Top ten issues identified during audits.
1. Errors made in benefit calculations, crediting service, reduction factors, general administration
Errors are made when participant benefits are calculated. The following reasons for these mistakes have been identified:
benefit provisions in the plan are misapplied
applicable law is not understood
faulty participant data is used and/or provided (by employer and/or union)
combinations of above
Administrators should take greater care when considering the applicable plan provisions, law changes, and the accuracy of participant data when determining benefits.
2. Internal Revenue Code Section 412 violation - funding deficiency
Plans subject to Internal Revenue Code Section 412 minimum funding requirements are failing to receive contributions necessary to satisfy this code section. In addition, participating employers responsible for the excise taxes that result are not filing the appropriate excise tax return (Forms 5330) and/or paying the tax.
Administrators should actively pursue the collection of delinquent employer contributions and inform any employer who has failed to satisfy its section 412 obligation of the requirement to file Form 5330 with the Service and pay the appropriate excise tax.
3. Plan did not make required actuarial adjustments for benefit payments beginning after Normal Retirement Date
The required actuarial adjustments or interest adjusted back payments are not being paid to participants whose retirement benefits first commence after the Normal Retirement Date as stipulated in the plan. This issue tends to be more prevalent when plans have normal retirement ages that are less than 65 because many participants are unaware of their eligibility to receive these benefits at this earlier age and thus fail to apply for their benefits.
Administrators should ensure that all missed payments due to the delayed commencement of benefits are restored and that these payments are increased by the appropriate interest factor.
4. Deficient Plan Language and/or Conflict between Plan Document and Other Agreements (Collectively Bargained, Joinder, Participation)
This involves situations where the language in the plan document is not specific as to its terms, or the language does not meet Internal Revenue Code Section 401(a). It also includes situations where the Plan Document does not agree with the language in Other Written Agreements. For example, the benefit formula in the plan is not the same as the one in the Collectively Bargained Agreement, or the eligibility provisions in the plan do not agree with those in a participation agreement.
Administrators should first ensure the plan document meets the requirements of Internal Revenue Code Section 401(a) and that the document is specific as to its terms. Administrators should also make sure that the terms in the plan document agree with all Other Written Agreements, especially when changes are made to these Other Agreements.
5. Internal Revenue Code Section 401(a)(9) violation (required minimum distributions)
Because administrators typically rely on participants to apply for benefits before addressing such issues, the required minimum distribution requirements of Internal Revenue Code 401(a)(9) are not being met. Specifically many plans have failed to make required distributions to participants by the first of April following the later of the year he/she turns 70 ½ or the calendar year in which they retire. In addition when participants die the rules governing the timing of such distributions to their beneficiaries are not being followed.
Plan administrators should be more proactive with respect to monitoring the section 401(a)(9) requirements.
6. Plan fails to follow or does not have a participation agreement for each participating employers
This normally involves non-collectively bargained employees working for union and/or trust fund who are participating in the plan yet did not have an agreement signed or the agreement in place is not followed. These agreements can be in the form of a side agreement, contained within the CBA or provided for within the plan itself. The failure to properly define the plan’s eligibility and participation requirements may result in its failing to constitute a definite written program under the law.
Administrators should ensure that prior to admitting a non-collectively bargained employee to the plan, adequate language addressing the eligibility requirements and benefit structure pertaining to such employee is formally adopted.
7. Accruals/service credit is dependent on employer contributions being made
Plans are failing to meet the definitely determinable benefit rules of I.T. Reg. 1.401-1(b)(1)(i). Plans are failing this requirement in form and in operation. The situation that usually results in such a violation is when the plan requires payment from the participating employer prior to crediting a participant for covered service associated with that employer contribution.
Administrators should ensure that the crediting of participant accruals and service is not dependent on the receipt of related employer contributions.
8. Internal Revenue Code Section 411 violations including cash out/forfeitures from lost participants, wrong vesting schedule used, and error in vesting percentages
Every plan is required to have provisions regarding how participants are vested in their benefits. Normally, the percentage a participant is vested is dependent on their credited service. If employers and/or union do not track a participant’s service correctly, the vesting percentage could be incorrect.
Errors that have been sited include the following:
erroneous cash outs and forfeitures
wrong vesting schedules being used
errors when calculating a participant’s vesting percentage
suspension of benefit issues including Heinz type violations
Greater care should be applied to the vesting provisions contained in the plan document and legal changes to Internal Revenue Code section 411.
9. Delinquent/late contributions
Plans subject to Internal Revenue Code Section 412 minimum funding requirements are failing to receive contributions by certain dates necessary to satisfy this code section. When the plan receives these contributions late, there are consequences which can include excise taxes being assessed, and/or deductions being disallowed on the employer’s tax return.
Administrators should advise all employers making contributions to the plan to make them timely per section 412. This may be difficult as not all the employers involved in a plan may have the same tax year nor the same method of accounting. If contributions are not timely per section 412, employers should be advised to file Form 5330 with the Service, and pay the appropriate excise tax due.
10. Misuse/Diversion of Pension Funds
This involves situations where the plan’s assets are used for purposes other than the benefit of plan participants or the trust. Errors that have been noted include the following:
plan trustee is using trust assets for personal use
plan loans money to a trustee using an interest rate that is less than the Fair Market rate
trust sells an asset to a “disqualified person” for less than Fair Market Value
failure to properly allocate expenses between different trusts
improper transfer of assets between related trusts
embezzlement of trust assets
Administrators should make sure that the trust assets are used for the exclusive benefit of plan participants.