1. Plan administrator doesn't make required actuarial adjustments for benefit payments in a defined benefit pension plan that commence after the plan's normal retirement date as required by Internal Revenue Code (IRC) Section 411(b)(1)(H)
In a defined benefit pension plan, the required actuarial adjustments or interest adjusted back payments are not being paid to participants whose retirement benefits first commence after the pension plan's normal retirement date. This issue tends to occur more often when plans have normal retirement ages that are lower than 65 because many participants aren't aware that they can receive these benefits at this earlier age or opt to delay receiving their pension benefits until they can also receive Social Security benefits and thus don't apply for their benefits.
Plan administrators for defined benefit pension plans should ensure that all missed payments due to the delayed commencement of benefits are restored and that these payments are increased by the appropriate interest factor.
2. IRC Section 401(a)(9) violation (required minimum distributions)
Because plan administrators for multiemployer plans typically rely on participants to apply for benefits, the IRC Section 401(a)(9) required minimum distributions aren't being met for vested participants who have terminated employment, but who have not yet applied for benefits. Specifically, plans fail to make required minimum distributions (defined contribution plans) or to have commenced annuities (defined benefit plans) to participants by April 1 of the calendar year following the later of the calendar year the participant turns 72 (age 70 ½ if born before July 1, 1949) or the calendar year in which the participant retires. In addition, when participants die the rules governing the timing of these distributions to their beneficiaries are not being followed.
Plan administrators should be more proactive in monitoring the IRC Section 401(a)(9) requirements.
3. Missing participant treatment
Plan administrators don't properly search for terminated vested participants when the participant doesn't timely file for benefits. Instead these participants are classified as missing. The plan administrator should:
- Search plan and related plan, sponsor and publicly available records or directories for alternative contact information;
- Use a commercial locator service, a credit reporting agency or a proprietary internet search tool for locating individuals; and
- Attempt contact with participants by certified mail to the last known mailing address and through email addresses and telephone numbers.
Plan administrators should be more proactive in searching for terminated vested employees prior to classifying them as missing.
4. Errors made in benefit calculations, crediting service, reduction factors and general administration
Errors are made when participant benefits are calculated due to:
- Benefit provisions in the plan being misapplied
- Law is not understood
- Incorrect participant data being used or provided by the employer or the union
Plan administrators should take greater care when considering the plan provisions, law changes and the accuracy of participant data when determining benefits.
5. Plan language doesn't meet legal requirements or there is conflict between plan document and other collectively bargained, joinder or participation agreements. This includes multiemployer plans incorrectly relying on a pre-approved document.
This issue includes two separate, but related, errors: (a) the language in the plan document doesn't meet IRC Section 401(a) and IRS regulations and guidance, or (b) the plan document doesn't agree with the language in other legally-binding written agreements between the union and the participating employers. For example, the benefit formula in the plan is not the same as the one in the collectively bargained agreement, or the eligibility provisions in the plan do not agree with those in a participation agreement.
Plan administrators should first ensure that the plan document meets the requirements of IRC Section 401(a) and that the document is specific as to its terms. Plan administrators should also make sure that the terms in the plan document agree with all other legally binding written agreements between the union and the participating employers, especially when changes are made to these other written agreements.
In addition, according to Revenue Procedure 2017-41, section 6.03(1), multiemployer plans can't rely on a pre-approved document and instead are always considered individually designed plans. This means the union as plan sponsor must adopt all interim amendments, and should be aware of how the interim amendments affect the other legally-binding agreements. More importantly, a pre-approved plan document is likely not properly set up to operate in a multiemployer plan environment.
6. IRC Section 401(k) plan administrator doesn't perform required nondiscrimination tests
If a multiemployer plan contains a cash or deferred arrangement (in other words, it's a 401(k) plan), many plan administrators don't perform required nondiscrimination tests on a misunderstanding that the test isn't required. That is, many plans fail to test all eligible bargaining unit employees for nondiscrimination (actual deferral percentage test). If, however, there is at least one bargaining unit highly compensated employee deferring into the multiemployer 401(k) plan, nondiscrimination testing of all eligible bargaining unit employees participating in the plan is necessary.
Many multiemployer plans also fail to separately test non-bargaining unit groups that are eligible to participate in the multiemployer IRC Section 401(k) plan, as a mandatorily disaggregated group. Plan administrators for multiemployer IRC Section 401(k) plans should ensure that proper nondiscrimination testing is performed for both the bargaining and non-bargaining units participating in the plan.
7. Plan doesn't follow or doesn't have a participation agreement for each participating employer
This error normally involves non-collectively bargained employees working for a union or trust fund who are participating in the plan yet do not have a participation agreement signed or the agreement in place is not followed. These participation agreements can be in the form of a side agreement, contained within the collective bargaining agreements or provided for within the plan document. The failure to properly define the plan's eligibility and participation requirements may result in the plan not being a definite written program under the law.
Plan administrators should ensure that prior to admitting a non-collectively bargained employee to the plan (including direct union employees), adequate language addressing the eligibility requirements and benefit structure for the union acting as a separate employer and/or the non-bargaining unit employees of participating employers is formally adopted.
8. Accruals/service credit is dependent on employer contributions being made
Plans don't meet the definitely determinable benefit rules of Treasury Regulations Section 1.401-1(b)(1)(i) in form and operation when the crediting of service and/or contributions is dependent on the employer contributions actually having been made. This typically occurs when the plan requires payment from the participating employer before crediting a participant for covered service associated with that employer contribution.
Plan administrators should ensure that the crediting of participant accruals and service isn't tied to the receipt of related employer contributions.
9. IRC Section 411 violations including cash out/forfeitures from lost participants, wrong vesting schedule used and errors in vesting percentages
Every plan must state how participants are vested in their benefits. Normally, the percentage a participant is vested is dependent on their credited service. If employers or unions don't track a participant's service correctly, the vesting percentage could be incorrect. Other vesting errors include:
- Erroneous cash outs and forfeitures
- Wrong vesting schedules being used
- Errors when calculating a participant's vesting percentage
- Suspension of benefit issues including the types of violations found in Central Laborers' Pension Fund v. Heinz, 541 U.S. 739 (2004)
10. Misuse/diversion of pension funds within the meaning of IRC Section 4975
The plan assets are used for purposes other than the benefit of plan participants or the trust. Examples include:
- Plan trustee uses trust assets for personal use
- Plan loans to a plan trustee using an interest rate that is less than the fair market rate
- Trust sells an asset to a "disqualified person" within the meaning of IRC Section 4975(e)(2) for less than fair market value
- Failure to properly allocate expenses between different trusts