Compliance February 4, 2015

IRS Shares Tips for Avoiding Form 5500 Scrutiny

The IRS revealed Form 5500 errors it found during various compliance projects, which could cause a plan to be selected for a compliance check.
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The Internal Revenue Service (IRS) says in many of its Employee Plans Compliance Unit (EPCU) projects, it finds plan sponsors enter incorrect information on their Form 5500 series returns or information reports.

The agency says it uses information on Form 5500 returns and reports to select cases for compliance checks. For the sponsor, entering incorrect information on the return or report, or leaving a field blank when there should be an entry, increases the likelihood that a plan will be selected for an EPCU compliance check.

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Examples of the types of errors found during recent projects include:

  • Plan Participants project – The IRS found sponsors incorrectly entered 0 for the number of participants or left that line item blank.
  • Termination project – Plan sponsors incorrectly marked their 5500 return to show they: 1) adopted a resolution to terminate the plan when they had not; 2) distributed all plan assets but did not mark the return as the final return; 3) claimed to have terminated the plan when it was not fully terminated; or 4) distributed all plan assets but did not mark zero assets at the end of the plan year. 
  • Fraud project – Plan sponsors incorrectly entered the fidelity bond amount or gave inaccurate/incomplete answers on questions about loss caused by fraud or dishonesty.
  • Hacienda project – Plan sponsors incorrectly entered the Puerto Rico-related pension feature code 3J on their 5500 return when they should have entered 3C.
  • Frozen Plans project – Plan sponsors entered pension feature code 1l, frozen defined benefit plan, on their 5500 return when their plan was not a defined benefit plan or frozen.

The IRS also found, during its Excess Deferral project, that 403(b), 457 or nonqualified plan elective deferrals were frequently and incorrectly coded as 401(k) elective deferrals (box 12, code D) on W-2, Wage and Tax statements. During its Simplified Employee Pension (SEP) Plans project, the IRS found incorrect reporting of rollover contributions as SEP contributions on Form 5498, IRA contribution information, in box 8 instead of box 2.

The IRS says plan sponsors that prepare the Form 5500 return or information report themselves should look at each line item and related instructions with fresh eyes. It warns plan sponsors not to copy line item entries from year to year without reviewing them carefully to ensure they did not make an entry on the wrong line item, put an entry in a wrong box, leave a line blank that needs an entry, or use an incorrect code.

When a third party prepares the Form 5500 return, plan sponsors should take time to review it and match answers to the form’s questions. The IRS recommends making sure providers have administrative procedures in place to prevent mistakes on the 5500 return and information reports. If a plan sponsor finds errors on a return or information report, it should fix them promptly by amending the return or filing a corrected information report.

More information is here.

Administration February 4, 2015

January a Tough Month for Corporate Pensions

The funded status of U.S. corporate pensions fell nearly 5% in January, according to BNY Melon ISSG.
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Corporate pension plans, public pension plans, foundations and endowments all missed their return targets for January 2015, according to the BNY Mellon Investment Strategy and Solutions Group (ISSG).  

The funded status of the typical U.S. corporate pension plan declined 4.9% to reach 82.4% by the end of January, propelled downward as the interest rate that determines future liabilities fell to an all-time low, BNY Mellon ISSG says.

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The Aa corporate discount rate, which is the key interest rate that determines these liabilities, finished the month at 3.56%, sending projected liabilities 7% higher during the month. While assets for the typical corporate plan increased 1% during the month, this rise was trounced by the massive rise in liabilities, as shown by the BNY Mellon Institutional Scorecard. 

The increase in assets was also tempered by the weaker performance of U.S. equities, which detracted from improvements in other asset classes, ISSG says. The funded status for the typical corporate plan is now down 12.8% from the December 2013 high of 95.2%, according to the scorecard.

Improvements in corporate plan assets in January were driven by gains in fixed income and emerging markets equities. Public plans benefited from the performance of real estate investment trusts and high-yield fixed income, but were hindered by falling values of U.S. equities during the month, ISSG explains.

Endowments and foundations benefited from allocations to emerging markets equity and hedge funds, but also could not keep up with their targets due to weak equity markets in the U.S., ISSG says.

Researchers found a pronounced negative impact on funded status due to the uptake of longer mortality assumptions for pension plan participants and beneficiaries starting in 2015.

“The huge fall in funded status in January combined with the changes in the mortality assumptions that many plans implemented in December 2014 means that many corporate plans saw their funded status drop by more than 10 percentage points in two months,” notes Andrew D. Wozniak, head of fiduciary solutions, ISSG.  “This could be a signal to plans to take on more risk by making such moves as increasing their exposures to equities and alternatives or going to shorter duration fixed income. Shorter duration fixed income may better position them to improve their funding if rates rise.”

ISSG observes public defined benefit plans in January missed their targets by 0.7% as assets declined 0.1%.  Year over year, public plans have underperformed their return target by 1.4%, ISSG said.

For endowments and foundations, the real return in January was negative 0.5%, as assets returned negative 0.3%. Year over year, endowments and foundations are behind their inflation plus spending target by 1.2%, ISSG says.

More information about BNY Mellon ISSG and the BNY Mellon Institutional Scorecard is here. 

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