Armanino Blog

Avoiding the "Cross-Hairs"

by Gary Wyatt
April 04, 2017
Those dreaded words in a letter…”your plan has been selected for examination.” No plan sponsor welcomes those words, as they can create internal effort, external fees, penalties, etc.

Employee retirement plans are generally subject to oversight by two government agencies. One is the Employee Benefit Security Administration (EBSA), an agency of the Department of Labor (DOL), which enforces Title I of the Employee Retirement Income Security Act of 1974 (ERISA, as amended). Second, the Internal Revenue Service (IRS), an agency of the Department of the Treasury, which enforces provisions of tax law applicable to retirement plans.

Within the last few years, IRS has had a couple of initiatives to get more practical knowledge about employee retirement plans and their compliance. First, they sent the EPCU Section 401(k) Compliance Check Questionnaire to 1,200 nationwide plans of various sizes. The primary purpose of this action was to learn prevalent characteristics of plans and stratify the results by plan size. Also, the IRS audited several plans selected based on their Form 5500, which revealed certain criteria. This program was called Learn Educate Self-Correct Enforce (LESE), and its purpose was to determine whether the selected criteria were predictive of non-compliance.

Armed with the knowledge obtained in these two projects, it seems likely the IRS will be examining 401(k) plans with an eye toward the weaknesses they found. If any of the following applies to your plan, be forewarned.

Overview of findings
It’s the little things. Non-compliance with technical requirements for plans was found in most areas of inquiry by IRS. As might be expected, small plans seem to exhibit a lot of non-compliance. In plans of all sizes two problems seem to be prevalent:
  1. Failure to amend the plan for compliance with current law a
  2. Failure to obtain adequate fidelity bonds
Below is a checklist to reduce the likelihood of examination (or problems upon examination):
  • Ensure your plan is amended in accordance with current law. If in doubt, ask the third-party administrator (TPA).
  • Ensure your plan has an adequate fidelity bond (generally at least 10% of plan assets to a maximum of $500,000).
  • Deposit participant contributions and loan payments in a timely manner (as soon as possible but no later than the 15th business day of the month following the month of withholding). For most plans, this means a few days.
  • Consider whether distributions or other operational acts (e.g., allocation of contributions and forfeitures and distributions) are in accordance with terms of the plan. Pay attention that compensation used for various purposes under the plan is in accordance with plan terms.
  • Monitor various limits under the plan.
    • Limit on considered compensation.
    • Overall limit on plan allocations and accruals.
    • Individual deferral limit.
    • Limits imposed by discrimination testing.
    • Deduction limits.
  • Monitor for proper inclusion of eligible employees and false inclusion of ineligible employees. Pay particular attention to rehired employees and part-time employees.
  • Make sure participant loans are:
    • Allowed under the plan and loan policy.
    • Adequately secured.
    • Within allowed limits.
    • Evidenced by proper loan documents.
    • Issue Form 1099-R for loans in default.
  • If the plan contains a forced cash-out of terminated participants under a given dollar threshold (i.e., maximum $5,000), do it timely.
  • Remember to monitor whether the plan is top heavy (60% or more of the balances for key employees) and to make minimum contributions (generally 3% to non-key employees in a defined contribution plan).
  • If the plan is not on a platform where Forms 1099-R are prepared by the recordkeeper, make sure that those forms are prepared for distributions and defaulted loans.
  • If plan termination, freezing, or massive layoffs are being considered:
    • Remember that full vesting is thereby triggered.
    • A plan must have a sponsor. If the sponsoring employer goes out of existence, that causes a problem.
  • If the plan is a defined benefit or money purchase pension plan, pay attention to funding requirements.
  • For unusual assets (e.g., real estate, non-public securities, coins, etc.), make sure of:
    • Timely and proper valuation
    • Proper titling of the asset
    • Consider whether there is unrelated business taxable income
For more information on addressing employee benefit plan issues, or for general inquiries about compensation and benefits planning, contact your local Armanino expert.

April 04, 2017

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