Risk Assessment Program - Results of Examinations of Form 5500 Money Purchase Plans With Sponsors from the Wholesale Industry
This is a summary of the examinations completed in the market segment made up of Money Purchase Plans sponsored by the Wholesale Industry. As of January, 2011 we had examined over 790 Form 5500 filings.
The results indicated that there was a high degree of Noncompliance within this segment.
There are two key areas to discuss in this article, plan sponsor business code analysis and the issues found. Each Industry (i.e., Wholesale) has business codes based on the North American Industry Classification System (NAICS). The Wholesale Industry is made up of 29 business codes. Approximately 86% of this segment’s plan sponsor’s business codes come from 16 of the 29 business codes. Based on our analysis it would appear that the Noncompliance is especially high in returns whose sponsors use the following business codes:
|Business Code||Business Code Name|
|423100||Motor Vehicles & Motor Vehicles Parts|
|423300||Lumber & Other Construction Materials|
|423400||Professional & Commercial Equipment|
|423600||Electrical & Electronic Supplies|
|423700||Hardware & Plumbing & Heating Equipment|
|423800||Machinery Equipment Supplies|
|423910||Sporting & Recreational Goods & Supplies|
|423940||Jewelry Watch Precious Stones & Precious Metals|
|423990||Other Miscellaneous Durables|
|424300||Apparel Piece Goods & Notions|
|424400||Grocery & Related Products|
|424500||Farm Product Raw Material|
|424600||Chemical & Allied Products|
|424700||Petroleum & Petroleum Products|
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 making sure 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 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 here causes 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.
Avoid the error by assuring the parties responsible for calculating the amount of contributions, as well as those making the payment of the contributions know when they should contribute. Review the plan to determine if it requires the forfeitures reduce the overall amount of the sponsoring employer required contributions. Generally, the payments are due 8 & ½ months after the end of the plan year.
The third most prevalent failure involves contribution allocation errors. This occurs when there is a failure to make the contribution required by the plan document formula (i.e., 10% of participant’s compensation). This could be for one participant or many participants. Reasons include an administrative error (not deposited timely) or due to negligence or oversight (wrong participant compensation used).
Avoid the error by knowing money purchase plans can have multiple types of contributions. All of these plans allocate employer contributions 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. They should also know the most current plan definition of compensation and ensure the plan operation uses the same definition. Finally, they must also know how forfeiture plan language reads and ensure it is consistent in operation.
The last 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 by discussing with your plan administrator or pension professional the plan status and ensure 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.