Who Are You Going to Call to Fix Your Plan?

Administrative Retirement Services, Inc. (ARS) believes that Plan Sponsors of qualified plans should comply with the rules and regulations of the Internal Revenue Code (IRC), and that includes making corrections when necessary.  While some accountants, administrators and attorneys may advise that it is ok to turn a blind eye to an operational error or past plan failure, ARS advises taking corrective action to fix errors.  Form 5500 is filed under the penalties of perjury and by ignoring errors you may be putting your plan at risk to lose its qualified status. 

ARS has prepared corrections for  late deposits of employee contributions, failure to correct a 401(k) discrimination test (ADP test) failure, and failure to file Form 5500’s.  We also re-qualify plans for not timely amending or restating for tax law changes.

Late Deposit of Employee Contributions:
Employee contributions must be deposited as soon as administratively feasible, or by the 15th business day of the month following the month contributions are withheld from pay.  It is a prohibited transaction for employee contributions to be deposited late.  Lost Earnings must be calculated on late employee contributions and paid to employee accounts for the period spanning the date due to the date the Lost Earnings are deposited.  Form 5330 must be filed to pay a 15% penalty to the Internal Revenue Service (IRS) on the Lost Earnings or the plan must apply for correction under the Department of Labor’s (DOL) Voluntary Fiduciary Correction Program.

Failure to Correct ADP Test Failures:
To correct an ADP test that fails, corrective action must be taken in the 12-month period following the close of the plan year.  The Self Correction Program (SCP) can be used to correct ADP failures during the two years after the 12-month period following the close of the plan year. The SCP is a self-initiated correction program and does not require IRS submission.  Beyond that time frame, the Internal Revenue Services’s (IRS) Voluntary Correction Program (VCP) must be used to make corrections. The VCP requires an IRS submission with IRS submission fees.

To address an ADP test failure during the two years after the 12-month period following the close of the plan year, the SCP requires that excess contributions plus earnings be refunded. Earnings that are refunded must be calculated through the date of the refund.  The SCP also requires that an amount equal to the refund amount (not including any associated match) be provided as an employer contribution.  The employer contribution is allocated among all non-highly compensated employees who were eligible participants during the plan year the ADP test was failed. Form 5330 must also be completed to pay a 10% penalty to the IRS on the late refunds. 

Failure to File Form 5500’s:
For plan years beginning January 1, 2007 and after, qualified retirement plans that have plan assets of greater than $250,000 are required to file Form 5500 annually with the Department of Labor.  Failure to file a timely Form 5500 can result in IRS penalties of $25 per day, up to a $15,000 maximum and DOL civil penalties of up to $1,100 per day with no limit. 

Failure to Amend or Restate for Tax Law Changes:
Qualified retirement plans periodically must be amended or restated for tax law changes.  Failure to timely amend or restate for tax law changes can result in disqualification of your retirement plan.  On audit this could result in the IRS considering each year’s contribution as disallowed and taxable in that year.  In addition, retirement account balances could be considered taxable in the year of the disqualification.  This is very serious and one of the most over looked concerns by plan sponsors who do not understand the consequences of not having a qualified written plan document.

The kinder and gentler IRS we have all grown to know and love has now turned into an agency which is aggressively looking for plan defects.  The audit rate of qualified plans has increased dramatically.  A plan may be audited at random, due to a pattern in filing history, or possibly due to a disgruntled employee contacting the IRS or DOL. 

We recommend you retain a good third-party administrator who will assist you in keeping your plan qualified.  As your plan grows in size, the potential downside to an audit can be much more costly.

To discuss any of these corrections in more detail, please contact Administrative Retirement Services, Inc.

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