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EP Exam Projects - Risk Assessment Program - Results of Exams of Form 5500 Money Purchase Plans With Sponsors From the Finance & Insurance Industry


This is a summary of the examinations completed in the market segment made up of Money Purchase Plans sponsored by the Finance & Insurance Industry. As of September, 2009 we had examined over 600 Form 5500 filings.

Project Results:

The results indicated that there was a high degree of Noncompliance within this segment. There are two key areas to discuss in this article, business code analysis and the issues found. Each Industry (i.e., Finance & Insurance) has business codes based on the North American Industry Classification System (NAICS). The Finance & Insurance Industry is made up of 27 business codes. About 82% of this segment’s universe have plan sponsor’s who use just 6 of the 27 business codes. We found substantial data in our examinations that plans whose sponsors used these six business codes all had a high degree of Noncompliance. Because of our analysis, it would appear that the Noncompliance is not limited to any specific business code within this market segment.

The most common failure involved inadequate bonding of plan fiduciaries and persons who handle pension funds, as required by Title I of ERISA, unless one of the limited exceptions is met. The amount of bonding should not be less than ten percent of the amount of funds handled, but in no event less than $1,000, nor more than $500,000.

Avoid the error by ensuring the person responsible for obtaining/maintaining your Fidelity Bond knows the rules for adequate bonding. Plan fiduciaries and persons who handle pension funds are required by Title I of ERISA to be bonded unless one of the limited exceptions is met. The amount of bonding should not be less than ten percent of the amount of funds handled, but in no event less than $1,000, nor more than $500,000.

The second most common failure involved Minimum Funding. Employers who sponsor Money Purchase Plans are required to make (or fund) contributions to or under the plan for the plan year which are required under the terms of the plan document. A failure here causes a funding deficiency that is initially subject to an Excise Tax equal to 10% of the deficiency. If not corrected, it can be subject to an Excise Tax equal to 100% of the deficiency.

Avoid the error by assuring the parties responsible for calculating the amount of contributions, as well as those making the payment of the contributions know when they should contribute. Review the plan to determine if it requires the forfeitures reduce the overall amount of the sponsoring employer required contributions. Generally, the payments are due 8 & ½ months after the end of the plan year.

The third most prevalent failure involves contribution allocation errors. This occurs when there is a failure to make the contribution required by the plan document formula (i.e., 10% of participant’s compensation). This could be for one participant or many participants. Reasons include an administrative error (not deposited timely) or due to negligence or oversight (wrong participant compensation used).

Avoid the error by knowing money purchase plans can have multiple types of contributions. All of these plans allocate employer contributions based on a specific formula. There could also be employee after tax (voluntary) contributions. The best way to avoid allocation problems is too make sure all the people responsible for the allocations know the correct and most current allocation formulas. They should also know the most current plan definition of compensation and ensure the plan operation uses the same definition. Finally, they must also know how forfeiture plan language reads and ensure it is consistent in operation.

The fourth most common failure involves participation/coverage. Participation errors (See Internal Revenue Code 410(a)) occur when a plan does not bring an employee into the plan when the plan document states they should, or brings an employee into the plan contrary to the plan document (i.e., plan states a participant enters the plan after completing a year of service). Coverage errors occur when the plan does not “cover” (meaning they are a participant) a certain amount of employees as required by Internal Revenue Code Section 410(b).

Avoid the error The two most common errors are poor recordkeeping and lack of knowledge. Participation factors include an employee’s date of hire, the amount of service completed from the date of hire, and possibly the age of the employee. Records not properly maintained equate to plan errors. The best way to avoid participation problems is too make sure all the people responsible for administering plan participation know the correct and most current eligibility provisions in the plan.

The final most common failure involved not timely amending the plan to comply with changes in current law and/or regulatory guidance. This failure specifically affects the qualified status of the plan, so take care to make certain administrators make timely amendments to ensure that the plan remains qualified.

Timely amending the plan includes the necessity to ensure the timely adoption of both interim and discretionary amendments, as well as for changes in law and regulatory guidance.

Avoid the error Discuss with your plan administrator or pension professional as to whether the plan is currently up to date with current law changes. Setting up operating procedures and appropriate internal controls for the plan is an important first step. Administrative problems cause a high percentage of pension plan errors. Many times there is a communication breakdown between attorneys, accountants, trustees, and employees helping administer the plan that can cause mistakes to be made. If you need help, a benefits professional can help you set up a system that works for you and your retirement plan.

If during a self-audit or other means, you discover that your plan was not timely amended to comply with the applicable laws and/or regulatory requirements, or where an operational review of your plan discloses other qualification failures, then you should consider availing yourself of our Employee Plans Compliance Resolution System (EPCRS). EPCRS is a comprehensive system of correction programs established by the IRS that enable sponsors of retirement plans that have experienced compliance violations to preserve the tax benefits of their plans.

Page Last Reviewed or Updated: 21-Sep-2016