Have You Had Your Retirement Plan Check-Up This Year?

A retirement plan needs regular care to keep it operating properly. Your plan's care should include a regular review of your plan's basic operations. These one-page checklists are a quick way to start your review. Each checklist links to a Fix-It Guide with tips on how to find, fix and avoid each potential error.

• SIMPLE IRA Checklist
• SEP Checklist
• SARSEP Checklist
• 401(k) Plan Checklist
• 403(b) Plan Checklist

The checklist is for your use on a voluntary basis. Don't file it with the IRS. Also, remember that the checklists aren't meant as a comprehensive review of every aspect of your plan - just an easy way to start.

Sample checklist questions:

1. Has your plan document been updated within the past few years to reflect recent law changes?
2. Are the plan's operations based on the plan document's terms?
3. Are all eligible employees participating in the plan?

What do your checklist answers mean?

Answering "no" to any of the checklist questions tells you that you may have a mistake in your plan operation. The expanded explanation for each question - the "Fix-It Guide" - gives you an example of how to correct the mistake.

Errors you might find:

Your checklist answers might uncover the following common mistakes:

• not covering the proper employees
• not giving employees required information
• not depositing employee deferrals timely
• not depositing employer contributions timely
• not following the terms of the plan document
• not limiting employee deferrals and employer contributions to the proper maximum limits

Need to make a correction? The IRS can help (and so can MFYCO).

The IRS has helpful correction programs structured to provide financial incentives to find and correct mistakes earlier rather than later. You can correct many mistakes easily, without penalty and without notifying the IRS.

Additional Resources:

• Plan Sponsor's Responsibilities to help keep your plan running smoothly all year
• Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
• Publication 3998, Choosing a Retirement Solution for Your Small Business
• Publication 4222, 401(k) Plans for Small Businesses
• Publication 4333, SEP Retirement Plans for Small Businesses
• Publication 4334, SIMPLE IRA Plans for Small Businesses
• Publication 4336, SARSEP for Small Businesses
• Publication 4483, Tax-Sheltered Annuity Plans for Sponsors

Pension Equity Plans

What is a Pension Equity Plan (PEP)?

PEPs, as well as cash balance plans are common types of "hybrid plans," defined benefit plans that combine elements of traditional defined benefit plans with elements of defined contribution plans. The main difference between a hybrid and a traditional defined benefit plan is that retirement benefits are more evenly accrued throughout an employee's career instead of being backloaded near the end of the employee's career. With a traditional defined benefit plan the benefit accrual entitles the employee to a stream of payments at normal retirement age. Accruals throughout an employee's career are based on the present value of this stream of income. The present value of such payments is much lower in an employee's early years than it is in his or her later years. That is why accruals are said to be backloaded for traditional defined benefit plans. In contrast, accruals for hybrid plans are not based on the present value of retirement income. Instead, they are based on the value of the amount credited in any particular year.

A cash balance pension plan is a hybrid defined benefit plan that provides guaranteed benefits for employees. The plan is a defined benefit plan that resembles a defined contribution plan. Cash balance plans establish a separate "hypothetical" account for each employee (hypothetical because each employee does not actually have an account).

The amount of an employee's hypothetical account balance in a cash balance plan is determined by hypothetical annual allocations, known as "pay credits," and hypothetical earnings, known as "interest credits." For example, the employer hypothetically credits a specified percentage of compensation (pay credits) to each employee's account and hypothetically credits each account with interest earned (interest credits) according to the terms of the plan. Generally, cash balance plans are designed to include the right to future interest on the pay credit when a participant's account receives the hypothetical pay credit for the year of service. The right to future interest is known as front-loaded interest credit. The right to future interest is not contingent on the participant remaining in the employ of the employer. The amounts to be contributed are actuarially determined to ensure sufficient funds to provide the promised benefit.

However, under a pension equity plan, benefits accrue on a level basis. Employees earn credits for each year they have worked. Upon termination, employees receive a lump-sum payment or an annuity that is based on accumulated credits and final average pay.

New Determination Letter Guidelines

The IRS has recently improved their processing of determination letter applications for PEPs by training a specialized cadre in EP Determinations and issuing the following procedural guidelines for its employees:

• PEP Determinations Worksheet
• Explanation of PEP Plan Issues (corresponds to the Worksheet)
• Memorandum to the EP Determinations PEP Cadre on the PEP accrued benefit (PEP Memorandum)

What issues do the Procedural Guidelines address?

The PEP Determinations Worksheet and Explanation of PEP Plan Issues are for IRS employees to use in processing determination letter applications. These documents explain the issues unique to PEP plans that we will take into account when reviewing plan documents, such as how the provision of hypothetical interest impacts the plan's compliance with the accrual rules of Internal Revenue Code Section 411(b)(1).

The PEP Memorandum highlights the plan document's compliance with IRC Section 411(b)(1)(G), which generally provides that a participant's accrued benefit under a qualified defined benefit plan cannot be reduced on account of any increase in the participant's age or service.

The PEP Memorandum states that, in order to resolve the pending requests for determination letters for PEPs, an EP Determinations employee should review the plan documents to determine if any of the following provisions are included:

1. Notwithstanding any other provision in the plan, a participant's accrued benefit as of any determination date will never be less than the benefit required to comply with IRC Section 411(b)(1)(G);
2. Notwithstanding any other provision in the plan, a participant's accrued benefit may not be reduced on account of an increase in a participant's age or service;
3. A participant's accrued benefit as of any determination date shall not be less than the accrued benefit to which the participant would have been entitled if he had ceased accruals at the end of any prior plan year;
4. A participant's accrued benefit shall be the lesser of the annuity benefit that the participant has accumulated to date (including interest projected to normal retirement age) and the annuity benefit the participant would accumulate if he or she worked to normal retirement age; or
5. The accumulated benefit determined under the PEP formula as of any determination date cannot be less than the accumulated benefit as of the end of any prior year with interest credited to the determination date, determined as if the participant had ceased accruals as of the end of that prior plan year.

If a PEP does not have any of the of these provisions, we'll generally ask the plan sponsor to amend the PEP retroactively to add provision 1 ("Notwithstanding any other provision in the plan, a participant's accrued benefit as of any determination date will never be less than the benefit required to comply with section 411(b)(1)(G) of the Code"). While a plan sponsor may choose to add one of the other provisions, we note that provision 4 generally cannot be implemented in an ongoing plan without creating a cutback of benefits in violation of IRC Section 411(d)(6).

Page Last Reviewed or Updated: 02-Dec-2014