RSM Resources

If your company offers a qualified retirement plan, when is the lasttime you made sure it complies with the Internal Revenue Code and theplan document itself?

Such due diligence is important for avariety of reasons. First, it’s the law. The Employee Retirement IncomeSecurity Act (ERISA) requires plan sponsors to design and operate theirplans for the sole benefit of participants, keeping plan expensesreasonable. Second, comprehensive due diligence can reduce fees andadministrative burdens for the company and provide better choices foremployees. Finally, the IRS has promised — and is delivering —increased scrutiny of employer-sponsored retirement plans. The IRS isparticularly interested in whether the employer accurately implementsthe ever-changing and complex rules of plan governance. Does theemployer offer the plan to all eligible employees and provide propernotice? Make deposits on time? Meet filing requirements? Properlycalculate underlying compensation to determine retirement contributions?

Followingare some of the most important retirement plan requirements to help youtest the operational and legal health of your retirement plan. Acomplete plan review can help determine whether you’re meeting all yourobligations as a plan sponsor.

Did you enable all eligible employees to begin participating in your retirement plan on the correct date? TheInternal Revenue Code establishes the minimum age and servicerequirements for employees to begin participating in a qualifiedretirement plan (a plan that qualifies for income-tax exemption). Ingeneral, a plan cannot require, as a condition of participation, anemployee to complete a period of service with the employer extendingbeyond the later of the date on which the employee reaches age 21 orcompletes one year of service. Many employers misinterpret the term one year of service.For eligibility purposes, the IRS defines the term as 12 consecutivemonths in which the employee works 1,000 or more hours. Many employersoverlook the 1,000-hour threshold, erroneously believing that it mayexclude part-time employees.

The code also stipulates when aneligible employee must begin participating. A plan can’t qualify unlessit requires participating employees to begin no later than the earlier of the following two dates:

• Thefirst day of the first plan year beginning after the date on which theemployee satisfied the minimum age and service requirements
• The date six months after the date on which the employee satisfied the minimum age and service requirements

Doesyour plan operation include all the employees described in the plandocument, and do you give them the benefits described in the plan? Yourplan document describes who benefits under your plan, and whatcontributions or benefits the plan will provide them. Your employees’rights to contributions and benefits derive from the plan document.

You must operate your plan in accordance with the terms of your plan document. Make sure you:

• Cover the employees that your plan document says you will cover.
• Cover employees when the plan document says they will be covered.
• Provide employees the contributions or benefits the plan document describes.
• Evenif the terms of your plan do not reflect your intent, you must followthe terms of your plan. You can change the terms of your plan via aplan amendment; however, the IRS may limit the areas you can change orthe timing in which changes may be effective. Federal law prohibitsplan sponsors from reducing any participant’s accrued benefit through aplan amendment. In general, this means you cannot take away aparticipant’s right to a benefit once earned under the plan terms. Forthis purpose, benefits include a participant’s right to a specificcontribution allocation or accrual formula, as well as certain forms ofdistribution and the timing of distribution payments.

Does your plan earmark all plan assets for the exclusive benefit of employees and their beneficiaries? Aretirement plan’s assets accumulate under a trust. The employer,employees, or both, contribute to the trust. The trust holds the assetsuntil they are distributed to the employees or their beneficiaries.Plan sponsors must maintain the trust for the exclusive benefit of theparticipants and their beneficiaries and cannot use any plan assets forother purposes. Failure to follow these rules can result in significantpenalties to the employer as well as civil penalties to the individualfiduciaries.

Knowing when employee salary deferrals, loanrepayments and other employee funds actually become plan assets iscritical. The Department of Labor (DOL) regulations deem employee fundsto be plan assets as soon as they can be "reasonably segregated" fromthe employer’s assets. The DOL has increasingly scrutinized this areain recent years. Many of its regional offices state that any plandeposits employers make more than three to seven days after withholdingthe funds from employees’ pay will be considered late. Are youremitting employee funds within three to seven days of the payrollcheck date?

Does your plan make the required minimum distributions to employees at the correct time and in the correct amounts? Anemployee’s assets won’t remain in the retirement plan indefinitely.With the exception of certain owner-employees, participants must begintaking distributions when they reach retirement age or actually retire.For most employees, distributions must begin no later than April 1 ofthe calendar year following the later of the calendar year in which theemployee attains age 70-1/2 or retires. This does not apply to anemployee who owns more than 5 percent of the employer’s business.Minimum required distributions for employees owning more than 5 percentof the employer’s business are triggered when the employee attains age70-1/2, regardless of whether he or she is still employed.

Distributionsmust be evenly spread over the remaining life of the employee, thelives of the employee and a designated beneficiary, or a period notextending beyond the life expectancy of the employee and a designatedbeneficiary.

Does your plan limit contributions made to your employees or benefits they accrue? Qualified retirement plans are not bottomless tax shelters. For2007, the annual benefit limitation for a defined benefit plan is$180,000 for each employee. The limit on annual contributions to adefined contribution plan in 2007 is $45,000 for each employee.

Does your plan account for the maximum compensation limit for each employee?For 2007, the maximum annual compensation of each employee that can betaken into account under a plan must not exceed $225,000. That amountis subject to cost-of-living adjustments for later years.

Giventhat laws and regulations governing qualified retirement plans changefrequently, savvy employers review their retirement plan documentsannually to ensure they conform to applicable tax rules. But duediligence shouldn’t stop there. Be sure to adopt practices, proceduresand other internal controls to ensure your plan operates in accordancewith its own requirements.

An important time to conduct duediligence is after certain "triggering events" such as a change inthird-party administrators, the departure of key internal benefitspersonnel, or a major business change including a spin-off, acquisitionor merger. Should you find an error in your plan document or in theplan’s operation, don’t despair. The IRS provides incentives forfinding and fixing mistakes sooner rather than later. Business ownerscan often correct plan errors without contacting the IRS or incurringregulatory scrutiny or penalties.