Among the complications for employers sponsoring 401k plans is the handling of deductions when retroactive contributions are made. Now, attorneys caution that the Internal Revenue Service (IRS) is signaling heightened interest in audits related to deduction errors. Here’s what plan sponsors need to know–and do.
Employer Deductions of Retroactive Contributions
Groom Law Group points out that a section of the SECURE Act may have “heightened the interest of IRS agents in auditing employer deductions of retroactive contributions to 401(k) plans,” and notes:
The rules are relatively complex and sometimes misapplied. And section 201 of the SECURE Act, which became effective for taxable years beginning after December 31, 2019, has added a new rule which allows an employer to retroactively adopt a new 401(k) plan – and make tax-deductible contributions – until the employer’s tax-filing deadline (including extensions) for the taxable year of adoption. As the IRS advises in its Issue Snapshot, employers should confirm that any deductions and allocations of retroactive contributions to a retirement plan are made to the appropriate tax year.
Essentially, the increased scrutiny revolves around the timing of deductible contributions and allocations to participant accounts, as well as the timing of elective deferrals. Groom Law Group offers guidance on adhering to the related IRS protocols right here and advises plan sponsors that IRS auditors are likely to seek confirmation of the following:
- An employer who deducted contributions made to the plan during the current tax year for the prior tax year treated its contributions as having been allocated to the prior tax year, pursuant to a specific plan provision, and actually made contributions no later than the employer’s extended tax-filing deadline.
- An employer made retroactive employer contributions in accordance with plan requirements (e.g., contributions must be made by the employer’s extended tax filing deadline, or alternatively, within 30 days of that extended tax filing deadline).
- An employer did not deduct any employer contributions made within 30 days of an employer’s extended tax filing deadline for the prior tax year, even if the employer allocated such contributions to the prior tax year for purposes of section 415 annual additions.
Another Audit Trigger: Inadequate ERISA Bonds
Compliance failures related to the ERISA fidelity bonds required for everyone involved in handling the funds or property of the retirement plan (in any way) routinely draw the attention of both the Department of Labor (DOL) and the IRS. Accountants at Eisner Amper provide this important reminder::
Section 412 of the Employee Retirement Income Security Act of 1974 (“ERISA”) requires every person who handles funds or other property of a plan to be bonded (excluding certain exempted individuals). Such persons include plan fiduciaries but may also include any director, officer or employee of the fiduciary. This is referred to as ERISA’s bonding requirement. The ERISA fidelity bond, also known as an employee dishonesty bond, is a legal requirement arising from ERISA to protect plans against losses resulting from an act of fraud or dishonesty by persons handling a plan’s assets.
Both failure to have an ERISA bond and failure to have an adequate ERISA bond expose plan sponsors to regulatory action, investigation, and, the risk of being held personally liable, as Fiduciary News explains:
“Some plan sponsors have a fidelity bond covering just 3-5% of total assets when it should be at least 10% according to ERISA Section 412…“Many 401k plan sponsors are simply not aware of: 1) the fidelity bond itself; 2) what’s required of that bond so that it protects the plan from losses due to fraud or dishonesty; or, 3) the risks associated with insufficient coverage, including triggering a plan audit or holding the plan fiduciary personally liable for losses that should have been covered by an ERISA fidelity bond.”
As a leading national ERISA Bond provider, listed with the Department of the Treasury, Colonial Surety makes it easy and speedy for plan sponsors to ensure compliance–and protect themselves. Uniquely, Colonial includes retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered. Additionally, plan sponsors can opt for comprehensive, multi-year coverage packages, ensuring the ERISA bond remains DOL compliant for the life of its term. Conveniently, plan sponsors can even opt for affordable packages that contain the ERISA bond, plus fiduciary and cyber liability coverages.Update your protection today:
It’s important for plan sponsors–and everyone with a role in the management of the retirement plan to understand that neither diligent effort, nor the ERISA fidelity bonds required by the Department of Labor (DOL), provide protection in the face of lawsuits: only Fiduciary Liability Insurance does.
Armed with Fiduciary Liability coverage from Colonial Surety, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber Liability coverage is included at no extra cost, providing additional protection–for the plan and your company–against regulatory actions related to data and privacy, as well as expert response services.
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