Qualified Plan Pitfalls: Top Tens You Won t See on Letterman

Transcription

1 2010 HUMAN RESOURCES SEMINAR Qualified Plan Pitfalls: Top Tens You Won t See on Letterman George L. Whitfield Warner Norcross & Judd LLP gwhitfield@wnj.com

2 Qualified Plan Pitfalls WHAT WE LL COVER: Why you should correct Common pitfalls and failures IRS correction guidance Available resources 2

3 Qualified Plan Pitfalls THERE IS NO SUCH THING AS A PERFECT PLAN What is perfect? True or False? Good or Bad? 3

4 We will expand our enforcement contacts by continuing to use the EP Compliance Unit (EPCU) to leverage our resources. We will start new EPCU projects to pursue and investigate areas of potential noncompliance. By combining our EPCU contacts with our examinations, we will have the broadest impact on compliance in the retirement plans community. Monika Templeman, Director, EP Examinations Employee Plans News, Winter

5 Tax Exempt and Government Entities (TE/GE) Employee Plans (EP) EP Rulings and Agreements EP Customer Education and Outreach EP Examinations 5

6 Goal of Employee Plans Division Expand and preserve retirement benefits and retirement savings opportunities through increased understanding and compliance with applicable tax laws 6

7 EP Examinations/Enforcement EP Examinations is responsible for overseeing compliance with the retirement plan provisions of the Internal Revenue Code, including the protection of plan assets and of the interests/rights of participants. This is accomplished by conducting examinations to analyze operational features of retirement plans. A centralized examination case selection and review process is used to enhance consistency of enforcement activities and to focus resources on the areas of highest noncompliance

8 Qualified Plan Pitfalls WHAT IS A COMPLIANCE FAILURE? Demographic Document Operational 8

9 Qualified Plan Pitfalls OPERATIONAL FAILURES: Eligibility/Entry Vesting Contributions Amount and timing 9

10 Qualified Plan Pitfalls OPERATIONAL FAILURES: Distributions Timing Hardship Loans Discrimination Applicable Limits Top-Heavy Rules 10

11 Qualified Plan Pitfalls OPERATIONAL FAILURES: THE BIGGIE: Failure to administer and operate plan in accordance with its terms. Plan reflects requirements But also discretionary design features 11

12 Qualified Plan Pitfalls OPERATIONAL FAILURES: How Do You Find Failures? Self-audits Checklists/IRS, DOL Resources Culture/Employee Awareness Internal Controls 12

13 Qualified Plan Pitfalls WHAT DO YOU DO WHEN YOU FIND COMPLIANCE FAILURES? Correct IRS correction program and guidelines 13

14 Qualified Plan Pitfalls TOP TEN REASONS TO FIND AND CORRECT MISTAKES: 1. What you don t know CAN hurt you. 2. Frequent law changes. 3. Fresh eyes. Independent review can help. 4. Ignorance is expensive. 5. Participants expect what s promised. 14

15 Qualified Plan Pitfalls TOP TEN REASONS TO FIND AND CORRECT MISTAKES (cont): 6. IRS correction programs help. 7. Self-correction is encouraged. 8. Alternative: VCP submission. 9. IRS audit: Most expensive correction 10.It s the right thing to do. 15

16 Qualified Plan Pitfalls TOP TEN REASONS TO FIND AND CORRECT MISTAKES (cont): Least cost Risk of Audit Top Ten Reasons to Identify and Correct Mistakes html 16

17 Pitfalls: Top Ten DC Compliance Failures COMPENSATION: Not follow definition Example: W-2 pay but deferrals from regular pay See 401(k) Breakout materials 17

18 Pitfalls: DC Top Ten HARDSHIP DISTRIBUTIONS: Not qualifying reason Failure to document reason See 401(k) Breakout materials 18

19 Pitfalls: DC Top Ten PARTICIPANT LOANS: No loan provision Exceeding limits Proper documentation See 401(k) Breakout materials 19

20 Pitfalls: DC Top Ten ELIGIBILITY/ENTRY FAILURES: Inclusion of ineligible employee Exclusion of eligible employee Example: Plan requires one year of service (1,000 hours); semi-annual entry (January 1/July 1) 20

21 Pitfalls: DC Top Ten ELIGIBILITY/ENTRY (cont): Example (cont): Employee included after completing 1,000 hours Employee included after completing 12 months 21

22 Pitfalls: DC Top Ten ELIGIBILITY/ENTRY (cont): Employee deferral election not implemented Part-time time or temporary excluded Former participant rehired: held out for one year 22

23 Pitfalls: DC Top Ten ELIGIBILITY/ENTRY (cont): Leased employee becomes employee 23

24 Pitfalls: DC Top Ten VESTING CREDIT FAILURES: Year equals 1,000 hours (or less) even if terminate (not 12 months) All service with employer/controlled group counts Normally based on plan year 24

25 Pitfalls: DC Top Ten VESTING FAILURES (cont): Example: DOH: July 1, 2007 DOT: June 25, 2010 How many years? 25

26 Pitfalls: DC Top Ten VESTING FAILURES (cont): Rehired former participant Affected Affected by partial termination 26

27 Pitfalls: DC Top Ten EXCESS ELECTIVE DEFERRALS: $16,500 for 2010 Age 50 catch-up up: $5,500 for 2010 Not eligible for catch-up contributions 27

28 Pitfalls: DC Top Ten LATE DEPOSIT OF ELECTIVE DEFERRALS: Prohibited transaction subject to excise tax As soon as reasonably separate Seven days for small employers 28

29 Pitfalls: DC Top Ten FAILURE OF ADP OR ACP TEST: Normally monitored by record keeper Normally corrected when test failed 29

30 Pitfalls: DC Top Ten DISTRIBUTION FAILURES: In-service when not eligible Installments when plan allows lump sum only Failure to obtain participant or spousal consent (if required) Failure to cash out small balance 30

31 Pitfalls: DC Top Ten DISTRIBUTION FAILURES (cont): Failure to make required distribution at/after age 70½ Failure to notify of right to defer Failure to provide updated special tax notice 31

32 Pitfalls: DC Top Ten EXCESS ANNUAL ADDITION: $49,000 for 2010 Excludes catch-up Alt: 100% of 415 comp (special definition) 32

33 Pitfalls: DC Top Ten STANDARDIZED PLAN FAILURE: Standardized prototype, SEP, SARSEP, and SIMPLE No other plan allowed All employees of controlled group 33

34 Pitfalls: DC Top Ten IMPROPER ROLLOVERS: Rollover rules very liberal But must be eligible rollover distribution Plan allow? 34

35 Pitfalls: DC Top Ten AUTOMATIC ENROLLMENT FAILURES: Failure to enroll eligible employees Failure to give initial and/or follow- up required notices 35

36 Pitfalls: DC Top Ten SAFE HARBOR CONTRIBUTION FAILURES: Failure to give required notice Failure to give notice required for conditional safe harbor 36

37 Pitfalls: DC Top Ten TOP-HEAVY CONTRIBUTION FAILURE: Failure to provide contribution Year-end end employment; no hours Trap: all compensation for year 37

38 Pitfalls: DC Top Ten LATE AMENDER/NONAMENDER: Timely restatement and submission of plan (5 or 6 year cycle) Required interim amendments 38

39 Pitfalls: DC Top Ten CONTRIBUTION FAILURES: All kinds Contributions not allowed by plan: example: Roth Matching not made or based on wrong compensation 39

40 Pitfalls: DC Top Ten HCE DETERMINATION: Critical for ADP and other nondiscrimination testing Failure to follow definition 40

41 Pitfalls: DC Top Ten CONTROLLED GROUP FAILURES: Coverage and discrimination testing: single employer Affiliated service groups Others: management entity; IRS discretion 41

42 Pitfalls: DC Top Ten MULTIPLE EMPLOYER PLAN: Single/separate employers Additional Form 5500 filing requirements Special rules for employee leasing arrangements 42

43 Pitfalls: DC Top Ten DISCRIMINATION FAILURES: Definition of compensation Contributions Investment opportunities All of above 43

44 Pitfalls: DC Top Ten FIDELITY BOND FAILURES: No bond Bond amount not updated Failure to cover all required Multiple plans 44

45 Pitfalls: DC Top Ten OTHER FAILURE TO FOLLOW TERMS OF PLAN: Any of above Many other examples 45

46 Pitfalls: DC Top Ten MULTIPLE PLANS IN TRUST: Treated as master trust Special Form 5500 reporting requirements for master trusts 46

47 Pitfalls: Top Ten DB Compliance Failures FUNDING FAILURES: Failure to meet minimum funding requirements Delinquent deposit of contributions 47

48 Pitfalls: DB Top Ten FIDELITY BOND FAILURE VESTING FAILURES PROHIBITED TRANSACTIONS - LOANS 48

49 Pitfalls: DB Top Ten PARTICIPATION/COVERAGE FAILURES DISCRIMINATION ERRORS IN CONTRIBUTIONS AND BENEFITS IMPROPER DEDUCTIONS 49

50 Pitfalls: DB Top Ten (cont) LATE AMENDER/NON-AMENDER REQUIRED DISTRIBUTION FAILURES QUALIFIED JOINT AND SURVIVOR ANNUITY FAILURES 50

51 Pitfalls: DB Top Ten (cont) BENEFITS IN EXCESS OF SECTION 415 LIMITS FAILURE TO SUSPEND BENEFIT PAYMENTS ON RE-EMPLOYMENT EMPLOYMENT Top Ten Issues Defined Benefit Plans 0.html 51

52 Qualified Plan Pitfalls EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM (EPCRS): Program for correcting compliance failures in qualified plans Why correct? Get it right at least cost Audit emphasis by IRS 52

53 Qualified Plan Pitfalls EPCRS: Purpose: foster compliance and delivery of promised benefits Goal: consistency in administering program Concerns of practitioners: Fair treatment Monetary sanctions 53

54 Qualified Plan Pitfalls STRUCTURE OF EPCRS: Employee Plans Compliance Resolution System ( EPCRS EPCRS ) Self-Correction Program ( SCP SCP ) Voluntary Correction Program ( VCP VCP ) Audit Closing Agreement Program ( Audit CAP ) 54

55 Qualified Plan Pitfalls COMPONENTS OF EPCRS: Self-Correction Program - SCP No contact with IRS No fee or sanction least cost most risk Limited correction by amendment IRS provided examples and corrections Compliance practices and procedures 55

56 Qualified Plan Pitfalls COMPONENTS OF EPCRS: Voluntary Correction Program - VCP Submit to IRS Pay fee and/or sanction may be large Multiple components/john Doe Allows correction by amendment Negligible risk (nondisclosure) IRS provided examples and corrections 56

57 Qualified Plan Pitfalls COMPONENTS OF EPCRS: Audit Closing Agreement Program Audit CAP Failure identified on audit Pay sanction penalty highest cost No risk 57

58 Qualified Plan Pitfalls EPCRS GENERAL PRINCIPLES: Full Correction Required All failures for all years Exceptions where unreasonable or not feasible Estimates permitted in certain circumstances Distribution of $75 or less (formerly $50) Overpayments of $100 or less Ignore lost participants after reasonable efforts to locate 58

59 Qualified Plan Pitfalls EPCRS GENERAL PRINCIPLES: Must Restore Benefits As if no failure Reasonable and appropriate correction method Consistency by year, plan and type of failure Not available when correction otherwise available under Code (e.g. Section 401(b)) or when Code provides other sanctions (e.g. excise taxes) Excise taxes still apply but possible waiver of excise tax on failure to make required minimum distribution 59

60 Pitfalls: Warning Signs Contributions Being Misused ACCOUNT STATEMENTS LATE OR IRREGULAR BALANCE NOT ACCURATE CONTRIBUTIONS LATE 60

61 Pitfalls: Top Ten Warning Signs DROP IN ACCOUNT VALUE NOT DUE TO MARKET CHANGES DEDUCTION FROM YOUR PAYCHECK MISSING INVESTMENTS NOT WHAT YOU DIRECTED 61

62 Pitfalls: Top Ten Warning Signs FORMER EMPLOYEES NOT PAID OR PAID INCORRECT AMOUNTS ACCOUNT SHOWS LOAN TO EMPLOYER OR OTHERS UNEXPLAINED CHANGE IN INVESTMENT MANAGERS 62

63 Pitfalls: Top Ten Warning Signs EMPLOYER EXPERIENCING SEVERE FINANCIAL DIFFICULTY Warning Signs That 401(k) Contributions Are Being Misused (DOL) arningsigns.html 63

64 Qualified Plan Pitfalls: Resources The Fix Is In: Common Plan Mistakes e/0,,id=137958,00.html A Guide to Common Qualified Plan Requirements ,00.html 64

65 Qualified Plan Pitfalls: Resources Correcting Plan Errors Avoid Plan Errors 401(k) Plans: Additional Resources - 401(k) Fix-It Guide - Check-Up for Your 401(k) Plan 65

66 Qualified Plan Pitfalls: Resources EP Compliance Trends and Tips Encouragement of Compliance Procedures and Self-Examinations 66

67 Qualified Plan Pitfalls: Resources EP Examination Guidelines 00.html Compliance Monitoring Procedures 00.html 67

68 Qualified Plan Pitfalls: Resources Learn, Educate, Self-Correct and Enforce (LESE) Projects A Guide to Common Qualified Plan Requirements 68

69 Qualified Plan Pitfalls: Resources EPCU Overview and project information EPTA Large Case Top Ten Audit Issues 0.html 69

70 Qualified Plan Pitfalls: Resources Top Ten Ways to Prepare for Retirement (DOL) A%2F%2Fwww.dol.gov%2Febsa%2Fpublications %2F10_ways_to_prepare.html or prepare.html 70

71 Qualified Plan Pitfalls: Resources Consumer Information On Retirement Plans (DOL) ension.html 71

72 Qualified Plan Pitfalls QUESTIONS? v2 72