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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.
In its Spring 2006 edition of Retirement News for Employers, the IRS has provided employers with solutions under the Employee Plans Compliance Resolution System (EPCRS) for correcting common mistakes made with regard to IRA-based plans, such as Simplified Employee Pension plans (SEPs), SEPs established prior to 1997 that include a salary reduction arrangement (SARSEPs), and SIMPLE IRA plans. Common mistakes which can cause plans to become disqualified, according to the IRS, include the failure to update plans for recently enacted laws, the failure to pass the deferral percentage test (for SARSEPs), and under- or over-contributions to funds. Employers engaging in fixes under the EPCRS will use either the Self-Correction Program (SCP), or the Voluntary Correction Program (VCP), depending on the timing of the fix and the significance of the failure.
If the plan has not been properly updated to reflect laws, such as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the IRS states that documents required to bring the plan into compliance should be adopted, and restoration must be made of any benefits lost by participants due to the failure. The IRS is reminding employers that they have until December 31, 2006 to update their plans for EGTRRA.
Generally, under-contributions may be corrected by the plan sponsor. Participants will fully vest in the contributions, which must be adjusted for earnings. Corrections for over-contributions, however, depend upon whether or not they are due to excess elective deferrals or employer contributions. Excess elective deferrals should be distributed to the participant, reported on IRS Form 1099-R, and should be adjusted for earnings. They are includible in the participant's gross income in the distribution year. Excess employer contributions, adjusted for earnings, are distributed to the plan sponsor. The excess contributions are not includible in the affected participant's gross income, but they should be reported on IRS Form 1099-R, with the taxable amount indicated as zero.
For excess retained amounts, a fee will apply, in addition to the usual VCP fee, unless the total excess is $100 or less, in which case no distribution is required, and the additional fee will not apply. Only excess amounts that did not result in a violation of statutory limits may be retained, and no deduction is allowed for these excess amounts if they are retained in the plan. With regard to retained excess amounts from contributions that exceed the legal maximum, the excess amount must be used to reduce each affected participant's yearly contribution limit each year following the year of correction until the excess is eliminated. The plan sponsor may instead choose to reduce each affected participant's yearly limit starting with the year of correction.
The IRS suggests that employers have a system for ensuring that their plans are updated for new laws. Employers should also ensure that their plan administrators are supplied with accurate payroll information so that proper deferrals and contributions can be made to participants' accounts, the IRS states.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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