Most of the plans the IRS has checked for compliance with the grandfathering requirements of 401(k) money purchase pension plans had acted appropriately, says the agency’s Employee Plans Compliance Unit. However, some plans made reporting mistakes on their annual Forms 5500.
The 401(k) Money Purchase Pension Plan project is a study the EPCU conducted to determine if money purchase pension plans with a 401(k) feature created after 1974 met the grandfathering requirements of Code Section 401(k)(1). Only a pre-ERISA money purchase pension plan can contain a qualified cash or deferred arrangement or 401(k) feature. Money purchase pension plans were no longer allowed to have a 401(k) feature after ERISA’s enactment unless they were grandfathered as part of an already existing plan arrangement.
Compliance contact letters were sent to more than 700 plan sponsors that filed an annual return showing that they were a money purchase pension plan with a 401(k) feature after ERISA’s enactment in 1974. Sponsors were asked to answer questions about their plan to determine if they had mistakenly adopted such a feature post-ERISA, and if so, to obtain correction.
Most Plans in Compliance
Most plan sponsors in the sample had merged a money purchase pension plan into a 401(k) profit-sharing plan because of the increased profit-sharing deduction rules, which began in 2002. These changes allowed a plan sponsor to contribute and deduct in a single plan what previously could only be contributed and deducted in two separate plans, according to the EPCU’s summary. Rather than maintaining two defined contribution plans, sponsors adopted or continued a 401(k) profit-sharing plan, discontinued the separate money purchase pension plan and merged its assets into the 401(k) profit-sharing plan.
After the merger, sponsors reported that they had both a money purchase pension plan and a 401(k) profit-sharing plan on their Forms 5500, because of the special quality of the merged assets.
Only one plan sponsor in the sample incorrectly added a 401(k) feature to an already existing money purchase pension plan post-ERISA. Once brought to its attention, the plan sponsor corrected the error. A few plans that may not be in compliance were referred for examination.
Sponsors Appear Confused by Coding
Evidently the issue arose because of the different ways that the plan sponsors were reporting their plans on their Form 5500. EPCU had selected plans whose Forms 5500 plan characteristic code line listed that they were both a money purchase pension plan and a 401(k) plan.
However, when asked in the compliance contact letter if the plan was a DC plan, a money purchase pension plan or a 401(k) plan, some sponsors indicated their plans were either one of the latter two plans, but were not DC plans. This response was incorrect, according to the EPCU, because both money purchase pension and 401(k) plans are types of DC plans. In addition, a few plan sponsors said that their plans were only money purchase pension plans; a few indicated that their plans were neither that type of plan nor a 401(k) plan.
The EPCU recommended that to avoid errors on Form 5500, plan sponsors should review their plan’s characteristics and compare them to the pension feature code descriptions in the instructions to the forms.
The EPCU develops compliance projects and performs data analysis to focus on areas of potential noncompliance, according to its website. Most issues are resolved without an on-site examination of a plan’s books and records. To date, the EPCU has conducted more than 23,000 compliance checks.
Click here for more information on the 401(k) Money Purchase Pension Plan project.