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by MHA
The Internal Revenue Service (IRS) recently completed two examinations under its Learn, Educate, Self-Correct, and Enforce (LESE) initiative to test and measure the compliance levels of defined contribution retirement plans. Using randomly selected Form 5500 returns, the projects produced findings in two major areas: small plans with assets from $100,000 to $250,000 and top-heavy plan errors.
One of the top errors found for small plans was the failure to secure adequate bonding of plan fiduciaries who handle retirement plan assets. Under ERISA, the amount of bonding should not be less than 10 percent of the amount of funds handled (not less than $1,000 or more than $500,000) with exceptions. Other top errors included failing to amend plans on a timely basis to comply with statutory and regulatory changes, failure to timely submit Form 1099-R, failure to timely deposit elective deferrals, top-heavy failures, joint and survivor waiver failures, impermissible distributions, and failure to include into income “deemed distributions” relating to defaulted loans from the plan.
The second project examined approximately 50 plans with between three and eight participants which were expected to have top heavy plan errors. In general, a 401(k) plan is top heavy when more than 60 percent of the present value of benefits goes to key employees. If a plan is deemed top-heavy, it must apply certain accelerated vesting and contributions to all eligible non-key employees. The most common errors the IRS found were failure to test for top heaviness, improper exclusion of eligible employees, and allocation errors related to compensation and contributions.
In all of the errors found, the IRS has addressed correction procedures within the 401(k) “Fix-it Guide.” Additionally, the LESE project report also contains tips on avoiding the common errors found by the IRS.
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