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.
