We reviewed 50 Form 5500 returns of non-ESOP qualified plans with reported investments in non-participant loans.
We used focused examinations and reviewed:
- Plan qualification - compliance with current tax law in form;
- Trust investments (including the analysis of any plan loans); and
The results of this project reflected a substantial amount of non-compliance.
The most common issues encountered were:
- Prohibited transactions (in six plans) involving loans to disqualified persons.
- Seven plans examined contained operational failures dealing with employees not participating timely. All errors occurred because of the failure to follow plan terms.
- Rehired employees – failure to timely cover re-hired employees
- Part-time employees – must be allowed to participate once they have satisfied the plan eligibility requirements – employees can’t be excluded merely because they are employed on a part-time basis
- Improper early participation – employees can’t enter the plan earlier than the plan terms allow
- Ineligible employee – employees can’t participate if they weren’t eligible in accordance with plan terms
- Inadequate or insufficient bonding in six plans.
ERISA section 412 generally requires plans with more than one participant to have a fidelity bond in the amount of:
- ten percent of the trust:
- minimum bonding = $1,000
- maximum bonding = $500,000
- ten percent of the trust:
- Late or nonamenders in five plans.
- Plans must timely adopt interim and discretionary amendments, as well as amend for changes in the law and regulatory guidance. Failure to timely amend the plan affects the qualified status of the plan.
Other issues included:
- ADP and/or ACP testing errors
- Errors in allocation of employer contributions and forfeitures
- Failure to make the proper minimum funding contributions in a money purchase pension plan
- Impermissible in-service distributions in money purchase plans
- Failure to include a taxable distribution in income
- Unrelated business income
- Failure to title trust assets in the name of the trust
- Continuing a plan without an existing sponsoring employer
- Failure to file Form 1099-R for trust distributions
- Failure to follow plan provisions by not making an automatic contribution to all eligible participants, in particular those who failed to make a deferral election
Avoiding the Error:
Talk to your plan administrator or pension professional to determine if your plan is up to date with current law. The plan and trust must be operated according to its terms. Setting up operating procedures and 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.
If you discover that your plan was not operating according to its written provisions or with laws, then you should correct the mistakes using our Employee Plans Compliance Resolution System.