We examined 49 Form 5500 returns where the average cash contribution per participant exceeded $135,000.
Examination agents used focused examinations and considered:
- Plan qualification - compliance with current tax law in form;
- Contribution limits; and
- Deduction limits.
The primary issue found in this project was nondeductible employer contributions, resulting in loss of deduction, as well as filing of delinquent Forms 5330 with payment of the 10% excise tax (equal to 10% of the cumulative nondeductible contributions).
Other issues included:
- Not timely amending the plan to comply with current law and regulatory changes.
- Not making required minimum distributions.
- Distributions in excess of the maximum benefit permitted by law (and plan provisions).
- Not including eligible employees as participants according to the plan terms.
- Inadequate fidelity bond.
- Errors in the actuarial calculations, including valuing assets at less than fair market value and normal cost calculation errors.
- A SEP plan improperly filed a Form 5500 and was selected for examination in this project. The plan didn’t amend timely for law changes.
Avoiding the errors:
- Talk with your plan administrator or pension professional to determine steps taken to ensure proper plan administration. Setting up operating procedures and internal controls for the plan and trust 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.
- Consider a self-audit to ensure that you are operating your plan according to its terms.
- Reconcile any deduction taken on your tax return with contributions made, verifying the amount and timing of contributions.
- Ensure that all returns related to the plan and trust operation are filed in a timely manner. For example, if you made nondeductible contributions and didn’t timely correct them, you must file Form 5330 and pay a 10% excise tax, and ensure that the excess contribution isn’t deducted on your income tax return.
If you discover that your plan wasn‘t operated in accordance with its terms or with the law, then consider correcting the errors under our Employee Plans Compliance Resolution System.