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EP Examination Projects - Risk Assessment Program - Results of Examinations of Form 5500 Profit Sharing Plans With Sponsors from the Wholesale Industry


This is a summary of the examinations completed in the market segment made up of Profit Sharing Plans sponsored by the Wholesale Industry. As of March, 2012 we had examined over 1,700 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 Trade) is made up of business codes based on the North American Industry Classification System (NAICS). The Wholesale Industry is made up of approximately 29 business codes. Almost 74% of this segment’s universe is made up of plans whose plan sponsors come from only 11 of the 29 business codes. We found substantial data in our examinations that plans with sponsors using these 11 business 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 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.

The 2nd most prevalent failure involves contribution allocation errors. This occurs when the plan sponsor fails to make the amount of contribution required by the formula in the plan document (i.e., 10% of participant’s compensation). This could be for one participant or many participants. Administrative errors (not deposited timely) or oversight (wrong participant compensation used) are the general causes for failure.

The 3rd most common failure involves Participation/Coverage. Participation errors (See Internal Revenue Code Section 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).

The 4th most widespread 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 care should be taken to ensure that timely amendments are made 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.

Avoiding the Error:

Fidelity Bonds:

Make sure 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.

Contribution Allocations:

Profit Sharing plans can have multiple types of contributions being allocated to the plan. Most of these plans have employer discretionary contributions which are allocated 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 must also know whether or not forfeitures are allocated to participants, and if so what is the allocation formula. Finally, they must know the correct and most current definition of compensation being used in the formulas and assure it is used in the calculations.


Errors involving Participation/Coverage can be caused by a number of things. Poor recordkeeping and/or lack of knowledge regarding such are the 2 most common errors. Participation is generally based on an employee’s date of hire, the amount of service completed from the date of hire, and possibly the age of the employee. If records are not maintained properly errors will occur. Here again 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.

In order to make sure your plan does not have errors in Coverage it is essential that whoever is responsible for administering such has an in depth knowledge of Internal Revenue Code Section 410(b) as this contains the coverage requirements every plan must meet. As part of this they must also know exactly who is in the plan and who is not.

Not timely amending plan:

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: 19-Sep-2016