Case Study: Delinquent IRS Filing for Welfare Benefit Plan

Challenge

The Internal Revenue Service (IRS) and the Department of Labor (DOL) require that employers who provide welfare benefit programs (such as health coverage, dental, and group term life insurance) to their employees must file an annual report of those programs if the employer has over 100 employees who are eligible to receive the benefit—even if less than 100 employees elect coverage under the programs.  Failure to file a return of this type on a timely basis can subject the employer to substantial penalties (the DOL can assess a penalty of $1,100 per day for each program that is not filed on time; the IRS can assess a penalty of $25 per day, with a maximum of $15,000 per program).

The insurance broker for a local food distributor (‘distributor’) that maintained four separate programs became concerned that the distributor was not in compliance with the filing requirements. The broker came to us for assistance in making the appropriate filings, minimizing IRS and DOL penalty exposure, and creating an efficient method for future compliance.

Solution

We approached this situation in the following manner:

We reviewed the distributor’s payroll records to determine when returns were necessary; we determined that returns for four programs were delinquent for four years, and that the current year’s returns for those four programs were due in two months.  We estimated IRS penalties to approximate $56,250 per program.

For delinquent returns, we suggested to the distributor that the returns be prepared and filed under the Delinquent Filers Voluntary Compliance Program (DFVCP), which is administered by a division of the DOL known as the Employee Benefits Security Administration.  This would substantially reduce the late filing penalties, and provide the distributor with amnesty from other IRS and DOL penalties.

For future returns, we suggested the creation of a “wrap plan”, which is a legal document that would combine the four welfare programs into one for purposes of annual tax compliance.

Results

We prepared, and the distributor filed, the returns under the DFVCP; the distributor paid a total penalty of $16,000 for all four programs—as opposed to the potential IRS penalty of $225,000 for the four programs.  The distributor no longer has a concern regarding potential IRS or DOL penalty assessments relating to these programs for those years.

If the IRS or DOL would ask the distributor for returns for years prior to those filed with the DFVCP, we have created documentation which will allow the distributor to easily prove to the IRS/DOL that there were not 100 eligible employees in those years, and that no returns were necessary.

We prepared, and the distributor filed, the current year returns for all four programs on a timely basis, so no additional filing under the DFVCP was necessary.

We assisted the distributor in the creation of a “wrap plan” document; as a result, in future years, only one return will be necessary for all of the welfare benefits that the distributor will offer, even if they add programs.  The cost to the distributor to create the wrap plan document was less than the fee that we charge to prepare returns for two of the programs for one year.

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