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Benefits Tip: 4 Keys to Maintaining a Tax-Qualified Plan

May 21, 2014

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The most important job of a retirement plan sponsor is maintaining tax-qualification under the Internal Revenue Code (IRC). Qualification preserves the tax deferred status of contributions under the plan until they’re withdrawn at retirement or transferred to an Individual Retirement Account (IRA). When plans are disqualified under the IRC, the impact can be devastating to both plan sponsors and plan participants.

Disqualification would cause plan sponsors to lose valuable contribution deductions taken in the past, prompting amended corporate tax filings and the payment of unexpected taxes and penalties. Additionally, plan participants may be forced to pay tax on a tax deferred account years before normal retirement.

Plan sponsors, the reality is that “the buck stops here.” The Internal Revenue Service (IRS), the Department of Labor (DOL) and plan participants all hold you responsible for compliance with required rules and regulations.

So what’s a plan sponsor to do?
Acknowledge the obligation and take the job seriously. The fiduciary responsibility associated with plan sponsorship can’t be delegated to others. Make sure you engage qualified, competent plan service providers who operate in a conflict-free environment (i.e. ERISA attorneys, third party plan administrators, record keepers, financial advisors, etc.). Once you have completed these steps, divide the task into the following four manageable areas:

1. Plan Document Compliance
A successful retirement plan begins with the appropriate plan design. A good plan design is one that meets both the needs of the plan sponsor and the employees of the organization. It is as much an art form as it is an understanding of current retirement plan rules and regulations. The work doesn’t stop once the plan is installed. Tax laws impacting retirement plans are changing all the time. Take the time to keep abreast of current developments.
For instance, all defined contribution plans must be amended and restated for the Pension Protection Act of 2006. The restatement window will open in May of 2014 and close in April of 2016.

2. Compliance Reporting
Make sure you satisfy all required compliance filings (i.e. Form 5500s, Form 8955-SSA, etc.). Careless and incomplete compliance filings can lead to regulatory examinations. Although these information returns do not include tax payments to regulatory agencies, they can lead to expensive and time consuming examinations if not handled with due care.

3. Compliance & Non-Discrimination Testing
Each year, plan sponsors must be able to demonstrate that the plan does not discriminate against non-highly compensated employees. The compliance tests are very complicated and generally require the assistance of a qualified third party administrator. Plan sponsors should understand how their plan operates and be sure to provide the correct census information for testing purposes.

4. Asset Distribution Compliance
Plan design characteristics will dictate how and when plan participants can remove plan assets:
• while still employed (in-service withdraws, participant loans and hardship withdraws)
• following termination of employment (upon termination or only after reaching normal retirement age)
• following retirement (immediately or after a specified period of time)
• after death or disability

Plan sponsors, it’s crucial that you understand the distribution rules as they pertain to your plan so you can ensure only permissible distributions take place. Additionally, it’s your responsibility to obtain all required authorizations prior to a distribution of plan assets.

The article above is a brief overview of the importance of plan compliance. Additional guidance from CSH will highlight what you should do if you fall out of compliance. In the meantime, if you have any questions please contact one of our team members to discuss plan compliance issues in greater detail or to have us perform a plan compliance review.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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