Finding the needle in the haystack - Retirement Plans; tax laws

Many retirement plans do not comply with the Internal Revenue Code and ERISA, as evidenced by the estimated 10,000 submissions the IRS has received under its voluntary correction program in the past decade.

Countless other plans have self-corrected under the portion of the program that does not require an IRS submission. And many plans also have used the U.S. Department of Labor's correction program for ERISA violations.

Many companies rely on accountants and administrators to identify and correct violations in their plans. But where do you begin the search for violations and what are some common problems found during plan audits?

Penalties for ERISA violations can reach hundreds of thousands of dollars--and possible imprisonment. Businesses should audit their plans now, rather than risk an IRS or DOL audit later.

TARGET AREAS

The IRS has identified various target areas for retirement plan audits.

Deposit of Deferrals. Many companies do not realize that 401(k) deferrals must be deposited as soon as reasonably possible after the pay date. For many plans, the DOL would likely determine that the deferrals should have been deposited no later than five days to one week after the pay date. For periods longer than one week, the DOL is likely to consider the deferrals late, unless companies can provide business reasons for the delay.

Services Performed Through Employment Agency. Companies are required to give participation and vesting credit to employees for the time they performed services for the company through an employment agency before becoming a regular employee. However, many companies do not.

Employees as Independent Contractors. Many companies improperly classify employees with non-traditional roles as "independent contractors." As a result, these employees may be denied benefits to which they are entitled.

ERISA Sec. 404(c). Most plans do not comply with 404(c). As a result, the plan's fiduciaries are not given protection for participants' investment decisions. The most common causes of noncompliance include the failure to provide participants with the identity and contact information of the 404(c) fiduciary; prospectuses immediately before or after their initial investments in particular options: and a description of the additional information the participants may request.

Improper Correction Method. Some plans calculate earnings using the rate of return for a money market account, rather than the rate of return for the participant's self-directed account when they make corrections to the plan for exceeding the maximum contribution and deferral limits.

Participant Loans. The provisions related to loans in the plan document, loan policy and promissory notes should be coordinated. Frequently, these provisions are not consistent with each other, resulting in a failure to properly administer loans. Additionally, reasonable interest rates should be determined at the time each participant loan is made. Some plans only set an interest rate once a year.

Plan Merger Issues. The amount of the assets in each participant's account immediately after a merger must be equal to or greater than the amount the participant would have been entitled to if the plan terminated immediately before the merger. However, plans frequently fail to allocate their suspense accounts in accordance with their plan documents prior to the merger. As a result, participants are not given the amount they would have received if the plan terminated.

Default Account. Plans often specify a money market account or a guaranteed investment contract (GIC) as the plan's default account for participants who do not direct their accounts' investment. While money market accounts or GICs may be prudent for short-term use, they may not be appropriate for long-term investing for retirement.

THE VALUE OF REVIEWING PLANS

Plan violations typically continue until an outside consultant identifies them, and CPAs can provide a valuable service to their clients by identifying problems with their plans. If violations are identified quickly, they often can be corrected with minimal cost.

However, the cost of correcting problems is often significantly higher if the violation is discovered after a period of time or by the IRS or DOL. Remember. the cost of an audit may save companies a significant amount of money in the long run.

Debra Davis, Esq. is an associate with the law firm of Reish Luftman & Reicher in Los Angeles, specializing in the area of employee benefits law. You can reach her at [email protected].

COPYRIGHT 2003 California Society of Certified Public Accountants
COPYRIGHT 2003 Gale Group