Businesses and organizations generally offer a retirement benefit plan to attract and retain top talents. Other great benefits a plan sponsor enjoys are tax-deductibility of employer contributions, reduced turnover, increased productivity, and more.

In order to receive these benefits, the Plan has to comply with the Internal Revenue Service (IRS) and Department of Labor (DOL) rules and regulations. That means: (a) ensuring the plan is not discriminating against rank-and-file employees; (b) following the terms of the Plan document, (c) filing annual government returns/reports, and (4) providing certain disclosures to Plan participants, and so on. Not keeping the Plan in full compliance, however, can red flag your Plan and lead to government audits. So what are some retirement plan blunders that “spooks” the government, and how can plan sponsors remain on the good side of the IRS and DOL? Let’s dive in.

Spooky Item #1: No ERISA Fidelity Bond

Generally, plans must be bonded for at least 10 percent of the total plan assets, subject to a $1,000 minimum and maximum of $500,000. Why? It protects plans from losses caused by acts of fraud or dishonesty (e.g., theft, embezzlement or forgery). Plans must report the dollar amount of their fidelity bond on their annual IRS Form 5500 annual return/report filing.

So what spooks the IRS? When Plans fail to report sufficient bond on the Form 5500 which can red flag the filing and lead to IRS and DOL knocking on the plan sponsor’s door.

What’s best practice? Ensure that your plan has a fidelity bond. Review your Form 5500
carefully every year to make sure that the bond coverage is indicated in the government filings.

Spooky Item #2: Depositing Employee Contributions Late

Employees can contribute up to $19,500 and an additional $6,500 if they are age 50 or older. To do so, employees elect an amount they would like to contribute, and employer then deducts the amount from their paycheck and deposits it into their respective accounts. Under DOL rules, employee contributions must be deposited as of the earliest date the contributions could reasonably be segregated from the employer’s general asset, but in no event later than the 15th business day of the month following the month in which contributions were withheld from wages.

So what spooks the IRS? When employer fails to timely deposit contributions due to inadvertent error or as a result of extenuating circumstances. In that case, affected participants must receive lost earnings and the total amount must be reported to the IRS Form 5500.

What’s best practice? Review your deposits often. Ensure that deposits are being made within the guidelines and being deposited consistently. I would also suggest having policies and procedures in place.

Spooky Item #3: Not Following Definition of Plan Compensation

All plans must select the type of compensation they would like to use for purposes of employee and employer contributions. One of the most common error employers make when managing their retirement plan is using incorrect employee compensation. Typically, this error involves the employer excluding forms of compensation (e.g., bonuses, commissions or overtime) when the plan document says to include them.

So what spooks the IRS? Well, fortunately plans are not required to report any definition of compensation information on the Form 5500 return. However, it’s a mistake the IRS usually catches during audits.

What’s best practice? Review your plan document and make sure you understand the true definition of compensation. Is the plan perhaps not deducting employee salary deferrals from bonuses it should be deducted? Or Is the plan deducting deferrals from commissions when it should not be? Your trusted retirement plan expert should be able to paint a better picture as to how this works in your plan.

Spooky Item #4: Not Filing Form 5500 Timely

Filed with the U.S. Department of Labor every year, the purpose of the Form 5500 is to provide the Internal Revenue Service (IRS) and DOL with information about the plan’s operation and compliance with government regulations. For most plans, the 5500 is due the last day of the seventh month after the play year ends (July 31 for calendar-year plans). Of course, the plan can file an extension if more time is needed.

So what spooks the IRS? When a plan does not file the Form 5500 timely. The IRS and DOL systems are sophisticated enough to know that you have not filed the required return and plans that did not meet the deadline will typically receive a late notice along with associated fines and penalties. What’s more, effective January 1, 2020, the penalty has increased 10x to $250 per day up to $150,000!

What’s best practice? Your trusted retirement plan expert should be helping you complete and even file the Form 5500 timely. But it doesn’t hurt to set an annual reminder for yourself to make sure the 5500 does get filed. Ask your service provider to give you with a listing of compliance items that needs to get completed for your plan and due date for each item.

Final Words

An experienced retirement plan expert firm will be able to help you mitigate your risk, ensure your Plan is error-free and keep your Plan trouble-free from the IRS and DOL. That said, as much as we want to cover more eerie stuff, we don’t want to scare you to death. So, for now we’ll leave it here, but if you have any spooky stuff happening to your 401(k), 403(b) or any other types of plans, don’t be “afraid” to reach out to us. BOO!

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company’s benefits representative for rules specific to your plan.