Tax Traps for Benefit Plans_Bober Markey Fedorovich 6-25-15

T T f B fi PlTax Traps for Benefit PlansBy: Cindy Mitchell, CPA

June 25, 2015

Agenda

• Consequences of disqualificationq q• Types of plan failures• Correction programs availablep g• Common plan failures• Ways to prevent plan failures

© 2015 BOBER MARKEY FEDOROVICH

Consequences of Plan Disqualification

When a retirement plan is disqualified, the plan’s trust loses its tax‐exempt status and becomes a nonexempt trust. There are 5 main consequences:

1. Employees Include Contributions in Gross Income2. Employer Deductions are Limited3 Plan Trust Owes Income Taxes on the Trust Earnings3. Plan Trust Owes Income Taxes on the Trust Earnings4. Rollovers are Disallowed5. Contributions Subject to Social Security, Medicare and Federal

Unemployment (FUTA) TaxesUnemployment (FUTA) Taxes


Types of Plan Failures

• Operational failurep‒ failure to follow plan terms

• Plan document failure‒ plan provision violates IRS code

• Demographic failure‒ fail coverage non discrimination‒ fail coverage, non‐discrimination

• Employer eligibility failure‒ employer not eligible to adopt planp y g p p


Correction Programs Available

• IRS Programs • DOL ProgramsIRS Programs– SCP: Self Correction Program– VCP: Voluntary Correction

Program

DOL Programs– VFCP: Voluntary Fiduciary

Corrections ProgramDFVCP: Delinquent FilerProgram

– Audit Cap: Audit Closing Agreement Program

– DFVCP: Delinquent Filer Voluntary Corrections Program


IRS ‐ Self Corrections Program

Features: Types of failures:Features:• Easy• Free

l

Types of failures:• Operational failures only ‐ not following the plan document provisions• No IRS involvement

• Few guarantees• Limited to operational

provisions

Timing of correction:failures only

• Must have practices and procedures in place to avoid

• If insignificant error: correct any time• If significant error: correct within two years after the end of the plan year

future failures of failure


IRS ‐ Voluntary Corrections Program

Features: Types of failures:Features:• Not as easy• Fees apply

$750 $25 000

Types of failures:• Any failure – but cannot be under audit by the IRS or DOL

‒ $750‐$25,000

• IRS/attorney involvement• IRS guarantee

Timing of correction:• Any time – as long as not under auditAny time as long as not under audit

Note: Make sure to follow through on correction because IRS is following up (29% of plans failed to follow through on correction)


( p g )

IRS ‐ Audit Closing Agreement Program

Features: Types of failures:Features:• Fees apply

‒ $2,500 ‐ $88,000

IRS/ tt i l t

Types of failures:• Any failure

• IRS/attorney involvement• IRS guarantee

Timing of correction:• When under audit


DOL – Delinquent Filer Voluntary Compliance Program

Features:

Program

Types of failures:Features:• Fees apply

‒ Small plan $750Large plan $2 000

Types of failures:• Late filing of Form 5500

‒ Large plan $2,000‒ Max penalty – Two times

the amount shown above if multiple years involved

Timing of correction:• As soon as possible – cannot be used if under auditmultiple years involved

‒ If 5500 not that late, penalty reduced to $10 per day

if under audit


DOL – Voluntary Fiduciary Corrections Program

Features: Types of failures:Features:• May avoid paying IRS excise tax• Time consuming

Types of failures:• Delinquent participant contributions• Loan failures

• DOL “no action letter”• Must notify interested parties of the filing and correction

• Party‐in‐interest transactions• Plan expenses

Timing of correction:• As soon as possible – cannot be used if under auditif under audit


Common Plan Failures

• Failure to deposit employee deferrals timelyp p y y• Failure to file Form 5500 and/or 8955‐SSA timely• Plan loan failure• Failure to use correct definition of compensation• Eligibility failure• Failure to provide RMD (required minimum

distribution)• Wrong type of plan implemented


Late Deposit of Participant Contributions

• Employee contributions become plan assets on “the earliest date on which such contributions can reasonably beearliest date on which such contributions can reasonably be segregated from the employer’s general assets” but no later than the 15th business day of the following month.

l b l d d f l d lEmployee contributions include deferrals and loan payments‒ Must deposit money into the trust with lost earningsp y g‒ Must report late deposits on Form 5500

• Correction programs available:SC‒ SCP

‒ VCP (if significant and past the two year period)‒ VFCP


Failure to File Form 5500 Timely

• Form 5500 due seven months after the plan year end‒ Can file for a 2 ½ month extension using Form 5558g‒ Can rely on automatic extension using corporate extension‒ Special extension

Watch welfare plans (possibly more than one plan)‒ Watch welfare plans (possibly more than one plan)o Funded welfare plans (large or small) – filing requiredo Small unfunded/fully insured welfare plans – no filing

L f d d/f ll i d lf l fili i do Large unfunded/fully insured welfare plans – filing required

• Correction programs available:‒ SCP ‒ VCP (if significant and past the two year period)‒ VFCP


Failure to File Form 8955‐SSA Timely

• Form 8955‐SSA due 60 days after the due date of Form y5500‒ Can file for extension on Form 5558

Can rely on automatic extension using corporate extension‒ Can rely on automatic extension using corporate extension‒ Special extension

• Mandatory electronic filing‒ For employers that file more than 250 information returns

• Penalty for failure to file$1 per participant per day up to $5 000 per participant‒ $1 per participant per day, up to $5,000 per participant


Plan Loan Failure

• Plan document does not allow for loans but loans are permitted‒ Retroactively amend the plan to permit loans and file under VCP

• Loan terms exceed five years with no evidence that it was used to purchase primary residence‒ Re‐amortize the loan over the maximum remaining period from the date of

the original loan

• Loan amount exceeds dollar limit‒ Participant repays the excess amount and remaining principal balance is re‐

amortized over original loan’s remaining period

• Loan payments are not made timely‒ Participant to make a lump sum payment for missed installments or

deemed distribution of loan balance – employer must issue 1099‐R to participant


Failure to Use Correct Definition of Compensation

• Several different definitions of compensation – knowwhich pdefinition is used by your plan‒ Section 3401(a) – (FIT withholding)

W 2 Box 5 wages‒ W‐2 Box 5 wages‒ Include or exclude bonuses‒ Include or exclude fringe benefits‒ Include or exclude overtime, commissions, etc.

• When compensation used to practice is larger than the definition of compensation in the plandefinition of compensation in the plan‒ Improper employee contribution and earnings returned to

participantImproper matching contribution and earnings to be forfeited


‒ Improper matching contribution and earnings to be forfeited

Failure to Use Correct Definition of Compensation

• When compensation used in practice is less than the p pdefinition in the plan:‒ Contribute 50% of the employees missed elective deferral

Contribute 100% of the missed match‒ Contribute 100% of the missed match‒ Contribute earnings on all of the above

• Correction programs available:‒ SCP ‒ VCP (if significant and past the two year period)VCP (if significant and past the two year period)


Eligibility Failures

• Types of eligibility failures:yp g y‒ Missed entry date – employer required to provide participant

o 50% of missed deferralo 100% of missed matcho 100% of missed matcho 100% of lost earnings

‒ Entry allowed too earlyo Excess deferral and earnings should be returned to participanto Excess deferral and earnings should be returned to participanto Excess match and earnings should be forfeited and used in

accordance with plan terms

• Correction programs available:• Correction programs available:‒ SCP ‒ VCP (if significant and past the two year period)


Failure to Distribute Required Minimum Distribution

• Two problems for failing to distribute RMDp g‒ Operational failure for the plan‒ 50% penalty for the participant

C ti d• Correction procedures‒ Distribute RMD

• Correction programs available:p g‒ SCP ‒ VCP

If fil d d VCP IRS f i 50% lto If filed under VCP, IRS can forgive 50% penaltyo Reduced filing fee of $500 if less than 50 participants


Wrong Type of Plan Implemented

• 401(k) plan – any non‐government employer( ) p y g p y• 403(b) plan – public education/501(c)(3) organization• 457 plan – government or tax‐exempt organizationp g p g• Simple plan – small employers (100 or less employees)• SEP plan – any employer• SARSEP plan – must’ve been established by 1997• Profit Sharing plan – any employerIf wrong type of plan was established – file under the

VCP, most likely need to stop all contributions to plan


How to Avoid Failures in the Future

• Make sure to read the plan documents and know the pdefinitions provided

• Have practices and procedures in place to be compliant ith l d t ( d i t l t l )with plan documents (good internal controls)

• Monitor new legislation and impact on plan


Questions

Cindy H. Mitchell, CPASenior ManagerSenior ManagerTaxation [email protected]

BOBER MARKEY FEDOROVICH

3421 Ridgewood Road, Suite 300Akron, OH 44333

600 S i A E S it 925600 Superior Ave E, Suite 925Cleveland, OH 44114

bmfcpa.com


Documents

Tax Traps for Benefit Plans_Bober Markey Fedorovich 6-25-15