Employee Plans Learn, Educate, Self-Correct and Enforce Project - Defaulted Loans and/or Leases

 

We examined 69 Form 5500 returns with loans, fixed income obligations or leases in default or classified as uncollectible during the plan year.

The most common issues were:

Agents secured Form 5330 returns with excise tax and correction through repayment of loan principal and accumulated interest in 12% of the plans.

  • Failure to include taxable distribution in income:
    • About 6% of plans examined had participants who didn’t properly include their taxable distributions in income.
    • Agents secured Form 1040 income tax adjustments.
       
  • Inadequate or insufficient fidelity bond:
    • About 6% of plans examined failed to provide adequate bonding of plan fiduciaries, as required by ERISA Section 412.
       
  • Plan investments not properly diversified:
    • About 6% of plans examined had imprudent investments and failed to diversify investments.
       
  • Plan assets not valued at fair market value:
    • About 4% of plans examined failed to properly value assets at fair market value.
    • Correction involved revaluing plan assets and revising account balances.
       
  • Late deposit of employee deferrals:
    • About 4% of plans examined failed to deposit employee deferrals in a timely manner.
    • Correction involved making additional contributions for lost interest.

Other issues disclosed during the project included:

  • not timely amending the plan for law changes
  • not following the plan terms
  • eligibility errors, including failures to cover re-hired employee(s) timely
  • top-heavy Errors, including failure to provide the minimum top-heavy contribution
  • not making timely lump sum cash-out distributions to terminated participants
  • elective deferrals in excess of plan limits
  • trust assets not titled in the name of the trust

Avoiding the Errors:

Talk with your plan administrator or pension professional to determine if your plan is currently up to date with law changes. Setting up operating procedures and appropriate internal controls for the plan is an important first step. If you need help, a benefits professional can help you set up a system that works for you and your retirement plan.

Conduct a self-audit of your retirement plan. If you discover that your plan was not operating in accordance with written plan provisions or the laws and regulatory requirements, then consider correcting errors under our Employee Plans Compliance Resolution System.