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Friday, March 23, 2012

Is the Recession Causing Small Retirement Plans to Skimp on Compliance Efforts?

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Have difficult economic times caused small retirement plans to cut back on compliance with the tax laws? According to the March 20 issue of the IRS electronic newsletter, Employee Plans News, 1 in 4 smaller retirement plans reviewed starting in 2007 under the IRS’s LESE (“Learn, Educate, Self-Correct, and Enforce”) project had engaged in at least one prohibited transaction. Under LESE, the IRS examined 49 plans with less than $5 million in assets that also had investments in real estate and either participant loans or a Form 5500 Schedule D, DFE/Participating Plan Information and found that 12 of those plans had engaged in prohibited transactions. Among the problems were failures to follow loan provisions, to document loans and loan payments, and to prohibit loans to the employer or related entities. During a separate LESE project involving defaulted loans and noncollectible leases, the IRS found 1 in 10 retirement plans had engaged in prohibited transactions. Both LESE projects revealed retirement plans with improperly valued assets and plan documents not properly amended for recent changes in the law.

And, in a separate LESE project on compliance with top-heavy rules, the IRS found that about 14% of small §401(k) plans failed to comply with the top-heavy rules because, in many cases, the plan sponsors did not test for the top-heavy requirements and did not make required minimum contributions to the plans. The IRS also found instances of administrators not using a plan's definition of compensation, which caused minimum contribution allocation errors under the top-heavy rules.

The IRS acknowledges that issues like these arise in smaller plans because such plans typically have less oversight and weaker internal controls. Have these weaknesses been exacerbated by the economy?

--Mark C. Wolf, Compensation Planning Group
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