In the current economic climate, most owners of closely held corporations that sponsor tax qualified retirement plans are worried about the value of the investments in their plans, not about the minutiae of plan administration. But owners also need to be concerned about plan operational issues as they can cause the plan to lose its qualified status triggering taxes, penalties and interest – sometimes exceeding over half the plan’s value.
Why should I be concerned, the IRS issued a determination letter than my corporation’s plan is qualified?
Most corporations that maintain a tax qualified retirement plan have received letters from the IRS confirming that their plan meets the IRS requirements applicable to the type of plan they adopted. But these letters only confirm that the form of the plan meets IRS requirements, and they don’t provide any protection against an IRS claim that the plan should be disqualified or subject to penalties for the manner in which it has been operated.
What are the consequences of operational problems with my plan?
It depends on the nature of the violations, but in a worst case scenario the plan’s tax qualification can be retroactively revoked, the deductions claimed by the sponsoring corporation for contributions to the plan can be disallowed, and the plan participants can be subjected to current taxation on the amounts contributed to fund their benefits. For lesser violations the typical penalty is the imposition of a substantial excise tax for the year(s) that the violations took place.
What should I do to insure that my plan is being operated in compliance with IRS rules?
If your plan is being administered by a competent third party administrator (TPA), it is unlikely that your plan will have many of the operational problems common to self-administered plans. Nevertheless, you would be well advised to contact the TPA to make sure that it is monitoring the plan’s ongoing compliance with IRS rules and regulations, as there may be some compliance areas that the TPA doesn’t monitor as part of its regular services.
For plans that are being administered by an employee of the sponsoring corporation, insuring that the plan is being operated in compliance with IRS regulations can be a challenge, especially if plan administration is only one of many areas the employee is responsible for. While there are numerous ways that a plan can technically violate IRS regulations, the areas that typically generate the most compliance problems include the following:
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Plan Participation - were employees admitted into the plan at the proper time?
Plan Participation - were employees admitted into the plan at the proper time?•Vesting - were participants properly credited for service covered by the plan?
Vesting - were participants properly credited for service covered by the plan?•Contributions - were all employer and employee contributions to the plan made by the required dates and in the proper amounts?
Contributions - were all employer and employee contributions to the plan made by the required dates and in the proper amounts?•Distributions - were all distributions to former participants made by the time required? Did the plan trustee permit “in service” distributions not authorized under the plan?
Distributions - were all distributions to former participants made by the time required? Did the plan trustee permit “in service” distributions not authorized under the plan?•Plan Loans - were all loans made in compliance with the loan provisions in the plan? Were they limited to the maximum amount permitted under the plan? Were they repaid within the period provided in the plan?
Plan Loans - were all loans made in compliance with the loan provisions in the plan? Were they limited to the maximum amount permitted under the plan? Were they repaid within the period provided in the plan?•“Top Heavy” Plans - did anyone determine whether the plan might be subject to the so-called “top heavy rules” that require a reduction in the amount contributed for the benefit of highly compensated participants?
“Top Heavy” Plans - did anyone determine whether the plan might be subject to the so-called “top heavy rules” that require a reduction in the amount contributed for the benefit of highly compensated participants?•Bonding - if the plan covered employees in addition to the owners of the corporation and their spouses, did it have a fidelity bond in an amount equal to 10% of the assets in the plan?
Bonding - if the plan covered employees in addition to the owners of the corporation and their spouses, did it have a fidelity bond in an amount equal to 10% of the assets in the plan?•Self Dealing & Prohibited Transactions – were plan assets invested in art or other “collectibles” that arguably provided personal benefits to plan fiduciaries? Did the plan engage in transactions with the plan sponsor, its owners and members of their family? If so the plan may have violated the self dealing and prohibited transaction rules and be subject to confiscatory excise taxes.
Self Dealing & Prohibited Transactions – were plan assets invested in art or other “collectibles” that arguably provided personal benefits to plan fiduciaries? Did the plan engage in transactions with the plan sponsor, its owners and members of their family? If so the plan may have violated the self dealing and prohibited transaction rules and be subject to confiscatory excise taxes. What should I do if I think there may be operational problems with my plan?
The IRS offers a number of voluntary compliance programs designed to permit plan sponsors to correct operational problems, but these programs are generally not available once the IRS has commenced a plan audit.
Accordingly, if you think that there may be problems with the manner in which your corporation’s plan has been operated, please indicate your initial areas of concern and submit. We will then contact you to review your situation and assist you in developing a cost-effective approach to resolving your plan’s operational problems. You may also contact David J. Grant, Tax and Corporate Attorney, directly at dgrant@strategiclawgrouppc.com with your questions.
Potential Areas of Concern to Examine
Check the areas of concern along with your name and contact information and submit.
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Additional Information/Questions
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