Now that the GUST determination letter program is winding down, there is much discussion about the IRS gearing up to focus its attention on examinations of qualified retirement plans. This reminds me of a talk given by Preston Butcher, Director of Employee Plans Examinations. In an outline provided with the talk, Mr. Butcher lists items of information on IRS Form 5500 (Annual Return/Report for Employee Benefit Plan) which may trigger an examination and the possible compliance problems or issues that could be raised by the item (i.e. what could get a plan in trouble with the IRS). For those who have an interest as to what those items are (including the top 5 most common invitations for audit), you may continue reading:
| 5500 Information Item | Possible Compliance Issue |
|---|---|
| Low percentage of participants compared to number of employees | Coverage problem |
| Large percentage of loans to participants compared to total assets or large dollar amounts of loans | Prohibited Transaction and/or section 72(t) early distribution penalty tax issue |
| Large loss on income statement when it excludes distributions to participants | Bad investments |
| Funding deficiency on the Schedule B--defined benefit plan | Underfunded plan and excise tax payment |
| Funding deficiency on the 5500 form - defined contribution plan | Underfunded plan and excise tax payment |
| Date of most recent amendment | Did not amend for GUST or TRA 86 |
| A "yes" answer to the question, "Did any amendment during the current year result in the retroactive reduction of accrued benefits for any participant | Reduction in plan benefits |
| when comparing multiple years, there is a large drop in number of plan participants | Partial plan termination |
| when comparing multiple years, there is a large change in assets | Reason for large fluctuation |
| Large amounts of administrative expenses | Valid plan expenses |
| Large amounts of assets in real estate | Unrelated business taxable income |
| Large amounts of liabilities | Reason for plan liabilities |
| An adverse accountant's opinion letter | Reason for adverse opinion letter |
| Where the return indicates the plan terminated a long time ago but the distribution has not yet taken place | Distribution must occur as soon as administratively possible, usually within one year |
| *Large number of separated participants during the year with less than 100% vesting | Vesting issue |
| *Large percentage of assets classified as "Other Assets" on balance sheet | Questionable assets |
| Large percentage of plan assets in any one investment, e.g. mortgages | Diversity of assets |
| Compare end of the year assets to subsequent years beginning of the year assets | Should be the same |
| Compare end of the year plan participants to subsequent year beginning of the year participants | Subsequent year should be the same or greater |
| Terminated plan where the date of the most recent amendment is old | Terminated plans must be amended for the current law prior to termination |
| Large decrease in plan participants from beginning of year to end of year | Partial termination |
| *Large distributions on income statement | Proper vesting and determine if the participant picked up distribution in income and paid early distribution tax, if applicable |
| Small ESOP plans - less than 10 participants. | Closely held stock - stock valuation questions |
| *Top-heavy 401(k) Plans | Providing top-heavy minimums for non-highly compensated employees who don't receive employer contributions and treatment of matches used to meet top-heavy minimum |
| *Top-heavy plans covering self-employed individual | Top-heavy issues: Does plan provide for top-heavy minimums? Does plan use a top-heavy vesting schedule? (Self-employed issue: An owner employee must adjust their earned income by the contribution allocated on their behalf when determining their proper allocation as well as deduction. This is a circular calculation which is complicated and often incorrectly done. |
*Indicates the top 5 most common occurrences