Among the many provisions of the SECURE 2.0 legislation are a number of provisions designed to encourage employees to participate in and contribute to their employer provided retirement plan. Still other provisions provide more access to money in such plans under certain circumstances. This article will address provisions that encourage participation. A subsequent article will cover accessing retirement plan money.

Financial Incentives For Contributing. Effective for plan years after December 29, 2022, employers sponsoring 401(k) and 403(b) plans can offer de minimis financial incentives such as low-dollar gift cards for participating in the plan. The incentives cannot be paid for by plan assets. Guidance will be needed as to what constitutes a “de minimis” financial incentive.

Auto-Enrollment and Auto-Escalation For New Plans. I’ve already addressed the required automatic enrollment and automatic escalation provisions of SECURE 2.0 for new 401(k) or 403(b) plans beginning in 2025 in a prior post. See, SECURE 2.0 Requires Auto-Enrollment, Auto-Escalation For Most New Plans.

Permitting Long Term Part-Time Employees To Contribute. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. SECURE 2.0 expands this requirement to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans.

Student Loan Payments As Elective Deferrals. To encourage employees saddled with student loan debt from college that may otherwise not be able to save for retirement and share in corresponding employer matching contributions, SECURE 2.0 permits 401(k), 403(b), SIMPLE IRA, and governmental 457(b) plans to be designed to allow employer matching contributions to be made for “qualified student loan payments.” Essentially, the plan can treat the loan payments as elective deferrals under the plan. This provision is effective for plan years beginning after 2023.

Higher Catch-Up Contributions For Older Participants. For tax years after 2024 the limits on catch-up contributions are increased for participants age 60-63. The current catch-up limit is $6,500 for participants age 50 or older ($3,000 for SIMPLE IRAs). The increased limit is the greater of $10,000 or 1.5 times the regular catch-up limit for 2025. The amount is indexed for inflation after 2025. However, it must also be noted that after 2023, catch-up contributions by employees whose wages exceed $145,000 under 401(k), 403(b) or governmental 457(b) plans must be made on an after-tax Roth basis.

Saver’s Match Replacing Saver’s Credit. Tor tax years beginning after 2026, the current Saver’s credit for certain lower-earning participants is replaced by a Saver’s matching contribution from the Federal government to the retirement plan. The match is 50% of the employee’s contribution to an IRA or retirement plan up to a maximum of $2,000 per individual. The match phases out at certain income levels and becomes unavailable when the individual earns too much ($35,500 for single taxpayers, $71,000 for married filing joint). The match replaces the current non-refundable credit which is not valuable to many eligible employees because they have little or no tax liability for the credit to reduce to zero and the excess credit amount cannot be refunded.

Conclusion. These provisions all attempt to encourage employees to participate in, or to contribute more to, their employer’s retirement plan. Of course, some of these provisions are up to the discretion of the employer, such as whether to offer de minimis financial incentives or permitting student loan payments to be matched. Others are mandatory such as the automatic enrollment and escalation for new plans or permitting long term part-time employees to contribute.

My next blog will address some provisions of SECURE 2.0 that allow participants access to their money in the plan. These too can be seen as incentives to participate as they allow access to retirement money before retirement.

Among the many changes to retirement plans made by the SECURE 2.0 legislation are changes meant to encourage more employers to adopt retirement plans for their employees. Additionally there are provisions simplifying many rules of operating plans and provisions encouraging employees to participate and save for retirement. This article will discuss a couple of provisions encouraging employers to adopt plans.

Changes to Credit for Startup Expenses of Small Employers. The original SECURE Act of 2019 drastically increased the employer credit for employers with 100 or fewer employees adopting a new retirement plan. It increased the amount of credit for startup costs and provided the credit could be taken in the first 3 years of the plan. Beginning in 2019 the credit was 50% of the startup expenses up to the lesser of $5,000 or $250 for each eligible nonhighly compensated employee.

SECURE 2.0 changes the credit for employers with up to 50 employees for taxable years beginning after 2022. It increases the percentage to 100% of the startup costs. In addition, SECURE 2.0 creates an additional credit based on the amount of employer contributions to plans other than defined benefit plans. The credit is a percentage of the amount contributed for employees who make less than $100,000, up to $1,000 per employee. The percentage of contributions is 100% for the first two years of the plan but drops by 25% for the next three years with no credit available after the fifth year of the plan. The full credit is available to employers with 50 or fewer employees but is phased out for employers with 51 to 100 employees.

The Act clarifies that the credit is available for employers who join an existing Multiple Employer Plan including Pooled Employer Plans.

Starter Plans. Effective after 2023, Employers who don’t offer a retirement plan can adopt a “Starter” 401(k) or safe harbor 403(b) plan that only permits employee elective deferrals. The plan must auto-enroll all employees with a 3% to 15% deferral rate. The elective deferrals would be limited to the IRA limits (currently $6,500 with a $1,000 age 50 catch-up). Such plans would not be subject to nondiscrimination or top heavy testing which many employers see as deterrents to adopting a plan.

Conclusion. Millions of Americans do not have access to a retirement plan at work. The credits and starter plans are both aimed at increasing the ability of Americans to save for retirement at work by providing incentives for employers to adopt retirement plans. Whether it works remains to be seen.

A provision of the SECURE 2.0 legislation will affect an employer’s decision as to whether to adopt a 401(k) plan or 403(b) plan. The provision requires most 401(k) plans and 403(b) plans (Plans) adopted after the date of enactment of SECURE 2.0 (December 29, 2022) to automatically enroll eligible employees with an automatic contribution that will automatically escalate each year for plan years beginning after 2024.

Exceptions. The legislation gets to being only applicable to new Plans in a round about way. It provides that all Plans must provide the automatic enrollment and escalation as of the effective date. However, all Plans existing on the date of enactment are grandfathered from the requirement as an exception. Additionally, new employers, in existence for less than 3 years, are excepted from the requirement, until their fourth year. There is also an exception for Plans of employers who normally employ 10 or fewer employees until the year after the employer normally employs more than 10 employees. Governmental and church plans are also excepted, as are SIMPLE plans. Interestingly, if an employer with an existing plan on the date of enactment joins a multiple employer plan (MEP), the grandfathering disappears. Each Plan of an employer in the MEP is treated as a separate plan.

Automatic Deferral and Escalation. For plan years beginning after 2024, affected Plans must automatically enroll all eligible employees at a salary deferral rate of at least 3% of compensation but no more than 10%. The participant can elect to opt out or to change the Plan’s stated percentage. The automatic rate is increased 1% annually until reaching at least 10%, but no more than 15%. It is unclear how this works. It appears that this means if the Plan is drafted with an initial automatic deferral of 10%, it would continue the annual automatic escalation until it reached 15%. However, what if the initial deferral rate is only 9%, can it stop at 10%? Regulatory guidance is needed in this regard. Like with the automatic deferral, the participant can change or eliminate the automatic escalation.

Sound Familiar? If this auto-enrollment-auto-escalation sounds familiar to readers in California, it is probably because the state mandated payroll deduction IRA program for employers not maintaining a retirement plan, CalSavers, uses a similar approach.

Guidance Needed. Like many provisions of SECURE 2.0 this provision will need regulatory guidance to be completely understood. I already mentioned the automatic escalation provision above. Another example is, how do you measure how many employees a business “normally” employs?

Conclusion. SECURE 2.0 contains the automatic enrollment provisions because studies consistently show that most employees do not change an automatic enrollment. Therefore, it promotes retirement savings. This is also why many state mandated IRA programs, like CalSavers, also require automatic enrollment and escalation. While choosing the initial deferral rate (between 3% and 10%) is up to employer discretion as a matter of plan design, having to administer automatic enrollment and automatic escalation will be a consideration as to whether an employer desires to adopt a new 401(k) plan or 403(b) plan. Of course, in California, any employer not excepted from this provision of SECURE 2.0, that does not maintain a retirement plan, would have to implement the automatic enrollment-automatic escalation payroll deduction for any employees that do not opt out, under CalSavers. Adopting a profit sharing plan with only employer contributions would be one way to avoid automatic enrollment and escalation. Of course, this means the benefits are funded by employer contributions only.

Stay tuned for more articles on provisions of the massive SECURE 2.0 legislation including provisions encouraging employers to adopt retirement plans and provisions encouraging employees to participate in plans.

Of the over 90 provisions contained in the SECURE 2.0 legislation is a handful that only apply to retirement plans of nonprofit, tax exempt organizations (EOs). One is specific to EOs sponsoring 457(b) plans and others involve 403(b) plans. These provisions are discussed below.

457 RMD Amendment Deadline Extended. Late last year, I wrote on how, unlike 401(k) or 403(b) plans whose deadline was generally extended to the end of the plan year beginning in 2025, calendar year 457(b) plans of non-governmental EOs had to be amended by the end of 2022. Specifically an amendment was needed for the raising of the age for required minimum distributions (RMDs) from age 70 1/2 to age 72, unless legislation were enacted postponing the deadline. See Tax Exempt Organizations Must Amend 457(b) Plans By December 31 For Increased RMD Age. Well, SECURE 2.0 was enacted on December 29 and contains a provision extending the deadline to conform to the 2025 deadline of other plans.

For EO sponsors who amended their plans by year-end there is no harm in doing so. Those who bore the risk, won the bet. However, SECURE 2.0 also raises the age for participants turning age 72 after December 31, 2022, to age 73. It further raises the age to 75 for participants turning age 74 after 2032. Thus, additional amendments will have to be made by 2025. And, of course, the plan will have to be operated in accordance with the new law before being amended.

403(b) Changes. The following provisions specifically address EOs that sponsor 403(b) plans.

MEPs and PEPs. SECURE 2.0 allows multiple employer plan (MEPs) and pooled employer plan (PEPs) to be made up of sponsors of 403(b) plans beginning in 2023. These are plans allowing multiple employers to join together to get economies of scale when it comes to plan expenses such as recordkeeping and investment charges..

Collective Investment Trusts. Effective immediately, the tax code allows 403(b) plans to invest in collective investment trusts. Previously such plans could only offer annuities or mutual funds as investments. However, before an EO can actually implement such a change the federal Securities laws also need to be changed.

Hardship Withdrawals. For plan years beginning after 2023 a 403(b) plan may allow hardship withdrawals to be made from employer contributions instead of only employee elective contributions. Specifically hardship withdrawals can be made from qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and earnings from such contributions.

Long Term Part-Time Employees. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. This provision did not apply to 403(b) plans. SECURE 2.0 expands it to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans. This is a significant change to the universal availability rule for 403(b) plans which allowed the exclusion of employees who normally work less than 20 hours per week and who did not accumulate 1,000 total hours in the eligibility period.

Conclusion. EOs that sponsor such plans have time to make amendments to the plans. However, plans must be operated in accordance with applicable changes upon becoming effective. The RMD rules changes and Long Term Part-Time Employee changes are required amendments. The collective investment trusts and hardship withdrawals are in the discretion of the employer as a matter of plan design.

By now you probably know that the $1.7 billion Budget Reconciliation Act of 2023 (Act) that kept the Federal government funded was enacted on December 29, 2022. You are probably also aware that the legislation known as SECURE 2.0 was part of the legislation. However, you might not know that there are close to a hundred provisions affecting retirement plans contained in over 400 pages of the 4,000+ page Act. That is far too many to try to summarize in a single blog article. Therefore, I will be summarizing key provisions over several articles in the coming weeks.

The goal of the legislation is to improve the private retirement system by providing incentives for employers to adopt plans, making it easier to administer plans and correct errors, and providing incentives for increased participation by employees. It is important to note that while some provisions are effective immediately, and affected plans must be operated accordingly, plan documents generally need not be amended before 2025. While the effective dates vary by provision, this article will address some of the provisions that are effective now.

Changes to EPCRS. The Act legislatively expands the types of plan errors that can be corrected under the IRS’s Employee Plans Compliance Resolution System (EPCRS), including creating a new type of error, the “eligible inadvertent failure” (EIF). An EIF is a failure that occurs despite the existence of practices and procedures that satisfy the EPCRS principles or similar principles for IRAs. However, an EIF cannot be an egregious failure or one relating to misuse of plan assets or an abusive tax avoidance transaction. EIFs may be self-corrected at any time.

The Act specifically includes EIFs dealing with plan loans and provides that if self-corrected under EPCRS, it shall be treated as being self-corrected under the DOL’s Voluntary Fiduciary Correction Program. The Act also directs the Treasury to expand EPCRS to allow EIFs of IRAs, including waiving the draconian excise tax for failure to take required minimum distributions and correcting erroneous rollovers by nonspouse beneficiaries of inheritied IRAs.

The Treasury Department is to issue guidance on these provisions within 2 years of the date of enactment. These are welcome changes although the IRS now has to incorporate them into EPCRS by issuing a new Revenue Procedure outlining the program. Currently, insubstantial operational failures may be self-corrected at any time and I have been a critic of how those rules are written. See IRS Revamps EPCRS: Expands SCP; Eliminates Anonymous VCP Submissions; Expands Overpayment Safe Harbor to DB Plans; and A More In Depth Look At The Expansion Of Self-Correction Under EPCRS. Hopefully, this time we will get clearer rules that reduce the risk of self-correction.

Required Minimum Distributions. The Act contains many provisions regarding required minimum distributions (RMDs). For participants turning age 72 after December 31, 2022, the age for taking RMDs is raised to age 73. It further raises the age to 75 for participants turning age 74 after 2032. The SECURE Act of 2019 had raised the age from 70 1/2 to 72.

The Act also reduces the excise tax for failing to take RMDs from 50% to 25%. If the failure to take RMDs is from an IRA it can be further reduced to 10% if corrected in a timely manner (generally the earlier of 2 years of when it should have been taken or when a notice of deficiency is received or the the tax is assessed).

Self-Certification of Hardship Event or Unforseeable Emergency. Administrators of 401(k) or 403(b) plans can now rely on an employee’s written self-certification that he or she has experienced a safe harbor hardship event described under the regulations (e.g., medical bills; home repairs, funeral expenses) when applying for a hardship distribution. Likewise, administrators of governmental 457(b) plans may rely on such self-certification that the participant is faced with an unforeseeable emergency described in regulations. Previously administrators could only rely on self-certification that the amount requested was not in excess of the amount required to satisfy the need, and the participant still had to provide evidence that the event occurred.

Election Of Roth Employer Contributions. 401(k) plans, 403(b) plans, and governmental 457(b) plans may now allow participants to elect to have matching contributions or nonelective employer contributions made on a Roth (after-tax) basis. Whether the plan so provides is up to the discretion of the plan sponsor as a matter of plan design.

Conclusion. As mentioned, there are too many provisions to try to summarize in a single blog article. These are some of the major changes made by the Act that are currently effective. Stay tuned as later posts will summarize other provisions becoming effective in later years.

An ERISA class action suit recently filed in the United States District Court for the District of Arizona maintains the plan administrator breached its fiduciary duties by allowing participants to be charged unreasonable recordkeeping fees for years. Hagins et al v. Knight-Swift Transportation Holdings, Inc., 2022 CV 01835-MTM, October 26, 2022.  The case demonstrates how plan fiduciaries have a duty to continually monitor the fees that plan participants pay whether directly or indirectly and as the plan gets bigger, the fiduciaries have a duty to monitor such fees to ensure they are not unreasonably high.  The complaint provides a blueprint of actions plan fiduciaries should take to be able to defend their actions relating to plan costs.

The case was brought on behalf of all participants and alleges that  Knight-Swift allowed the recordkeeper to be paid unreasonable compensation for its recordkeeping services.  The case alleges that the plan paid too much in both direct and indirect compensation to the recordkeeper.  The plan’s Form 5500 filing for 2021 showed the recordkeeper was paid $1,209,053 in direct compensation.  This amounted to $83.81 per participant.  The complaint alleges that plans of similar size only paid $25-$30 per participant, making the fees paid excessive.

Additionally, the recordkeeper was paid indirect compensation in the form or revenue sharing and the float on investments.  The complaint alleges that the percentage of revenue sharing fees that the recordkeeper received never changed from the beginning of the plan even though the plan assets increased dramatically (by more than $240,000,000) over the past 6 years .  The total amount of both direct and indirect compensation paid to the recordkeeper amounted to $200 per participant.  It alleges that a prudent fiduciary would undertake three processes to prudently manage and control plan costs: 1) closely monitor the fees being paid by participants; 2) identify all direct and indirect compensation being paid by the participants; and 3) keeping up with trends by performing a Request For Proposal every 3-5 years to see what other recordkeepers would charge for the same services.

The complaint also alleges that the Sponsor breached its fiduciary duty of prudence to defray plan costs by failing to select low-cost institutional class mutual funds for the participant investment menu.  By not choosing institutional class shares for the plan, participants were required to pay higher expense ratios that were about double that of the institutional class shares.

While this case was just recently filed and has not been decided yet, it does demonstrate what plaintiff’s attorneys will look for in bringing a case against a plan sponsor and what steps a sponsor can undertake to avoid such arguments.  It also demonstrates the perils of plan sponsors who just “set it and forget it” when establishing a plan.  Sponsors should always monitor the fees that participants must pay and look to re-negotiate fees as the assets of the plan increase.  Reduced fees can also be negotiated upfront as the assets reach certain threshold levels.  However, these too should be monitored to ensure that they remain reasonable at the time the threshold is reached.


A new survey conducted by Newport Group and PLANSPONSOR shows a dramatic increase in the use of nonqualified deferred compensation (NQDC) plans to retain and attract executives.  Of 350 organizations offering NQDC plans, 42% said that was the reason for offering them.  This is up from 26% in the 2020 survey.  The survey also found a dramatic increase in the number of small and mid-sized companies offering NQDC plans.  In 2020 only 50% of those surveyed offered NQDC plans but that number is now 80%.

The limitations on the amounts that can be contributed to a qualified plan under Internal Revenue Code (Code) section 415 ($66,000 in a defined contribution plan for 2023); the limit on the amount of compensation that can be considered  in a qualified plan ($330,000 in 2023) under Code section 401(a)(17); and the limit on elective deferrals into a 401(k) plan ($22,500 if under 50, $30,000 with catch-up for 2023) under Code section 402(g) all limit how much a well-paid executive can save for retirement.  Therefore NQDC plans can be used to allow them to save more to have a larger percentage of replacement income at retirement.

The deadlines for amending many retirement plans for recent changes in the law under the CARES Act and SECURE Act have been extended to December 31, 2025 (governmental qualified or 457(b) plans or a 403(b) plan for public school employees deadline is generally within 90 days after the legislative body with authority to amend the plan closes the third regular legislative session that begins after Dec. 31, 2023).  IRS Notice 2022-33 first extended the deadlines for many, but not all, provisions in both Acts.  See Notice 2022-33 Does Not Extend Deadline For Adopting Amendments to Plans for All CARES Act Provisions: Loan and In-Service Withdrawal Provisions Excluded.   Additionally, Notice 2022-45 extended the deadline for amendments for loan and in-service withdrawal provisions to the same date.  However, importantly, these Notices do not extend the deadline for 457(b) plans sponsored by tax exempt organizations.  Thus, those plans must be amended by December 31, 2022 if on a calendar year. 

Tax Exempt Organization 457(b) Plans Are Different.  Internal Revenue Code (Code) Section 457 governs the taxation of unfunded deferred compensation plans of state or local governments or tax exempt organizations.  Generally, Code section 457(b) provides that benefits of an eligible deferred compensation plan are not taxable to the participant until received and sets forth the requirements to be an eligible deferred compensation plans.  The requirements are different depending on whether the employer is a state or local governmental entity or a tax exempt organization.  Governmental 457(b) plans are similar to 401(k) plans.  For example, the assets must be held in a trust for the exclusive benefit of participants.  However, the assets of a 457(b) plan sponsored by a tax exempt organization must remain the employers and subject to its creditors.  Thus, to avoid violating ERISA, the tax exempt organization 457(b) plan must be a “top hat” plan for a select group of management and highly compensated employees.

Required Minimum Distributions Amendment.  The SECURE Act increased the age when participants must begin taking required minimum distributions (RMDs) from age 70 1/2 to age 72.  Section 457(b) plans are subject to the RMD rules.  Therefore, 457(b) plans of tax exempt organizations must be amended by the end of the year for the changes to these rules unless the IRS issues another Notice extending the deadline.  Time is running out for the IRS to pass such an extension.  Therefore, tax exempt organizations should be taking steps now to amend their 457(b) plans.


On September 29, the House of Representatives passed the Mental Health Matters Act (Act) which included the provisions of another bill previously introduced, the Employee and Retiree Access to Justice Act (ERAJA).  While the Act principally deals with health plans and expanding access to mental health and substance abuse services, ERAJA amends ERISA in two important ways that will lead to much more ERISA retirement plan litigation.

Arbitration.  ERAJA would invalidate and render unenforceable any arbitration provisions, class action waivers, and representation waivers for the purposes of  claims brought under ERISA Section 502 as well as common law claims.   There is an exception if particular rules (including a paper notice written to be understood by an average participant and 45-day waiting period) are followed.  Agreeing to arbitration also cannot be a condition for participation under a plan.

Standard of Review.  ERAJA would also legislatively remove the ability of plans to give the plan administrator discretion in deciding claims and having the administrator’s decision be given deference by a reviewing court that has been the law since the 1989 Supreme Court decision of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).  Under that case, when the plan document gives the administrator discretion in deciding benefit claims, a reviewing court should not overturn the decision of the administrator unless it determines the administrator acted arbitrary and capricious.   ERAJA would require all courts to use a “De Novo” standard when reviewing the decision, not giving any deference to the administrator.  Multiemployer plans would not be subject to this change.

While ERAJA is just a bill that would have to pass the Senate and be signed by the President before becoming law, if it were to be enacted it would dramatically change the landscape of ERISA litigation.  It would no doubt increase ERISA litigation and act as even more of a deterrent for employers to adopt private retirement plans.

There has been much press coverage on how the Inflation Reduction Act provides billions in funding for IRS enforcement.  Some stories say that the IRS will be hiring 87,000 new agents to audit taxpayers over the next 10 years.  This is disputed but there is no doubt that there is $80 billion in funding to the IRS under the Act. Of this over $46 million is allocated to enforcement.  However, enforcement means a number of things other than just hiring agents to audit, it can also include hiring customer service agents, IT personnel and upgrading technology.  Secretary Treasury Yellen has stated that taxpayers making less than $400,000 a year should not see an increase in the rate of auditing activity. 

This debate centers generally around individual taxpayers.  However, since 2010 the IRS has seen its budget cut by 20%.  The number of employees has decreased by 16,000 employees and its enforcement agents decreased by 30%. See, What The New $80 Billion for the IRS Really Means for Your Taxes. Therefore, the agency needs the funding.  However, businesses and employers should be aware of the upcoming increase in enforcement and ensure they can withstand an audit.  In particular benefits plans should perform self-audits to see if there are document or operational failures that might be self-corrected or corrected under EPCRS or the Voluntary Closing Agreement program.  Likewise, there is significant reason to believe that there may be an enforcement initiative for nonqualified deferred compensation plans.  These are addressed respectively below.  

Qualified Plans.

Over the past few years there has been a lot of  legislation affecting plans due to the Covid-19 Pandemic.  On top of that, pre-approved plans were required to be restated for changes in the law to a certain point.  The way qualified plans work is that the IRS gives employers time after changes in the law are effective to adopt the written provisions into the plan document.  However, the plan must be operated in accordance with the new provisions upon the effective date regardless if the plan has been amended or not.  Therefore, there is ample opportunity for disconnects causing failures.  Below is a list of some items that should be reviewed.

  1. Ensure plans  have been timely restated.  For example, preapproved defined contribution plans were required to be restated by July 31, 2022.
  2. Ensure plans are properly operated.  For example, if the employer has adopted increased loan amounts for Covid-19 and/or distributions for Covid-19 hardships that the plan is properly operating these provisions with proper employee notices, etc.
  3. Ensure that any interim amendments required to be adopted are done so by their effective date.  While the deadline for adopting amendments for many changes has been extended not all have been. See Notice 2022-23 Does Not Extend Deadline For Adopting Amendments to Plans for All CARES Act Provisions: Loan and In-Service Withdrawal Provisions Excluded.
  4.  Ensure that elective deferrals are timely deposited.
  5.  Ensure Forms 5500 are timely filed
  6. Ensure that Required Minimum Distributions (RMDs) are being properly distributed by the applicable age 70 1/2 or 72.  Document if the plan suspended RMDs in 2020 due to Covid-19.
  7. Review the basic plan operation to ensure it is operating smoothly, participants are entering timely, getting employer contributions timely, etc.

These are but some of the issues that should be considered in a self-audit to ensure the plan is ready for an audit.

Nonqualified Deferred Compensation (NQDC)  Plans.

Last year the IRS revised its Nonqualified Deferred Compensation Audit Technique Guide effective June 1, 2021.  This document explains to auditing agents what issues they should be looking for when auditing nonqualified plans.  The guidelines breakdown the issues to the following three.

  1. When are deferred amounts includible in employee’s gross income?
  2. When are deferred amounts deductible by the employer?
  3. When are deferred amounts considered for employment tax purposes?

The new guidelines have a more detailed emphasis on Code section 409A and how it significantly changed the rules governing NQDC Plans including the fact that plans must be in writing.  The guidelines list of series of questions agents should ask to discover the possible plans of the employer.  For example:

Does the employer have any plans, agreements, or arrangements for employees that supplement or replace lost or restricted qualified retirement benefits?;

Do employees have individual employment agreements?;

Do employees have any salary or bonus deferral agreements?;

Does the employer have any insurance policy or annuity plan designed to provide retirement or severance benefits for executives?;

Are there any board of director’s minutes or compensation committee resolutions involving executive compensation?; and

Is there any other written communication between the employer and employees that sets forth “benefits”, “perks”, “savings, “severance plans”, or “retirement arrangements”

Employers would be prudent to self-audit their records to identify all possible arrangements and confirm their compliance with Code section 409A and other principles of law such as the Constructive Receipt and Economic Benefit doctrines.  Also as a result of the Pandemic many Executives may have renegotiated their employment arrangements or even taken severance.  These arrangements should be confirmed to be compliant with Code section 409A, as well.

The fact that the IRS updated its Audit Technique Guide could be a signal that it plans more examination activity in this area.


The additional funding for enforcement to the IRS under the Inflation Reduction Act will no doubt lead to more examinations.  The benefits area is ripe for increased enforcement activity.  Employers should be proactive to ensure their plans and operations are in good shape not only because they might be audited by the IRS but because it is the prudent thing to do.  A compliance failure may not only affect the tax effects of a plan but can also lead to a claim by a participant.  Additionally, while the pandemic is not over, businesses have learned how to deal with it and it should no longer be an excuse for neglecting plans.

We are always available to help review plans for compliance.