Employee benefit plan compliance is a top concern for employer plan sponsors. Failure to follow statutory rules and regulatory guidance for health and welfare and pension plans can lead to penalties, adverse tax consequences and plan disqualification.
The Internal Revenue Service (IRS) — one of the federal agencies responsible for aspects of employee benefit plan oversight — has issued a listing of the trends it sees recurring in plan audits and voluntary case submissions. Although the observations are based on experiences with large plans, plan sponsors of all sizes can benefit from knowing the issues that are causing common compliance problems.
The top failure across all plan types involved failure to amend the plan document to bring it in line with tax law changes, within the time period required by law. According to the IRS, failure to amend plan documents to comport with legal changes in a timely manner can cause problems in plan operation (is the plan following the law or the un-amended plan document?), and can result in plan disqualification upon audit. To avoid missing plan amendment deadlines, the IRS suggests:
- Reviewing the annual Cumulative Lists of necessary plan amendments maintained on the IRS Web site.
- Maintaining a calendar or ticker file of when amendments must be completed.
- Ensuring the plan document and summary plan description (SPD) match.
- Maintaining contact with the attorney, actuary, or company that services the plan, on at least an annual basis, to keep abreast of impending amendment deadlines and receive any amendments that the vendor provides.
The second most common failure found across all plan types was the failure to follow the plan’s definition of compensation in determining contributions. The IRS states that plans may be drafted to define compensation differently for contribution purposes and testing purposes, and that “it is extremely important that the payroll department follow the plan’s definition of compensation for contribution purposes.”
Failure to do so may result in participants receiving allocations that are either greater than or less than what they should be. To avoid compensation mistakes, the IRS suggests performing annual reviews of plan operations; making sure amended definitions are communicated to every individual involved with plan operations; ensuring the person in charge of determining compensation has been properly trained to understand the plan; and, if possible, simplifying the definition of compensation and using this simplified definition for all purposes.
Failure to follow the plan document’s eligibility provisions accounted for the third most common failure. The most significant trend in this category involved the improper exclusion of employees who are later determined to have been eligible for the plan, most frequently part-time employees who become eligible for the plan, incorrect continued eligibility of employees following a merger, and misclassification of independent contractors.
Rounding out the list of Top 10 plan failures were these:
- Failure to satisfy plan loan provisions.
- Impermissible in-service withdrawals.
- Failure to satisfy the 401(a)(9) minimum distribution rules.
- Employer eligibility failure (an employer adopts a plan it is not legally permitted to adopt, such as a government entity adopting a 401(k) plan).
- Failure to pass the ADP/ACP tests for 401(k) plan deferrals and matching contributions.
- Failure to provide the minimum contribution or benefit to non-key employees in a top-heavy plan.
- Failure to satisfy the contribution limitations of IRC Sec. 415.
In the listings, the IRS breaks out, in more detail, the most commonly seen mistakes made in 401(k) plans, defined benefit plans, 403(b) tax-sheltered annuities and 457 government plans.
The IRS notes, “The earlier a plan mistake is detected and corrected, the cheaper it is to fix. This also precludes the mistake from affecting other areas of the plan. For example, improperly excluding an employee from the plan for many years could lead to a mistake affecting not only the plan participant, but overall nondiscrimination testing, and other plan operations.” The release, “Employee Plans Team Audit (EPTA) Program-EPTA Compliance Trends & Tips,” can be found on the IRS Web site.