Employee Plans Learn, Educate, Self-Correct and Enforce Project - Small Plans with Participant Loans


We examined approximately 50 Form 5500 returns with:

Project Results:

The most common issues were:

  • Prohibited transactions
    • Approximately one-third of the audits revealed prohibited transactions involving improper loans. Auditors secured:
      • 47 delinquent Form 5330PDF returns with payment of excise tax,
      • loan correction by repayment of loan principal and accumulated interest, and
      • adjustments to the borrower’s Form 1040, including the taxable portion of loan.
    • The prohibited transactions were primarily caused by not following the plan terms, including:
      • not limiting loans to the stated dollar limit,
      • not providing adequate security,
      • making loans that weren’t bona fide participant loans (for example, no loan document or loan payments), and
      • allowing participant loans from plans which did not permit them.
  • Not amending the plan for current law
    • Approximately 14% of the plans reviewed were not timely amended to comply with current law changes. Auditors secured:
  • Not having adequate fidelity bonding
    • 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
    • Correction involved the plan administrator securing the necessary bonding for plan fiduciaries.

Our LESE projects involve retirement plan examinations that are small and quick projects with returns selected using judgment sampling.

Avoiding the Error:

  • Talk with your plan administrator or pension professional to determine if you are administering the plan according to the document’s terms and following your loan policy properly.
    • Not adhering to plan terms and statutory requirements can result in both income and excise taxes.
    • Not complying with the loan requirements can cause the loan to become a prohibited transaction, resulting in excise tax and requiring correction.
    • Exceeding the loan limits and not making timely loan payments can result in taxable income to the participant.
  • 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 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.