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EP Examination Projects - Risk Assessment Program - Results of Examinations of Form 5500 401(k) Plans With Sponsors from the Wholesale Industry


This is a summary of the examinations completed in the market segment made up of 401k Plans sponsored by the Wholesale Industry. As of September, 2009 we had examined over 1,500 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., Wholesale) has business codes based on the North American Industry Classification System (NAICS). The Wholesale Industry is made up of approximately 29 business codes. Almost 88% of this segment’s universe have plan sponsor’s who use just 15 of the 29 business codes. We found substantial data in our examinations that plans whose plan sponsors used these 15 codes had a high degree of noncompliance. As a result 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 involves errors in the ADP/ACP testing and in the payment of the 401k deferrals.

Avoid the error by making sure all the people responsible for running the tests are knowledgeable in the law (Internal Revenue Code 401(k)/m)). This includes knowing the employee contribution amounts and compensation to use in applying the tests.

Another very common problem involves 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. This issue made up 19% of the issues found.

Avoid the error by ensuring the person responsible for obtaining/maintaining your Fidelity Bond knows the rules for adequate bonding. The law requires (Title I of ERISA) plan fiduciaries and persons who handle pension funds 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 next 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 ensure that someone makes the 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 by discussing with your plan administrator or pension professional the plan status and ensure 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. Mistakes usually occur because there is a communication breakdown between attorneys, accountants, trustees, and employees helping to administer the plan. If you need help, a benefits professional can help you set up a system that works for you and your retirement plan.

The last 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 401k plans can have multiple types of contributions being allocated to the plan. In addition to tax-deferred contributions, there could be employee after tax contributions, employer matching contributions, and employer discretionary contributions. The best way to avoid allocation problems is too ensure all people responsible for the allocations know the correct and most current allocation formulas. They must also know the plan language requires allocation of forfeitures to participants, and if so the allocation formula. Finally, they must know the correct and most current plan definition of compensation and if the plan operation definition are consistent.

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