Some types of Plans have mandatory/required contributions. Pension plans are subject to mandatory contributions unless the benefits have been frozen by Plan amendment. Plans that are Top Heavy (60% of the assets are in the accounts of Key Employees) often require a mandatory contribution too. Pension Plan contributions, and Top Heavy minimum contributions are required within 8 ½ months after the end of the plan year. A Safe Harbor contribution or fixed matching contribution or non-elective contribution in a Defined Contributions Plan may also be mandatory in any particular Plan year. These contributions must be made no later than the last day of the following Plan year.
Since retirement benefits are protected under ERISA it is very difficult if not impossible to retroactively amend a plan to eliminate a contribution liability. As soon as a Plan Sponsor identifies the fact that they may have difficulty in making required contributions to the retirement Plan, they should discuss the situation with their TPA and/or CPA to eliminate additional liability as soon as possible.
Problem: The Company fails to make the required contributions to the Plan within the prescribed time frame, or fails to make a contribution for an eligible participant.
- Mandatory pension contributions. Mandatory means just that – the contribution must be made. And if you make a mandatory Pension contribution late, then you are subject to at 10% excise tax penalty each year until the payment is made. The excise tax is remitted on a Form 5330
- Other required contributions. Any other type of contribution required by the plan must be made as soon as possible, and interest must be allocated as well from the earliest date the deposit was due to the date it was actually made.
For example: The Dr. Doolittle Veterinary Clinic 401(k) plan is top-heavy for 2012. A top-heavy minimum contribution of 3% of pay was made to all eligible employees on March 14, 2013. In February 2014 Dr. Doolittle’s TPA identified an employee, Jonah, who should have received the top-heavy minimum contribution for 2012. Dr. Doolittle makes the required contribution to Jonah’s account on March 31, 2014 with interest calculated from 12/31/2012-3/31/2014. This contribution is deductible on Dr. Doolittle’s 2014 income tax return.
There is a lot of flexibility with respect to what investments can be purchased with qualified plan assets. There are some investments, however, that are considered Prohibited Transactions. Real estate occupied by the Plan sponsor or a “Disqualified Person” is not allowed. Collectibles used or enjoyed by a “Disqualified Person” is not allowed. Even getting duped by someone (think Madoff) may end up being considered a Prohibited Transaction for failure to do proper due-diligence. See our blog on Alternative Investments for more information.
Problem: You have been advised that you have an investment that is considered a Prohibited Transaction.
Fix: Reverse the transaction and bring the Plan back to the same position that it was prior to the transaction. Pay a 15% excise tax on the amount involved. This excise tax is paid by filing a Form 5330.
For example: Pablo is an attorney who has his own practice. He has a retirement Plan for his practice that has a total of $500,000 in assets. Pablo used $5,000 in Plan assets to buy a beautiful landscape painting that he hangs in the reception area of his law office. When his TPA asked him what he did with the $5,000 in plan assets he explained that he used it to buy a painting, so the painting should be considered a Plan asset now. The TPA explained that since the painting is hung in his office, that he entered into a Prohibited Transaction. He reverses the transaction by returning the painting to the art dealer from whom he purchased it. He is charged a 20% “restocking” fee, so he only receives $4,000 back. He must return the $4,000 to the plan, plus another $1,000 to reimburse the plan for the full $5,000. He must also pay $750 in excise tax (15% of $5,000) for each year that the painting was in his possession.
Controlled groups and affiliated service groups are a very complex area of the regulations. If a company is part of a controlled group of employers due to common ownership, or an affiliated service group of companies that provide services to each other, chances are that the retirement Plans for these companies must be treated as one Plan for compliance testing purposes. See our blog on Controlled Groups for more in depth information about this topic.
Problem: Two related companies have two independently administered plans that have not been combined for testing purposes.
Fix: You should engage the services of a quality TPA with experience in controlled group testing to perform testing for the two plans combined. Coverage, ADP/ACP, contribution limits, vesting, and top heavy rules all apply to the combined Plans. Additional contributions may be required to employees of one of the controlled companies if one plan is more generous than the other.
For example: English Gardens Landscaping company is owned by Mr. Silver and Mr. Gold. They have 85 employees. Mr. Silver and Mr. Gold set up a separate company they call Overseer LLC as a management organization for English Gardens Landscaping. They are the only paid employees of Overseer LLC. They set up a retirement Plan for Overseer LLC, but have no plan for English Gardens Landscaping. Since Mr. Silver and Mr. Gold own both companies, they would have to include the employees of English Gardens Landscaping in their Overseer LLC retirement Plan.
For example: A company based in China, Beijing Ltd., owns two separate companies located in the United States; a retail store in California that sells handbags, and a manufacturing company located near Las Vegas Nevada. If the Nevada company has a retirement Plan, they would have to include the employees of the California company in the compliance tests of their Plan.
See you next week when we talk about Adopting Multiple Plans, 5500 Filing Deadlines and a summary of the most common retirement plan problems! Also, don't forget to subscribe to our blog at the top left of the screen!