Nobody wants to be the bearer of bad news, but small business owners should be aware that the Internal Revenue Service is stepping up its examinations of companies' retirement plans this year, hoping to catch those that are cheating their workers or the government, or both, as well as to ensure that the plans meet federal regulations.Traditional pensions, 401(k) plans and profit-sharing plans are all on the agenda.

The agency intends to do about 9,000 of these focused exams on companies of all sizes over the coming nine months. The smaller businesses have more to fear from such an examination. They are more likely to be out of compliance, if for no other reason than that they normally outsource set-up and administration, as they lack the resources to do such work in-house.

The IRS may simply be acting upon a belief that there is rampant abuse in the pension area, which belief may be the result of numerous complaints to the IRS in the pension arena. Corporate pension plans have long been a target, but now the IRS appears to want to uncover more noncompliant and fraudulent plans. Knowing that smaller plans are more likely to be out of compliance, there has simply been a change in methodology. The agency no longer appears to look at all aspects of a given plan.

IRS agents now focus more on plan documents and internal controls. The plan documents are examined to make sure that they are current.

The agents will then focus on whether employers are properly handling various duties, including notifying workers of eligibility, matching employee contributions (in the case of 401(k) plans), calculating traditional benefits, investing, vesting workers and distributing benefits. By utilizing this somewhat streamlined approach, the agency hopes to audit about 25 percent more plans this year than last.

Depending on circumstances and magnitude, those companies that are not in compliance could face sanctions ranging from fines up to and including closure.

Somewhat surprisingly, however, small business advocates see some silver linings. Setting up retirement plans is very complex, and if this extra scrutiny were to spark or accelerate a trend toward having this work done by specialists, that would not be a bad thing.

Also, examinations that are limited in scope are less expensive and intensive than the comprehensive audits heretofore conducted by the IRS. And, of course, the mere possibility of increased scrutiny will result in many companies internally reviewing their retirement plans, thereby, presumably, making a diligent effort to see to it that their plans are in compliance.

I have two suggestions.

First, get an expert to review your retirement plan. Second, consider using a welfare benefit plan. A welfare benefit plan can yield large tax deductions, as well as facilitate dealing with, among other things, business succession and estate tax problems. It yields substantial tax deductions, and often makes items that are not normally deductible, such as life insurance premiums, tax deductible.

In addition to all the tax advantages that a welfare benefit plan offers, it is not subject to the cumbersome reporting requirements and administrative oversight that plague traditional retirement plans, and is likely to allow an employer to escape the frightening regulatory net described above. Or, if an employer prefers, they can even maintain a welfare benefit plan and a traditional retirement plan simultaneously.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about welfare benefit plans, retirement plans and tax reduction strategies. Reach him at (516) 938-5007, or visit online at

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