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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS's Employee Plans Compliance Unit (EPCU) has completed a project to determine if plan sponsors properly considered leased employees for qualified plan purposes. Most of the plan sponsors contacted either misunderstood the leased employee rules or misapplied these rules, the IRS found. The goals of the project were to provide plan sponsors an overview of how the plan must treat leased employees, learn if sponsors were correctly considering leased employees for plan purposes, and determine whether leased employees were due additional plan benefits.
Generally, a leased employee is defined as an individual whose services are purchased from a leasing organization and provided to a recipient company. For retirement plan purposes, the recipient company must treat a leased employee the same as a common law employee. This means that if a leased employee meets the age and service requirements of the plan, he or she must be allowed to participate in the plan. However, a sponsor may specifically exclude leased employees from participating in the plan, but must still consider them when performing the plan's coverage and nondiscrimination testing.
The EPCU sent contact letters to a sample of plan sponsors listing pension feature code "3F" on their Form 5500, Annual Return/Report of Employee Benefit Plan, filings. Code 3F indicates that the "Plan sponsor(s) received services of leased employees, as defined in Internal Revenue Code section 414(n), during the plan year." The EPCU asked sponsors how they treated leased employees in their retirement plan. Approximately 65% of sponsors in the sample did not actually have any leased employees, the IRS found. Instead, the sponsors either didn't fully understand what it means to be a leased employee for plan purposes as defined in Code Sec. 414(n); used pension feature code "3F" when they actually meant to indicate "3E" (prototype plan); or selected pension feature code "3F" because on prior year Forms 5500, "3F" stood for some pension feature code other than for leased employees.
The responses also showed that in 25% of sample cases, sponsors correctly applied the leased employee rules, or used the Employee Plans Compliance Resolution System (EPCRS) to correct plan errors that occurred when they didn't properly apply the rules. Some plans incorrectly applied the leased employee rules and the EPCU advised those plan sponsors to correct these errors. Unlike an EP audit, errors discovered during the compliance check process may still be corrected through EPCRS because the plan isn't under examination. The EPCU referred plans that didn't respond to the compliance check letters to EP Examinations to be evaluated for an audit.
Source: IRS Employee Plans News, Issue No. 2011-9, December 20, 2011.
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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