We examined 47 Form 5500 returns to obtain a snapshot view of qualified plans where the Form 5500 reflected that the plan had terminated, yet the IRS had no record that a Form 5310, Application for Determination Upon Termination, had been submitted.
A plan sponsor isn’t required to submit a Form 5310 to the IRS to rule on a plan’s termination. However, a favorable determination letter upon plan termination from the IRS gives reliance that the plan document is qualified in form at the time of plan termination.
Examination agents used focused examinations and considered:
- Plan qualification - compliance with current tax law in form;
- Distributions; and either:
- Plan assets if the plan was a defined contribution plan, or
- Minimum funding requirements if the plan was a defined benefit plan.
Overall, the terminating plans reviewed were generally in compliance. However, there were some plans that failed to comply with reporting, form or operational requirements.
The most common issues were:
- Not filing the final Form 5500, which you must continue to file until all plan assets are distributed. The return should indicate “final return” only in the year that the final assets are paid.
The failure to file Form 5500 could lead to the following penalties:
- $25 a day (up to $15,000) for not filing returns for qualified plans by the due date.
- $1,000 for not filing the actuarial statement (Schedule MB or SB) for defined benefit plans.
DOL has a Delinquent Filer Voluntary Compliance Program, which permits plan administrators to pay reduced penalties for voluntarily complying with their annual reporting requirements. IRS will generally accept delinquent Form 5500 filings without applying separate penalties if a plan sponsor utilizes the DFVCP.
- Failure to timely amend plans to comply with current law and regulatory changes
- Inadequate bonding
Some other issues that were less common include:
- Failure to include taxable distributions into income.
- Allocation errors relating to required employer contributions under a safe harbor 401(k) plan and discretionary employer contributions.
- Trusts that continued to hold plan assets within a “wasting trust,” without an employer sponsoring the plan. A qualified plan must be established and maintained by an employer. If the sponsoring employer dissolves, then the plan must be terminated and all assets distributed to participants.
- Not filing Forms 1099-R when making plan distributions. Significant penalties apply for each failure to file a Form 1099-R - see the Form 1099-R instructions (PDF).
- Not withholding tax on distributions. Generally, plans are required to withhold 20% federal income tax upon payment of a distribution directly to a participant.
- Not timely depositing employee elective deferrals.
Avoiding the error
Talk with your plan administrator or pension professional to determine if your plan is up to date with the law.
Operate the plan according to its written terms.
Set up operating procedures and internal controls for the plan. 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 wasn’t operated according to its terms or with the law, then consider correcting the errors under our Employee Plans Compliance Resolution System.