Employee Plans Learn, Educate, Self-Correct and Enforce Project - Small Plans with Participant Loans
We examined approximately 50 Form 5500 returns with:
- 10 or fewer participants, and
- participant loans exceeding $100,000.
Project Results:
The most common issues were:
- Prohibited transactions
- Approximately one-third of the audits revealed prohibited transactions involving improper loans. Auditors secured:
- 47 delinquent Form 5330 returns with payment of excise tax,
- loan correction by repayment of loan principal and accumulated interest, and
- adjustments to the borrower’s Form 1040, including the taxable portion of loan.
- The prohibited transactions were primarily caused by not following the plan terms, including:
- not limiting loans to the stated dollar limit,
- not providing adequate security,
- making loans that weren’t bona fide participant loans (for example, no loan document or loan payments), and
- allowing participant loans from plans which did not permit them.
- Approximately one-third of the audits revealed prohibited transactions involving improper loans. Auditors secured:
- Not amending the plan for current law
- Approximately 14% of the plans reviewed were not timely amended to comply with current law changes. Auditors secured:
- the necessary amendments to the plans, and
- closing agreements and sanctions.
- Approximately 14% of the plans reviewed were not timely amended to comply with current law changes. Auditors secured:
- Not having adequate fidelity bonding
- Plans with more than one participant generally must have a fidelity bond in the amount of ten percent of the trust:
- minimum bonding = $1,000, and
- maximum bonding = $500,000
- Correction involved the plan administrator securing the necessary bonding for plan fiduciaries.
- Plans with more than one participant generally must have a fidelity bond in the amount of ten percent of the trust:
Our LESE projects involve retirement plan examinations that are small and quick projects with returns selected using judgment sampling.
Avoiding the Error:
- Talk with your plan administrator or pension professional to determine if you are administering the plan according to the document’s terms and following your loan policy properly.
- Not adhering to plan terms and statutory requirements can result in both income and excise taxes.
- Not complying with the loan requirements can cause the loan to become a prohibited transaction, resulting in excise tax and requiring correction.
- Exceeding the loan limits and not making timely loan payments can result in taxable income to the participant.
- Ensure that you are aware of your specific plan terms and you are following them in the daily operations of your plan.
- Ensure that you amend your plan timely for all statutory and regulatory requirements
- Failure to timely amend your plan can cause the plan to become non-qualified, resulting in adverse tax consequences to the plan sponsor, the trust and the participants/beneficiaries.
- If an operational review of your plan discloses qualification failures, the Employee Plans Compliance Resolution System (EPCRS) offers a way to correct most plan errors.
Page Last Reviewed or Updated: 2013-05-01
