliance initiatives for its fiscal year. The 2021 letter updates the compliance initiatives outlined in the 2020 Program Letter, both of which are available on the IRS website.

Among the updates are several priorities that apply to retirement plans:

Small exempt organizations that sponsor retirement plans. The IRS will examine the retirement plans of small exempt organizations to determine if plan investments are being properly administered, whether there are any party-in-interest transactions in the plan trust and whether any participant loans violate IRC Section 72(p).

Worker classification. The IRS will examine retirement plans of employers that were determined to have misclassified employees as independent contractors. These retirement plans will be reviewed to determine if coverage requirements of the Internal Revenue Code are satisfied.

Required minimum distributions (RMDs) in large defined benefit plans. The IRS will perform examinations to ensure retirement plan sponsors comply with IRC Section 401(a)(9) to begin distribution of benefits by April 1 following the calendar year an employee turns 70 ½. 

Participant loans. The IRS will perform examinations to ensure that participant loans comply with IRC Section 72(p) rules on maximum loan balances and IRC Section 72(t) re-payment rules for early distributions before age 59 ½. We’ll verify whether participant loans of retirement plans that hold a high percentage of participant loans to total assets of the trust are being repaid timely if the loan balance remains consistent or increases for more than one year.

Plan liabilities and unrelated business income. The IRS will conduct compliance checks to determine if plan sponsors who reported plan liabilities on their Form 5500-series return are engaging in activities that result in taxable unrelated business income. Large, unusual and questionable liabilities may result from prohibited transactions, unrelated business income or failure to value assets properly.

Inflated assets. The IRS will conduct compliance checks to determine if plan sponsors are completing financial information on Form 5500-series returns with complete and accurate information. It will focus on plans whose assets have increased beyond reasonable amounts from the beginning of the year to the end of the year.

Partial termination/partial vesting. The IRS will conduct compliance checks on identified employers whose Form 5500, Annual Returns/Reports of Employee Benefit Plan, indicates their plan has had a significant decrease in plan participants. The IRS will review these plans to determine compliance with IRC Section 411(d)(3) vesting requirements and accuracy of other information on the identified employers’ Form 5500.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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