401(k) Money Purchase Pension Plans - Summary
The Employee Plans Compliance Unit (EPCU) 401(k) Money Purchase Pension Plans project began in July 2011 and ended in May 2012. Compliance contact letters were sent to over 700 plan sponsors that filed an annual return (Form 5500, Form 5500-SF, or Form 5500-EZ) showing they were a money purchase pension plan with a 401(k) feature after the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. Money purchase pension plans were no longer allowed to have a 401(k) feature after ERISA unless they were grandfathered as part of an already existing plan arrangement.
Sponsors were asked to answer questions about their plan to determine if they had mistakenly adopted a money purchase pension plan with a 401(k) feature after ERISA, and if so, to obtain correction. The project goals were met, and focus points for Employee Plans (EP) were identified including recommendations to enhance compliance.
The responses showed that only 1 plan sponsor in the sample had adopted a money purchase pension plan with a 401(k) feature after ERISA by incorrectly adding a 401(k) feature to an already existing money purchase pension plan. Once brought to their attention, the sponsor applied to EPCU to correct their plan error. As opposed to an examination, errors discovered during the compliance check process may still be voluntarily corrected or self corrected through EPCRS because the plan is not considered to be under examination.
Instead, mostly all the sponsors had merged a money purchase pension plan into a 401(k) profit sharing plan due to changes in the deductibility rules for defined contribution plans beginning in 2002. These changes allowed a sponsor to contribute and deduct in a single plan what previously could only be contributed and deducted in 2 separate plans. Rather than maintaining both a money purchase pension plan and a 401(k) profit sharing plan, sponsors adopted or continued a 401(k) profit sharing plan, discontinued the separate money purchase pension plan, and transferred it’s assets into the 401(k) profit sharing plan.
After the merger, sponsors continued to report they were both a money purchase pension plan and a 401(k) profit sharing plan on their Forms 5500 due to the special quality of the merged assets. For example, joint and survivor rules continue to apply to the money purchase pension assets even when they are merged into a 401(k) profit sharing plan.
Some sponsors in the sample indicated that their plans were money purchase pension plans or 401(k) plans, but were not defined contribution plans. Since both money purchase pension plans and 401(k) plans are types of defined contribution plans, there appeared to be some confusion on plan types. A minority of sponsors responded that their plans were only money purchase pension plans and not 401(k) plans, or 401(k) plans and not money purchase pension plans. These types of preventable errors result from sponsors selecting the wrong pension feature codes on their Forms 5500. Finally, a few potentially noncompliant situations which required review of the plan sponsor’s books and records were referred for examination.
The project was designed to determine if money purchase pension plans with a 401(k) feature created after 1974 (post-ERISA), met the grandfathering requirements of IRC section 401(k)(1). Only a pre-ERISA money purchase pension plan can contain a qualified cash or deferred arrangement (CODA) or 401(k) feature.
The plans in the sample were identified by the plan sponsor as having both money purchase and 401(k) components on the annual Form 5500 Return. The Form 5500 series, which includes Form 5500, Annual Return/Report of Employee Benefit Plan, Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan and Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, is the annual information report used by EP to monitor compliance by pension plans.
The results from this project will enable EP to develop further tools, guidance and enforcement efforts. If plan sponsors are not in compliance with their annual information reporting and plan qualification requirements, then the potential exists for discrimination in favor of highly compensated employees (HCEs), prohibited transactions and abusive tax avoidance.
The Project goals were to determine whether the plan was:
- in existence before ERISA was enacted;
- a defined contribution plan;
- a money purchase pension plan;
- a 401(k) plan (had a cash or deferred arrangement).
The EPCU reviewed and analyzed the compliance check responses to determine if the employers in the sample had made mistakes in reporting that their plans were a post-ERISA money purchase pension plan with a 401(k) feature.