We’re well into the start of calendar year 2019, and the to-do list to close out 2018 holds many tedious and time-consuming tasks. It is tempting to put off thinking about what may be coming in this new year.
However, the Internal Revenue Service (IRS) works on a different timeline. The IRS plans its work based on its fiscal year, which for fiscal year (FY) 2019 began on October 1, 2018, and ends September 30, 2019. Right at the start of this fiscal year, the IRS released Publication 5313, “Fiscal Year 2019 Program Letter,” to share publicly the initiatives that the agency will be working on in FY 2019. It is worth taking a few minutes now to look at these initiatives, make some quick checks of any issues that may apply to your retirement plan, and prioritize action on them, if needed.
Six issues are listed as priorities for the IRS Tax Exempt & Government Entities (TE/GE) unit that oversees employer-sponsored plans in the 2019 Program Letter’s Compliance Strategies section:
- Distributions: Verify that participants are receiving correct distribution amounts within industries experiencing a decline in employment.
- Form 5500/Form 5500-SF stop filers: Contact employers sponsoring plans that did not file one or more required returns.
- Internal Revenue Code (IRC) Section 403(b)/457 plans: Examine 403(b) plans for universal availability, excessive contributions, and proper use of catch-up contributions under IRC Section 414(v); and 457(b) plans for excessive contributions and proper use of the special 3-year catch-up contribution rule.
- Small plans with large assets: Determine whether smaller plans with trusts holding large assets have taken deductions on Form 1120, U.S. Corporation Income Tax Return, exceeding IRC Section 404 limitations.
- Simplified Employee Pension (SEP) plans: Determine whether accounts violated maximum-participant rules, failed to meet statutory and matched employer contribution requirements, and/or failed to meet IRC Section 416(i)(6) top-heavy requirements.
- Terminated cash balance plans: Assess terminated plans with cash balance features that may have exceeded IRC Section 415 limitations, or generated a reversion that is subject to an excise tax.
As usual, the IRS cautioned in the document that as more issues are developed and approved by its Compliance Governance Board through the fiscal year, some with even higher priority may potentially shuffle or replace the Compliance Strategies listed above.
What to Check Now
Here are some checks to make now for a quick (but not conclusive) assessment of your plan’s risk of noncompliance.
Distributing the correct benefits to participants is a fundamental priority for any retirement plan, even if you are not within an industry with declining employment. The U.S. Department of Labor (DOL) provides a list titled “10 Common Causes Of Errors in Pension Calculation” on its website that can be used as a checklist to review your plan.
The list includes several items related to incorrect data and errors in benefit calculations. Defined benefit (DB) plans should add to the list using correct benefit commencement dates and confirming actuarially equivalent payment calculations.
Filing an annual report from the Form 5500 series also is a fundamental and routine priority for a retirement plan, and yet some plans stop filing for no readily apparent reason. The IRS is using available historical 5500 data to look for plans that filed in the past and then stopped. In this initiative, the IRS will be asking for an explanation of why the filings stopped.
A quick way to check a plan’s historical filings going back to 2009 is to use the DOL’s Form 5500/5500-SF Filing Search website. You only need to fill in the plan sponsor’s employer identification number (EIN) to get a list of 5500s that have been filed. If there is a plan without a current filing, open the latest filing and check to see if it was marked as final and had zero ending assets. If it does not, then follow up with the plan administrator to see if there is an explanation for the stoppage.
If it is determined that filings should have been made and weren’t, then consider immediately starting the process to file the missing forms using the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) on its website. The DFVCP is a relatively inexpensive alternative to paying the standard penalties for late filings.
Section 403(b) Plans
The universal availability requirement for a Section 403(b) plan has long been a struggle for administrators. A quick way to check for symptoms of a problem with universal availability is to get a report of employees who are actively deferring into the plan, and then think about the population of employees who are not deferring. If an entire category of employees is not deferring, then check to see if the plan has a permissible reason to exclude that category.
Sponsors of 403(b) plans also have struggled with tracking two sets of rules for catch-up contributions, allowing both elective deferrals and Roth deferrals, and giving proper consideration to deferrals made to a 401(k) plan also have been a struggle for 403(b) plan sponsors.
The IRS’s “403(b) Plan Fix-It Guide” on its website provides an excellent resource for a quick check of salary deferral issues, for example. The guide also offers specific help on elective deferral, Roth, and catch-up contribution questions here.
Small Plans with Large Assets
The initiative to look at the deductions taken on a Form 1120 corporate tax return by sponsors of small plans that have large assets is an example of how the IRS is using data-driven analyses to identify situations with a high risk for noncompliance. This issue is unlike the other five mentioned in the 2019 Program Letter because there are many scenarios in which a small plan can accumulate large assets.
The IRS did not disclose the search criteria being used. If you’re managing a small plan with large assets, check to see if there are documentable events that can explain this condition. For example, consider answers to questions like: Are there large rollovers into the plan? Were there periods of unusually high rates of return on assets? Is the plan a DB plan with high actuarially required minimum funding levels? If there are no obvious reasons, pose the question to the company’s accountants and the plan’s service provider for their input.
For SEPs, the initiative as presented in the Program Letter could lead to a fairly broad type of operational review for compliance. Keeping in mind that SEPs truly are simpler than most other defined contribution (DC) plans, a quick review of the IRS’s SEP Plan FAQs on the website provides a fresh look at how the SEP should work. Any item that is not familiar or known not to be in compliance should be explored further.
The last issue is focused narrowly on terminated plans with cash balance plan features. A plan sponsor that attempted to terminate the plan without professional assistance almost certainly will draw a close review. Similarly, if the topic of addressing excess assets came up, then a quick check of the plan termination documentation can be done to confirm that the Section 415 or reversion issues were addressed. If the documentation is not available or is not clear, then the service provider should be asked to provide the complete documentation.
Most likely, only one or two of these issues may apply to a specific plan, so very little time is needed for a quick check to see if the plan may be within the scope of these IRS priority initiatives. A quick check now can reduce the anxiety created by receiving a letter from the IRS saying that the plan may not be in compliance. If a brief check uncovers an issue, then it is better to begin to address it now. The Pension Plan Fix-It Handbook is a good place to start.
|A. Paul Protos is president and cofounder of ATR Inc., a third-party administration and benefits consulting firm that provides services related to Forms 5500, plan documents, summary plan descriptions, recordkeeping services, and compliance/operational reviews. Protos has more than 40 years of benefits consulting and administration experience. He has achieved the enrolled retirement plan agent (ERPA) designation. Protos is the contributing editor of the Pension Plan Fix-It Handbook.|