Small plans are plans that have less than $250,000 in assets and have been recently implemented. The Internal Revenue Service (IRS) issued a report in late 2013 after an examination of approximately fifty Form 5500 returns of defined contribution plans with:

  • assets valued between $100,000 and $250,000;
  • a plan effective date of January 1, 1997 (or earlier); and
  • disclosed plan distributions,

and found issues with these plans.

If you’re a business owner and your company sponsors a defined contribution plan that fits the description of a small plan outlined above, you should read this memo and contact your Connie Dello Buono, financial planner 408-854-1883

Generally, the two most common issues uncovered were:

  • not timely amending the Plan to comply with current law, and
  • not having adequate fidelity bonding.

Plans must adopt amendments for changes in laws and regulatory guidance, as well as discretionary amendments, on a timely basis. Failure to timely amend the plan affects the qualified status of the Plan.

In addition, Section 412 of the Employee Retirement Income Security Act of 1974 (ERISA) generally requires plans with more than one 

participant to have a fidelity bond in the amount of 10% of plan trust assets with a minimum bond of $1,000 and a maximum bond of $500,000.

Other issues uncovered:

  • not timely filing Form 1099-R for plan distributions,
  • not allocating contributions and forfeitures according to the plan terms,
  • top-heavy failures, including top-heavy minimum contribution failures,
  • not securing joint and survivor annuity waivers,
  • making distributions not allowed by the plan terms,
  • not fully vesting participants upon a complete discontinuance of contributions, and
  • not including defaulted loans in income.

In addition, almost one third of the 401(k) plans examined revealed:

  • failure to properly run the discrimination tests, and
  • failure to timely deposit elective deferrals into the trust.

How you, the Plan Sponsor, may avoid errors:

As we mentioned, mistakes such as the failure to properly and timely amend the Plan could be costly because the qualified status of the Plan may be adversely affected. Yet generally, the mistakes are avoidable.

Large plans generally have teams of experts overseeing the plan operation. However, issues may arise more frequently in smaller plans due to less oversight and weaker internal controls. That’s not uncommon because you’re too busy running your business. Setting up operating procedures and appropriate internal controls for the Plan is an important first step. One of these procedures should include an annual review of the Plan’s fidelity bonding compared to the the value of the trust assets.

The examination project conducted by the IRS is clear – you cannot do it alone. Employers must count on professionals who have an expertise in these areas.

At least annually, you should talk with your Plan’s Third Party Administrator (TPA) to determine if the Plan is currently up-to-date with law changes.

You should also, on an annual basis, conduct a self-audit of your retirement plan. Generally, all of your retirement planning programs, both employer sponsored and personal plans should be reviewed annually. If you discover that you did not timely amend the Plan to comply with the laws and regulatory requirements, or that you did not follow the terms of the plan in operation (i.e., you are not following the terms of the Plan as you designed it), you should strongly consider correcting the errors under the IRS’ Employee Plans Compliance Resolution System (EPCRS).

If this self-audit discloses that the fidelity bond does not meet the requirements of ERISA, simply contact the vendor to adjust the amount of the bond.

As the audit points out – you cannot do it alone. Your Guardian Financial Representative can assist you in this process and identify possible problem areas.

It is beneficial for you to uncover potential problems with your own Plan rather than having the IRS uncover them for you in an audit.