Is the Recession Causing Small Retirement Plans to Skimp on Compliance Efforts?

Internal Revenue Service
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If small businesses do not properly manage their company retirement plan the government will. This government intervention will prove to be much more expensive and less flexible than their current plan. Many small business owners would be well advised to hire professional fiduciaries to assist them. This can prove to be less expensive than their current plan.

Have difficult economic times caused small retirement plans to cut back on compliance with the tax laws? According to the March 20 issue of the IRS electronic newsletter, Employee Plans News, 1 in 4 smaller retirement plans reviewed starting in 2007 under the IRS’s LESE (“Learn, Educate, Self-Correct, and Enforce”) project had engaged in at least one prohibited transaction. Under LESE, the IRS examined 49 plans with less than $5 million in assets that also had investments in real estate and either participant loans or a Form 5500 Schedule D, DFE/Participating Plan Information and found that 12 of those plans had engaged in prohibited transactions. Among the problems were failures to follow loan provisions, to document loans and loan payments, and to prohibit loans to the employer or related entities. During a separate LESE project involving defaulted loans and noncollectible leases, the IRS found 1 in 10 retirement plans had engaged in prohibited transactions. Both LESE projects revealed retirement plans with improperly valued assets and plan documents not properly amended for recent changes in the law.And, in a separate LESE project on compliance with top-heavy rules, the IRS found that about 14% of small §401(k) plans failed to comply with the top-heavy rules because, in many cases, the plan sponsors did not test for the top-heavy requirements and did not make required minimum contributions to the plans. The IRS also found instances of administrators not using a plan’s definition of compensation, which caused minimum contribution allocation errors under the top-heavy rules.The IRS acknowledges that issues like these arise in smaller plans because such plans typically have less oversight and weaker internal controls. Have these weaknesses been exacerbated by the economy?

Plan sponsors are required to seek professional fiduciary help if they lack this expertise, which most do. This can be done, in many cases at a lower cost than you are currently paying for your 401(k) Plan.

Please comment or call to discuss how this affect you organization.

  • Eight suggestions for improving your 401(k) plan (
  • DOL & IRS Ramping Up Enforcement (
  • Small business owners are unprepared for retirement (
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DOL & IRS Ramping Up Enforcement

The DOL & IRS are ramping up enforcement efforts for retirement plan compliance.

The Obama administration has been increasing the IRS and DOL staff to combat the large number of retirement plans that it says are not compliant with retirement planning rules and regulations.

The DOL says 77% of 401(k) plans are non-compliant in some form.

At a recent conference John Carl president of the Retirement Learning Center discussed the increased enforcement efforts.   While 2009 was a bad year for the economy, Carl said, it wasn’t so bad for DOL — it added 997 employees that year — with 70% of those employees added to its enforcement division. The department’s Employee Benefits Security Administration (EBSA), for instance, saw a 28% budget increase in 2009, and EBSA added 29 enforcement personnel.

The targets for the IRS are U.S. companies owned by foreign entities; 403(b) plans; and small business owners.

The IRS is coming.

Please comment or call to discuss how this could affect you and your organization.

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When is a 401k Distribution Not Subject to the 10% Penalty?

WASHINGTON - OCTOBER 26:  Internal Revenue Ser...
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When is a 401k Distribution Not Subject to the 10% Penalty?

There are only a couple of situations where the IRS will waive the 10% 401k early withdrawal penalty, i.e., a withdrawal prior to the participant reaching age 59½.

  • Amount of your unreimbursed medical expenses greater than 7.5% AGI ( IRC §72(t)(2)(B) ).
  • There is a Qualified domestic Relations Order (QDRO) from the courts that mandate funds from your account go to a former spouse, child, or dependent ( IRC §72(t)(2)(C) ).
  • You have separated from service and were at least 55 years of age when you did so (or separated from service in the year in which you turned 55) ( IRC §72(t)(2)(A)(v) and 72(t)(10) ).
  • You have elect a Section 72(t) distribution.
  • You are totally disabled. (The key to the disability exception seems to lie in the permanence of the condition, not the severity. Therefore, to claim this exemption you have to furnish not only information proving that you are totally disabled, but also information on the permanence of the disability.) ( IRC §72(t)(2)(A)(iii) )
  • You have died and your beneficiary gets the money ( IRC §72(t)(2)(A)(ii) ).
  • You have made contributions under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment ( IRC §414(w)(1)(B) ).
  • Certain distributions to qualified military reservists called to active duty (IRC §72(t)(2)(G) )
  • Because of an IRS levy of the plan ( IRC §72(t)(2)(A)(vii) )

It goes without saying that early withdrawal from your retirement plan should be your last resort.

Please comment or call to discuss.

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