Top 10 employee benefits compliance and reporting concerns
Entrepreneurs are popping up all over as companies downsize, retirees start businesses and job dissatisfaction leads employees to strike out on their own. Many new business owners are using retirement assets to fund their start-ups. Releasing retirement funds can have serious consequences for employers and plan participants, however. Even when handled properly and with filings of IRS Forms 1099-R and 5500, such transactions may be considered questionable and discriminatory. They can trigger plan disqualification and adverse tax consequences for the employer and the entrepreneur, and can be quite costly to correct.
As part of its fresh-start initiative in fall 2011, the IRS enabled eligible employers to voluntarily reclassify independent contractors and other non-employees as employees for future tax periods. There are pitfalls, however. Uncertainties remain, as federal tax reclassification does not address state tax relief or potential taxes, penalties and interest. Employers may have to amend their retirement plans language and alert these new employees that they will be treated differently than independent contractors when it comes to income, payroll and self-employment taxes. Employers also need to look closely at their medical plans for possible red flags concerning discrimination.
Retirement plans are required to have formal governing documents that explain all of the provisions of the plan to employees. The documents must be easy to understand and supplied to employees in a timely manner. Employers need to keep signed documents on file and update them when regulations change. Amendments to the plan should include information about termination, vesting, future benefit accruals and IRS Form 550 reporting, and be adopted before contributions to the plan may commence. Failure to comply with governing document regulations can result in costly consequences, including loss of tax preference, as this is considered to be a Top 10 Error by the IRS.
Late salary deferral contributions are prohibited and can cause headaches for the employer and plan participant. Not only are they prohibited by the plan fiduciary, they are actually lost earnings for the plan and are reportable on Form 5500 until funded. These contributions require financial disclosure and trigger the Department of Labors Voluntary Fiduciary Correction Program. They also can become a focus of DOL audits and an excise tax liability. As if all this isnt enough to deter one, the IRS considers late salary deferral contributions to be a Top 10 Error and they are very costly to correct.
The timing of deductions and the failure to fund contributions are the key issues regarding employer contributions. First, a deduction may be treated as contributed in a prior year if the contribution is made by the due date of the employers tax return. The qualified plan must be adopted by the end of the tax year for the deduction to be valid. If an employer fails to fund its contributions, it must amend its tax return, revise participant statements and fund lost earnings due the plan. Keep in mind that failure to fund contributions is prohibited and can result in an excise tax liability and Form 5330 filing.
Participant loans may be life-savers for people in certain situations, but they are also highly regulated. Qualified retirement plans, annuity plans and governmental plans allow loans under certain circumstances. Loans are not allowed under IRAs, SEPs, SARSEPs and SIMPLE IRA plans. Participant loans are taxable if they fail to satisfy the plan loan rules of IRS Section 72(p) covering retirement plan loans.
Qualified plan contributions can be included in an employees income at the time of distribution of funds. The retirement plan governing documents must specify the available forms and distributable events for the employee. Distribution notice requirements apply, and the distribution must be reported on IRS Form 1099-R. Failure to comply could result in plan disqualification, adverse tax consequences for the employer and plan participants, as well as excise taxes. Need we say that this could be costly to correct!
The Form 5500 may be fueling some plan administrators dreams, considering all of the disclosure requirements involved. There are several new compliance and technical questions on this form involving termination, paid benefits, blackout notices, delinquent participant contributions and minimum funding amounts. Special rules apply to so-called Top-Hat nonqualified deferred compensation plans for select groups of highly compensated employees and top management, as well as ERISA welfare benefits. Small pension plans with fewer than 100 participants may be eligible for audit waivers under certain conditions. Its best to cover all the bases and the details when it comes to Form 5500.
IRS Form 8955-SSA is used to report when participants separate from service covered by a plan and are entitled to a vested plan benefit at a later date. The Social Security Administration uses it to alert retirees filing for benefits that they may have additional benefits available under a previous employers plan. Special filing due dates apply for 2009 and 2010 plan years, but in general, Form 8955-SSA is due the same date as Form 5500 and related tax schedules. Sponsors of government, church and other plans not subject to ERISA Section 203 are exempt.
Nonqualified deferred compensation refers to any plan, agreement or arrangement between an employer and employee to pay compensation to the employee in the future. Written plan documents are required for deferred compensation and timing considerations must be made for income tax, FICA and Medicare. There are significant penalties for noncompliance for the employee under IRC Section 409A.
For more information about employee benefit plan compliance and reporting, contact Kelly Davis at Kelly.Davis@cliftonlarsonallen.com
or (480) 615-2383
Employers can stay on the right side of regulators by complying with laws and regulations governing employee benefits. As the regulatory landscape changes, plan sponsors and administrators who keep pace with new requirements and filings prevent errors and problems down the road. CliftonLarsonAllen LLP offers these Top 10 Employee Benefits Compliance and Reporting Concerns as a tool or aid for keeping plan administration on the straight and narrow.