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EP Exam Projects - Risk Assessment Program - Results of Exams of Form 5500 Profit Sharing Plans With Sponsors From the Finance & Insurance Industry

Overview:

This is a summary of the examinations completed in the market segment made up of Profit Sharing Plans sponsored by the Finance & Insurance Industry. As of May, 2010 we had examined over 500 Form 5500 filings.

Project Results:

The results indicated that there was a high degree of Noncompliance within the examinations closed to date in this segment. There are two key areas to discuss in this article, business code analysis and the issues found. Each Industry (i.e., Finance & Insurance has business codes based on the North American Industry Classification System (NAICS). The Finance & Insurance Industry is made up of 27 business codes.  Approximately 84% of this segment’s universe have plan sponsor’s who use just 10 of the 27 business codes. We found substantial data in our examinations that plans with sponsors using all the business codes from this segment had a high degree of Noncompliance but especially those representing “Commercial Banking”, “Security Brokerages”, “Other Financial Investment Activities”, and “Other Insurance Related Activities”.

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.

Avoid the error by ensuring the person responsible for obtaining/maintaining your Fidelity Bond knows the rules for adequate bonding. Plan fiduciaries and persons who handle pension funds are required by Title I of ERISA to be bonded 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.

The second most prevalent failure involves contribution allocation errors. This occurs when the plan sponsor fails to make the amount of contribution required by the formula in the plan document (i.e., 10% of participant’s compensation). This could be for one participant or many participants. Administrative errors (not deposited timely) or oversights (wrong participant compensation used) are the general causes for failure.

Avoid the error Profit Sharing plans can have multiple types of contributions allocated to the plan. Most of these plans have employer discretionary contributions allocated based on a specific formula. There could also be employee after tax (voluntary) contributions. The best way to avoid allocation problems is too make sure all the people responsible for the allocations know the correct and most current allocation formulas and forfeiture allocation provisions. Finally, they must know the correct and most current definition of compensation used in the plan and in the operation of the plan.

The third most common failure involves participation/coverage. Participation errors (See Internal Revenue Code 410(a)) occur when a plan does not bring an employee into the plan when the plan document states they should, or brings an employee into the plan contrary to the plan document (i.e., Plan states a participant enters the plan after completing a year of service). 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).

Avoid the error Poor recordkeeping and lack of knowledge are the two most common errors. Participation data includes an employee’s date of hire, the amount of service completed from the date of hire, and possibly the age of the employee. Errors occur when plan administrators do not maintain records properly. The best way to avoid participation problems is too make sure all the people responsible for administering plan participation know the correct and most current eligibility provisions in the plan.

In order to make sure your plan does not have errors in coverage it is essential that whoever is responsible for administering such has an in depth knowledge of Internal Revenue Code Section 410(b) as this contains the coverage requirements every plan must meet. It is important to ensure the plan meets these requirements.

The fourth most prevalent failure involves vesting. A vesting error can occur when a plan does not count a participant’s vesting service correctly as per the plan document, and/or incorrectly applied the plan’s vesting percentage schedule. Errors in vesting can result in the participant receiving less of their pension benefits.

Avoid the error Poor recordkeeping and lack of knowledge are the two most common errors. In some plans a participant becomes 100% vested as soon as they enter the plan. For the majority of plans, vesting percentage is based on an employee’s years of vesting service as defined by the plan document. Depending on the number of years of vesting service completed, a participant is entitled to a certain vesting percentage as defined in the vesting schedule in the plan document. If errors are made in the years of service or the wrong schedule is used a participant could receive the wrong amount of their pension benefits. The best way to avoid these problems is too make sure all the people responsible for administering the plan’s vesting know the correct and most current vesting provisions in the plan.

The fifth and final most common 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.

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.

Avoid 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.  Administrative problems cause a high percentage of pension plan errors. Many times there is a communication breakdown between attorneys, accountants, trustees, and employees helping administer the plan that can cause mistakes to be made. 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.

Page Last Reviewed or Updated: 25-Sep-2014