Received an IRS Notice About Your Employee Benefit Plan? Take These Steps

Receiving an IRS notice related to your employee benefit plan can be unsettling, especially if the notice includes proposed penalties, requests for documentation, or questions about prior filings. While every situation is unique, one thing is consistent: ignoring the notice or delaying a response can make the situation more difficult to resolve.

In many cases, an IRS notice is the first indication of compliance issues that may extend beyond a single filing year. Plan sponsors and fiduciaries should use the notice as an opportunity to understand the underlying issue, assess whether additional compliance concerns exist, and establish a thoughtful response strategy. 

Disclaimer: This article is intended to provide general information and should not be construed as legal advice. The appropriate response to an IRS notice will depend on the specific facts and circumstances involved. Plan sponsors and fiduciaries should consult qualified ERISA counsel and other appropriate professional advisors regarding their situation.

Start by Understanding Exactly What the IRS is Requesting

Before taking action, carefully review the notice and identify:

• The plan referenced in the notice.
• The plan year involved.
• Any deadlines for responding.
• The reason the notice was issued. 
• Documents or information being requested. 
• Proposed penalties, if applicable. 
• Instructions for submitting a response.

Create a summary of the notice that can be shared with internal stakeholders and advisors. This ensures everyone involved is working from the same understanding of the issue. 

Do not assume the notice is limited to the specific matter identified by the IRS. For example, a notice concerning a missing Form 5500 filing could indicate broader filing or reporting issues that warrant further review. 

Route the Notice to the Right People Immediately

Government notices often arrive through general mailboxes or administrative offices and may not reach the individuals responsible for benefit plan compliance right away. 

As soon as a notice is received:

• Notify the plan administrator.
• Inform appropriate HR and benefits personnel.
• Engage ERISA counsel if legal issues may be involved. 
• Contact relevant service providers, such as the recordkeeper or third-party administrator.
• Determine who will coordinate the organization’s response.

Assigning clear ownership at the outset can help prevent missed deadlines and duplicate efforts. 

It is also a good practice to establish a central repository for all communications related to the notice, including correspondence, documentation requests, response drafts, and records of conversations with the IRS. 

Investigate Beyond the Year Identified in the Notice 

One of the most common mistakes plan sponsors make is focusing exclusively on the filing year cited by the IRS. 

Instead, consider conducting a broader review that includes: 

• Prior Form 5500 filings.
• Extension filings.
• Audit reports and financial statements.
• Plan amendments and restatements.
• Plan termination documentation.
• Historical compliance issues.

For example, if an organization discovers a missing Form 5500 filing for one year, it may uncover additional late or incomplete filings from prior years. Addressing related issues at the same time may help reduce future compliance risks and administrative burden. 

This broader review can also help identify whether the issues resulted from a one-time oversight or a breakdown in compliance procedures. 

Gather Documentation Before Responding 

An effective response depends on accurate information and supporting documentation. 

Documents that may be relevant include: 

• Executed Plan amendments and restatements.
• Form 5500 filings.
• Audit reports.
• Financial statements. 
• Payroll records. 
• Contribution remittance records.
• Communications with service providers. 
• Documentation related to corporate transactions.
• Plan termination records.
• Evidence of corrective actions.

Take time to verify facts before submitting information to the IRS. Inconsistent or incomplete responses can create unnecessary follow-up requests and prolong the resolution process. 

For fiduciaries, maintaining organized records is not just a compliance exercise. It demonstrates prudent administration and helps support decision-making during examinations or inquiries. 

Work With the Appropriate Advisors

Depending on the nature of the notice, addressing the issue may require input from multiple professionals. 

Potential members of the response team may include: 

• ERISA counsel. 
• Employee benefit plan auditors. 
• Tax professionals. 
• Third-party administrators.
• Recordkeepers.
• Payroll specialists.
• Internal finance and HR personnel.

Each advisor may bring a different perspective to the issue. Legal counsel can help assess legal exposure and response strategies. Auditors and administrators can assist with historical filings and supporting records. Tax professionals may help evaluate penalty-related matters. 

A coordinated approach often produces more efficient and comprehensive responses. 

Evaluate Your Response Options Carefully

Upon gathering the relevant facts, determine whether: 

• The notice accurately reflects the circumstances. 
• Supporting documentation exists that may address the IRS’s concerns.
• Additional corrective action is necessary. 
• A written explanation should accompany your response.
• Professional representation would be beneficial during communications with the IRS.

Plan sponsors should avoid assuming that a proposed penalty must automatically be paid without further evaluation. At the same time, they should avoid making unsupported arguments or submitting incomplete information. 

A thoughtful response grounded in documentation is generally more effective than a rushed submission prepared to meet a deadline. 

Identify the Root Cause 

Once the immediate issue is addressed, fiduciaries should focus on understanding why the problem occurred. 

Common causes include: 

Organizational Changes

Mergers, acquisitions, divestitures, and ownership transitions can create uncertainty around benefit plan responsibilities. Historical records, filing obligations, and administrative processes sometimes fail to transfer smoothly. 

Personnel Turnover 

When key HR, payroll, or benefits personnel leave, important compliance responsibilities can be overlooked if procedures are not documented. 

Plan Terminations 

Some sponsors mistakenly assume filing obligations end once a plan is terminated. In many situations, filings continue to be required until all plan assets have been distributed, and final reporting obligations are satisfied. 

Reliance on Service Providers 

While service providers often assist with compliance activities, fiduciaries remain responsible for overseeing plan administration and confirming that required filings have been completed accurately and on time. 

Strengthen Your Compliance Process Going Forward 

Every IRS notice presents an opportunity to improve governance and compliance processes. 

Consider implementing the following practices:

• Review Form 5500 filing history annually.
• Maintain a compliance calendar with assigned owners. 
• Verify that required filings have been submitted and accepted. 
• Confirm that all required attachments are included before submission. 
• Maintain current contact information for plan-related filings. 
• Document the responsibilities of internal personnel and service providers. 
• Include benefit plan compliance considerations in M&A and plan termination activities. 
• Develop procedures for routing government notices immediately upon receipt. 
• Maintain centralized electronic records for filings and correspondence. 

These controls can help reduce the likelihood of future notices and provide greater confidence that the plan is being administered consistently and effectively.

Looking Ahead

An IRS notice does not necessarily indicate a significant compliance failure, but it should always be treated as a priority. Prompt action, thorough documentation, and a coordinated response can help plan sponsors address the matter efficiently while uncovering potential issues that may require additional attention. 

For fiduciaries, the response process is also an opportunity to evaluate whether existing governance and compliance procedures are sufficient to support ongoing plan administration. Identifying gaps and implementing stronger controls today can help reduce compliance risk and administrative challenges in the future.