Employee Plans Learn, Educate, Self-Correct and Enforce Project - Real Estate Investment & Participant Loans

We examined approximately 50 Form 5500 returns with:

• net assets under $5,000,000, and
• investments in real estate, and either
  • participant loans, or
  • Schedule D (DFE/Participating Plan Information)
    

Project Results:

The most common issues were:

• Prohibited transactions
  • Approximately 24 percent of plans examined revealed prohibited transactions involving improper participant loans. Auditors secured:
    • 79 delinquent Form 5330 returns with payment of excise tax and
    • loan correction by repayment of loan principal and accumulated interest.
      
      
  • The prohibited transactions were primarily caused by not following the plan terms, including:
    • making loans that weren’t bona fide participant loans (for example, no loan document or loan payments),
    • allowing participant loans from plans which did not permit them, and
    • allowing loans from the plan to the plan sponsor or owner.
      
      
• Plan assets not valued at fair market value
  • Approximately 24 percent of plans examined revealed plan assets not valued at fair market value.
    • Correction involved revaluing plan assets, revising account balance allocations and in some instances, making additional corrective distributions.
      
      
• Late or Non-Amenders
  • Approximately 12 percent of plans examined did not timely amend their plans to comply with current law changes.
    • Correction involved agents securing retroactive amendments to the plan and the plan sponsor paying a sanction through Audit CAP.
      
      
• Inadequate fidelity bonding
  • Approximately 12 percent of plans examined failed to provide adequate bonding of plan fiduciaries and persons who handle pension funds.
  • 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
      • the upper limit of bonding for plans that hold employer securities is increased from $500,000 to $1,000,000.
        
        
  • Correction involved the plan administrator securing the necessary bonding for plan fiduciaries.
    
    
• Not including a taxable distribution in income
  • Three plans examined had participants who failed to include their taxable distributions in income.
  • Resolved through Form 1040 income tax adjustments.

There were other compliance issues addressed, but no specific or recurring trends.  These areas of non-compliance included:

• Minimum Funding – Money purchase plans which were not fully funded.  We secured additional funding and delinquent Form 5330 returns and excise tax.
• Distributions (vesting) – Years of vesting service was not calculated properly, resulting in an improper vested amount distributed to terminated participants.
• Impermissible Distributions –Improper in-service distributions were made to active participants when the plan terms did not specifically provide them.
• Allocation errors – Not using the plan definition of compensation when allocating employer contributions and forfeitures.
• Unrelated Business Income – Debt-financed trust investments in income producing property, which required the trust to file Form 990-T, Exempt Organization Business Income Tax Return.
• Trust Assets – Titled in the name of an entity (such as an individual or the employer) other than the trust.

Avoiding the Error:

• Set up operating procedures and appropriate internal controls for the plan
• 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 only make participant loans to plan participants and that you follow all plan provisions related to the loans.
• Ensure that assets without a readily determined fair market value are valued at least annually.
• Annual review your fidelity bonding compared to the value of trust assets.
• 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.