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Risk Assessment Program - Results of Examinations of Form 5500 401(k) Plans with sponsors from the Mining Industry


In FY 2001, at the request of the Commissioner of the IRS, each of the business units of the IRS was directed to create a Risk Assessment of their entire Customer population. This assessment was to be designed to be able to provide compliance information on this population by breaking it into market segments. The format of the assessment and the creation of the market segments were basically left up to each business unit’s discretion. The goal of this program for Employee Plans Examination Division was to be able to identify the baseline compliance level of each new market segment, which had never been done before. Once this was done, we would be able to direct our resources toward the segments which we found to be noncompliant. The Program was designed to improve the voluntary compliance of all sponsors who maintain qualified retirement plans.

This is a summary of the examinations completed in the market segment made up of 401(k) Plans sponsored by the Mining Industry. Returns with plan sponsors from the Mining Industry make up just ½ of 1% of the entire pension universe. As of February, 2012 we had examined 228 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, plan sponsor business code analysis and the issues found. Each Industry (i.e. Mining) is made up of business codes based on the North American Industry Classification System (NAICS). The Mining Industry is made up of 7 business codes. Over 78% of this segment’s universe have plan sponsor’s who use just 3 of the 7 business codes. The data in these examinations indicated that the plans whose sponsors used these 3 business codes had a high degree of Noncompliance. Although we did not have quite as much data on plan sponsors who used the other 4 business codes it appeared that Noncompliance was high for those as well. Noncompliance was especially high with plan sponsors using the business codes representing “Stone Mining & Quarrying”; and “Support Activities for Mining”.

The most common failure involves errors in the ADP/ACP testing and in the timely depositing of the 401k deferrals. The tests are detailed in IRC Sections 401(k)(3) and 401(m)(3). Common errors in the tests are not properly identifying highly compensated employees, improperly including or excluding employees on the test and using the wrong compensation and/or contribution amounts. Another area we found a number of problems with was not timely depositing the employee deferrals.

The second most prevalent failure involves errors in allocating contributions to the plan participants. Allocation errors occur when the contribution is not allocating in the manner in which the plan document states it should. Common examples include using the wrong compensation definition, including or excluding certain employees and enforcing or failing to enforce requirements stated in the plan document that must be met for a participant to receive an allocation (i.e. last day employment, certain hours of service).

Avoiding the Error:

ADP/ACP Testing/Deferrals:
The best way to avoid these problems is too make sure all the people responsible for running the tests are knowledgeable in the law covering such [IRC Sections 401(k)/(m)]. This includes knowing what contribution amounts are used, what employee compensation to use, whether an employee is considered Highly Compensated or Non Highly Compensated and what yearly period to use in applying the testing.

Those responsible for administering the amounts employees elect to contribute to the plan must make sure they are timely deposited. The Department of Labor regulations requires employee deferrals to be deposited as soon as they can be segregated.

Contribution Allocations:
401(k) 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 make sure all the people responsible for the allocations know the correct and most current allocation formulas. They must know the correct and most current definition of compensation being used in the formulas and assure it is used in the calculations. Finally, they must also know whether or not the plan calls for forfeitures to be allocated to participants (in addition to amounts required by the plan formula), and if so what is the allocation formula.

Page Last Reviewed or Updated: 17-Nov-2016