EP Exam Projects - LESE Projects - Project #12- Results of Examinations for Potential IRC §402(g) Excesses in CODAS

Overview:

This specific LESE project involved examinations of Form 5500 filings of IRC §401(k) plans, where the Form 5500 filing appeared to reflect that participant contributions may have exceeded the IRC 402(g) dollar limits (i.e., limits on elective deferrals). A total of 54 Form 5500 returns were examined (which included some subsequent year pick-ups).

This project commenced in the latter part of 2008 and utilized the focused examination concept to perform our examinations. As such, the pre-identified issues required to be considered were 1) Form Qualification, 2) Code §402(g) Limits, and 3) ADP Testing. Under the focused examination concept, the scope of the examination requires the agent to determine compliance in three pre-identified areas. However, the agent has the discretion to expand their examination beyond the three pre-identified areas to any other areas based on their independent judgment as they deem warranted.

Project Results:

The majority of plans selected for this LESE project were found to be both in form and operational compliance with the law. However, for those plans where issues were discovered, the two most common issues were:

• Failure to secure adequate bonding per ERISA Act §412.
• Failure to timely amend to comply with current law and regulatory guidance.

As noted above, the 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 is met. 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. However, with respect to a plan that holds employer securities, the upper level of the amount of bonding is increased from $500,000 to $1,000,000.

The second most prevalent failure involved not timely amending the plan to comply with changes in current law and/or regulatory guidance. This failure specifically affects the qualified status of the plan, so care should be taken to ensure that timely amendments are made to ensure that the plan remains qualified. This failure was resolved during the examination process through our Audit Closing Agreement Program, which included the payment of a negotiated sanction.

Timely amending the plan includes the necessity to ensure the timely adoption of both interim and discretionary amendments, as well as for changes in law and regulatory guidance. For more information regarding this matter and for information relating to our Determination Letter Program, refer to our web page. There is also a more detail explanation of the determination letter program’s Staggered Remedial Amendment Period Revenue Procedure.

The remaining issues did not relate to any specific area. These included a spattering of other isolated failures, but no notable trends.

• Eligibility failures involving improper early participation. This error occurred due to the failure to follow plan terms, with the inclusion of a partner as a participant prior to the partner completing the plan’s eligibility requirements. The plan administrator should ensure plan terms are consistent with the operational aspect of the plan.
  
  
• Plan allocation failure - Failure to allocate the employer profit sharing discretionary contributions in accordance with per plan terms, which required the allocation to be based on the participant’s compensation to total participant compensation. Again, it is important for the plan administrator to follow then plan terms in operation.
  
  
• Deductions taken on the plan sponsors’ tax returns in excess of the deductible contributions actually made to the plans involved.  
  
  
• Excess IRC §402(g) deferrals not fully corrected prior to our audit, however; this issue occurred only once. Of particular note is that one of the primary focuses of this project were plans with potential excess IRC §402(g) deferrals (i.e., elective deferrals in excess of the statutory dollar limit), yet there was only one instance where this was even an issue.

For additional information, refer to the 401(k) Fix-It Guide. The guide helps you find, fix, and avoid 401(k) errors.

Avoiding the Error:

Discuss with your plan administrator or pension professional as to whether the plan is currently up to date with current law changes. Setting up operating procedures and appropriate internal controls for the plan is an important first step. If you need help, a benefits professional can help you set up a system that works for you and your retirement plan.

If during a self-audit or other means, you discover that your plan was not timely amended to comply with the applicable laws and/or regulatory requirements, or where an operational review of your plan discloses other qualification failures, then you should consider availing yourself of our 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.