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Risk Assessment Program - Results of Examinations of Form 5500 Profit-Sharing Plans with sponsors from the Retail 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 Profit Sharing Plans sponsored by the Retail Industry. As of April, 2011 we had examined over 1,000 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 sponsors business code analysis and the issues found. Each Industry (I.E. Retail ) is made up of business codes based on the North American Industry Classification System (NAICS). The Retail Industry is made up of 66 business codes. Approximately 79% of this segment’s plan sponsor’s business codes are from 28 of  the 66 business codes. Based on 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 amount of contribution required by the formula in the plan document (I.E. participant contribution equals the participant’s compensation / total participant contribution compensation ) is not made. This could be for 1 participant or many participants. It could be caused by an administrative error (I.E. not deposited timely) or due to negligence or oversight (i.e. wrong participant compensation used).

The 3rd most prevalent failure involves Participation/Coverage. Participation errors (See IRC 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 IRC Section 410(b).

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. All of these plans have employer 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 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.

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.

Page Last Reviewed or Updated: 17-Nov-2016