Blog
August 1, 2018
What is the Government’s Plan of Attack for 2018?
We often get the question…” What does a TPA do”. That can be a involved conversation. The short answer is ….we keep you out of trouble with the government. The following is a laundry list of what the IRS is finding wrong with employer retirement plans. Utilizing BEI as your TPA can avoid these issues.
There are two primary governing agencies: The Internal Revenue Service (IRS) and the Department of Labor (DOL).
The IRS tells us each year, based on previous audits throughout the country, what initiatives they are concentrating on. This is a real money maker for the IRS so we pay attention. If the Plan is not operated in accordance with their rules the penalties are severe. For example: an employer had a 401(k) plan for 20 years and when audited the IRS asked for all their legal plan documents. They could not find the original plan document when they first started the plan. The IRS penalized them $30,000. The attorney got the penalty reduced but the bill was (including attorney fees) $12,000. Still a lot of money. Another case involved an employer that hired a new salesman and brought him into the plan before he was eligible. That penalty was similar to the previous amount. Other penalties that occur frequently are not filing the plan Report/Return Form 5500 timely. The IRS wants $25.00 a day late fee, and if they think you just ignored sending in the Form they send the DOL after you and their penalty is $2,140 a day!
Let’s look at the other potential penalties.
Initiatives in 2017 that are carried over to 2018.
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Hardship distribution substantiation directives. The IRS issued guidelines to its agents for examining whether a plan sponsor has properly substantiated whether a hardship distribution by 401(k) and 403(b) plans is on account of an immediate and heavy financial need. This is a problem that confounds Employers. If an employee has other assets or overstates their need the IRS can say the hardship didn’t qualify as a hardship. Which means you need to put the money back into the plan.
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Maximum loan amount directive. The IRS issued a directive to its agents addressing the maximum plan loan amount for participants with multiple loans. You need to determine the maximum loan amount when participants take out two loans in the same 12-month period.
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Section 403(b) & 457 plans. The IRS continues to examine plans that fail to meet the universal availability requirements for salary deferrals, the limitations relating to age 50 and/or 15-year special catch-up contributions, improper hardship withdrawals.
IRS Examination & Compliance Priorities in 2018
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Discrimination testing. Various testing issues will be examined, including “gateway” testing failures, failed actual deferral percentage (ADP) and actual contribution percentage (ACP) tests, and failures to give proper notices to participants in safe harbor plans.
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Plans with partial terminations. Partial terminations result in full vesting for all plan participants. A partial termination occurs when there is substantial reduction (20%) in the number of participants and there is a corporate event related to it (for example, the closing of a company division or a plant or laying off a lot of employees).
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Participation & coverage failures in operation. Failure to follow the requirements relating to minimum age and/or service. An example of this type of failure is allowing ineligible participants to participate.
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Distribution Failures. These failures include distributions subject to the minimum required distribution rules, and distributions not made consistent with the terms of the plan.
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Erroneous allocations of contributions & earnings. Plans that made erroneous allocations of contributions and forfeitures due to the use of an incorrect definition of compensation or that failed to make all matching contributions consistent with plan terms.
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Elective deferral withholding issues. The IRS is concerned that plans are not withholding the proper amount of elective deferral contributions as requested by the employee or not following the terms of the plan.
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Mergers/consolidations. Plans that have transferred their assets or liabilities to another plan as the result of a merger or acquisition are a target and will be the subject of examination activity.
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Failure to properly value trust investments. Arriving at a proper value for plan assets is a concern for the IRS as it impacts several plan functions. These include the reporting of the appropriate taxable amount on participant distributions and determining the correct amount of minimum required distributions. The IRS also believes real estate investments are not being properly valued.
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Plans with non-participant loans. Non-participant loans likely draw the attention of the IRS because they potentially involve related parties and that is a prohibited transaction with excise tax penalties.
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Section 403(b) plans. The IRS is spending a lot more time auditing 403(b) plans. Employers need to know all the current rules not to get penalized.
The IRS will either audit the plan in its entirely or ask for a few specifics which they call a “Compliance Check”. Compliance Checks are not a full plan examination, but rather represent an IRS inquiry into a specific aspect of plan operations. They do not become full-blown examinations unless during the course of the check, facts develop providing a reason for a full examination.
Our expert TPA's at Benefit Equity, Inc. can help ensure you are compliant. Get in touch with us today at 1-800-899-9141 or planservices@benefitequity.com.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.