Employee Plans Learn, Educate, Self-Correct and Enforce Project - Real Estate Investment & Participant Loans


We examined approximately 50 Form 5500 returns with:

  • net assets under $5,000,000, and
  • investments in real estate, and either
    • participant loans, or
    • Schedule D (DFE/Participating Plan Information)

Project Results:

The most common issues were:

  • Prohibited transactions
    • Approximately 24 percent of plans examined revealed prohibited transactions involving improper participant loans. Auditors secured:
      • 79 delinquent Form 5330 returns with payment of excise tax and
      • loan correction by repayment of loan principal and accumulated interest.
    • The prohibited transactions were primarily caused by not following the plan terms, including:
      • making loans that weren’t bona fide participant loans (for example, no loan document or loan payments),
      • allowing participant loans from plans which did not permit them, and
      • allowing loans from the plan to the plan sponsor or owner.
  • Plan assets not valued at fair market value
    • Approximately 24 percent of plans examined revealed plan assets not valued at fair market value.
      • Correction involved revaluing plan assets, revising account balance allocations and in some instances, making additional corrective distributions.
  • Late or Non-Amenders
    • Approximately 12 percent of plans examined did not timely amend their plans to comply with current law changes.
      • Correction involved agents securing retroactive amendments to the plan and the plan sponsor paying a sanction through Audit CAP.
  • Inadequate fidelity bonding
    • Approximately 12 percent of plans examined failed to provide adequate bonding of plan fiduciaries and persons who handle pension funds.
    • Plans with more than one participant generally must have a fidelity bond in the amount of ten percent of the trust:
      • minimum bonding = $1,000, and
      • maximum bonding = $500,000
        • the upper limit of bonding for plans that hold employer securities is increased from $500,000 to $1,000,000.
    • Correction involved the plan administrator securing the necessary bonding for plan fiduciaries.
  • Not including a taxable distribution in income
    • Three plans examined had participants who failed to include their taxable distributions in income.
    • Resolved through Form 1040 income tax adjustments.

There were other compliance issues addressed, but no specific or recurring trends. These areas of non-compliance included:

  • Minimum Funding – Money purchase plans which were not fully funded.  We secured additional funding and delinquent Form 5330 returns and excise tax.
  • Distributions (vesting) – Years of vesting service was not calculated properly, resulting in an improper vested amount distributed to terminated participants.
  • Impermissible Distributions –Improper in-service distributions were made to active participants when the plan terms did not specifically provide them.
  • Allocation errors – Not using the plan definition of compensation when allocating employer contributions and forfeitures.
  • Unrelated Business Income – Debt-financed trust investments in income producing property, which required the trust to file Form 990-T, Exempt Organization Business Income Tax Return.
  • Trust Assets – Titled in the name of an entity (such as an individual or the employer) other than the trust.

Avoiding the Error:

  • Set up operating procedures and appropriate internal controls for the plan
  • Ensure that you are aware of your specific plan terms and you are following them in the daily operations of your plan.
  • Ensure that you only make participant loans to plan participants and that you follow all plan provisions related to the loans.
  • Ensure that assets without a readily determined fair market value are valued at least annually.
  • Annual review your fidelity bonding compared to the value of trust assets.
  • Ensure that you amend your plan timely for all statutory and regulatory requirements
    • Failure to timely amend your plan can cause the plan to become non-qualified, resulting in adverse tax consequences to the plan sponsor, the trust and the participants/beneficiaries.
  • If an operational review of your plan discloses qualification failures, the Employee Plans Compliance Resolution System (EPCRS) offers a way to correct most plan errors.