IRS Logo
Print - Click this link to Print this page

Risk Assessment Program - Results of Examinations

Results of Examinations of Form 5500 Money Purchase Plans with sponsors from the Religious, Grantmaking, Civic, Professional and Similar Organizations; Labor Unions and Similar Organizations; and Government Instrumentality or Agency business codes

Overview:

We have examined over 430 Form 5500 filings.

Project Results:

The results indicate a high degree of noncompliance within this segment.

Businesses:

Each Industry (i.e., Other Services) uses business codes based on the North American Industry Classification System (NAICS). This segment is made up of only 3 business codes. Approximately 95% of this segment’s plan sponsor’s business codes represent “Religious, Grantmaking,Civic, Professional and Similar Organizations”. We found substantial data in our examinations that all three business codes had a high degree of noncompliance. Because of our analysis, it appears that noncompliance is not limited to any specific business code within this market segment. 

Issues Found:

The most common failure involved minimum funding. Employers who sponsor Money Purchase Plans are required to make (or fund) contributions to or under the plan for the plan year which are required under the terms of the plan document. A failure to do so results in a funding deficiency that is initially subject to an excise tax equal to 10% of the deficiency. If not corrected, it can be subject to an excise tax equal to 100% of the deficiency.

It is essential that the parties responsible for calculating the amount of contributions and responsible for making the contribution payment know the rules regarding when contributions are required to be paid. They should also determine if the plan requires use of forfeitures to reduce the overall amount of the sponsoring employer required contributions.

The second most prevalent failure involves contribution allocation errors. This occurs when the plan sponsor does not make the amount of contribution required by the formula in the plan document (e.g. 10% of participant’s compensation). This could be for one participant or many participants. An administrative error (e.g., not deposited timely) or negligence or oversight (e.g., wrong participant compensation used) could cause this error.

Money purchase plans can have multiple types of contributions (employer, after tax (voluntary)) allocated to the plan. These plans allocate employer contributions based on a specific formula. Make certain all people responsible for the allocations know the correct and most current allocation formulas. They should also know the correct and most current plan definition of compensation and assure it is the same used in plan operation. Finally, they must also know the plan language, if any, for forfeiture allocation to participants (in addition to amounts required by the plan formula), and the allocation formula.

The third most prevalent failure involves participation and coverage. Participation errors occur when a plan does not bring an employee into the plan as required by the plan document or by Code Section 410(a). Coverage errors occur when the plan does not “cover” (meaning they are a participant) a certain amount of employees as required by Internal Revenue Code Section 410(b).

A number of reasons, including poor recordkeeping and not knowing the plan language, can cause errors involving participation and coverage. Participation in a plan is determined by an employee’s date of hire, the amount of service completed from the date of hire, and possibly the age of the employee. Errors will occur if you do not have properly maintained records. Make certain all the people responsible for administering plan participation know the correct and most current eligibility provisions in the plan. It is essential that the plan administrator(s) have an in depth knowledge of the Internal Revenue Code Section 410(b) coverage requirements. They should review the participation status of all employees at least once a year.
  
The last most common failure involved inadequate bonding of plan fiduciaries and persons who handle pension funds, as required by Title I of ERISA, unless one of the limited exceptions applied. The amount of bonding should not be less than ten percent of the amount of funds handled, but in no event less than $1,000, nor more than $500,000. Make sure the person responsible for obtaining/maintaining your fidelity bond knows the rules for adequate bonding.

If an operational review of your plan discloses plan qualification failures, then you should consider using the Employee Plans Compliance Resolution System (EPCRS). EPCRS is a comprehensive system of correction programs established by the IRS that enable sponsors of retirement plans that have experienced compliance violations to preserve the tax benefits of their plans.

Page Last Reviewed or Updated: 17-Oct-2013