403(b) Plans – It’s A New World   IRS Guidance for Plan Sponsors   IRS Plan Audits: Top Ten Issues Found In EPTA Audits   Fiduciary Liability Exposure of Retirement Plan Sponsors under ERISA 404(c)   Corporate Governance of Retirement Plans: Best Practices   Specific Steps Involved in Creating and Maintaining a System of Retirement Plan Governance   404(a)5 Fee Disclosure to Plan Participants   408(b)2 Fee Disclosure to Plan Sponsors   Small Plan ERISA 3(38) Fiduciary Services   Cost Sharing Policy for 401(k) and ERISA 403(b) Plan Expenses

3. Deferral Percentage Tests

• If the plan has no limits on HCE deferrals and no matching contributions, examining how the plan meets the ADP test may uncover a process inadequacy.
• ADP/ACP percentage calculations may be performed incorrectly.
• ADP/ACP electronic data may be faulty.
• There could be failures if testing is completed by a third party vendor and there is no oversight by the employer.
• The employer's ADP test could fail if a benefit is provided to a "special" group of participants and not to "all" participants.
• Newly acquired employees may have not been offered an option to make elective deferrals or may not have been considered for testing purposes.

4. Compensation

• Equity compensation plans typically generate Form W-2 income on exercise of stock options or early sales of stock purchased through a section 423 stock purchase plan. A plan, which permits employees to make section 401(k) deferrals from such income, may not have any means to collect the deferred income and, therefore would be applying the deferral percentages incorrectly.
• If the section 401(a)(17) compensation limitation is exceeded, the result could be excess employer contributions.

5. Plan Document

• Qualification issues exist where plans have not timely adopted amendments (including GUST amendments), leading to automatic disqualification. These issues are resolved through closing agreements.
• The merger of plans into other plans - The plan documents may not have been timely amended to comply with all applicable laws prior to the time the plans were merged.

6. Vesting

• Issues may exist where the accounts of participants age 65 and over have forfeitures. If the participant is age 65 or over, the participant should be 100% vested and there should be no forfeitures.
• Issues exist where the plan failed to properly calculate participants' vesting percentages.
• Plans may be using incorrect vesting schedules.
• Plans may fail to properly determine participants' service correctly.
• Failures occur when plan administrators incorrectly apply the vesting provisions written in the plan documents.

7. Distributions and Loans

• Large distributions on the income statement relative to plan assets or to a prior or subsequent plan year.
• Large distributions payable relative to plan assets or to distributions actually paid out during the plan year.
• Plans may fail to suspend "salary deferrals" of participants receiving hardship distributions from their accounts as required by I.T. Regulation 1.401(k)-1(d)(2)(iv)(b).
• Plan participants, receiving premature distributions or defaulting on plan loans, fail to report the distributions and/or pay the 10% excise tax on their individual tax returns.
• Return indicates that the plan terminated a long time ago, but distributions did not take place.
• If the employer uses automated systems for participants to secure plan loans, in-service distributions, or hardship distributions, significant compliance issues may occur if required documentation or spousal consents are not secured and maintained.
• Distributions may be understated due to a plan's failure to properly value employer real property or employer securities in a closely held corporation.
• Distributions codes used on the Forms 1099 may be in error resulting in improper tax treatment of distributions and/or a failure to report the 10% excise tax.

8. Assets

• Large percentage of assets classified as other assets on the balance sheet.
• Large percentage of assets in one single investment.
• Large amounts of administrative expenses.
• Significant misclassifications of assets or liabilities.
• Significant changes in types of investments from one year to the next based on a comparative analysis of three or more plan years.
• Existence of relatively large liabilities (other than in a leveraged ESOP).
• Large percentage of assets invested in employer real property or employer securities (other than in an ESOP).

9. Limits

• Excess deduction taken as a result of the "accrual" of a pension expense with no corresponding Schedule M-1 adjustment.
• Plan(s) may exceed IRC section 415 limits when plan participants are participating in more than one plan of the employer and the employer is making annual additions to all plans.
• Employees may also exceed the IRC section 402(g) limit when participants are participating in more than one plan that offers elective deferrals.

10. Miscellaneous

• Lack of sufficient internal controls to ensure that data provided to third party record keepers/plan administrators is accurate. Often the audit reveals that reports and testing prepared by third parties have inaccurate data, such as dates of hire or termination, ages of employees, amount of compensation, etc. Thus the plan administrator is improperly calculating such things as vesting or employer matching allocations.
• Large corporations with decentralized payroll systems may have problems administering the plan if there are no internal controls to ensure plan provisions are properly applied. For example, if each subsidiary determines eligibility for plan participation, who is an HCE, or what constitutes "plan compensation", significant compliance issues may occur in coverage and allocations.
• Plan data used to prepare the 5500 returns does not always match the actual records (such as payroll data). In addition, the Taxpayer's Employee Master File has been found to be incomplete (for example, participants who are being reflected on the section 401(a) plan records do not have hire dates shown on the Employee Master File).