Do You Know How Your Pension Plan Really Works?

Most law firms sponsor some type of retirement plan for their employees, but how many plan administrators really know their plan? As a plan fiduciary, what are your responsibilities related to the operation of your pension plan? Read on to find out about your responsibilities as plan fiduciary, key features of your plan about which you should be intimately familiar, and some common problems associated with operating retirement plans.

Knowing Your Fiduciary Responsibilities

The Employee Retirement Income Security Act, known as ERISA, set the standards for operating and managing employee benefit plans. Administering a qualified pension plan falls under this set of standards. As a sponsor of a pension plan, it is your responsibility to protect the interests of your plan participants. Specifically, your fiduciary responsibilities include the following:

• Know and follow your written plan documents: You must understand the terms of your plan, ensure the terms are up-to-date with current laws and regulations under ERISA, and review them for compliance with the Internal Revenue Code (“IRC”). It is your responsibility to avoid prohibited transactions, make timely remittances of participants' contributions, make timely employer contributions to fund benefits, make required disclosures to participants and their beneficiaries, and timely file reports with the Internal Revenue Service (“IRS”) and the U.S. Department of Labor (“DOL”).
• Act prudently: If the plan administrator lacks an expertise, he or she should act prudently and hire an outside expert to perform that particular function. Years ago, many plan sponsors made their own investment decisions. Today, plan sponsors hire outside investment managers and advisers to help select investment options, to monitor investment performance, and to educate plan participants about their investment choices.
• Select and monitor your third-party vendors and administrators: You can outsource certain services provided to the plan, such as payroll accounting, investment management, actuarial services, and plan record keeping, but you can never outsource your ultimate responsibility. It is the plan sponsor's responsibility to make sure outsourced functions are being completed properly and in a timely manner. This requires review, control, and oversight by the plan sponsor. Monitor your service providers carefully after making sure they are qualified to do the job in the first place. It is also your responsibility to make sure any services and expenses paid for by the plan are reasonable.
• Diversify plan investments: Plan assets may consist of a combination of participant-directed and non'participant-directed investment accounts. Plan sponsors should offer a variety of investment choices from which the plan participants can choose to invest their self-funded retirement accounts. A portfolio of diversified investments will include investments that vary based on nature and risk. To limit liability and reduce fiduciary risk, consider bringing in an outside investment adviser periodically to educate participants about the nature and risk of investment options so they can choose options that match their needs and risk tolerance. For non'participant-directed accounts, it is also important to create and follow a prudent investment strategy that reduces and balances risk over time and safeguards investment assets. The main purpose of offering a pension plan is to provide benefits to participants in the future.

Other best practices among plan fiduciaries include the following:

• Create a pension committee from interested and competent individuals at the firm to oversee the operations of the pension plan.
• Document the processes used to meet the plan sponsor's fiduciary responsibilities.
• Document the approval of members of the pension committee and hiring of third-party vendors who are competent.
• If applicable, organize a pension audit committee. Create an audit committee charter that defines the committee's role in hiring the plan auditor and overseeing the pension audit.
• Disseminate information to eligible participants so they can make informed investment decisions.
• Obtain a fidelity bond to meet or exceed the level required by law to protect the plan against any issue that may arise from fraud or dishonesty as covered specifically under the fidelity bond insurance.
• Meet with ERISA counsel to make sure your plan is updated to comply with current laws and regulations.

Following Your Plan Documents

There are two general types of pension plans ' defined benefit plans and defined contribution plans.

Defined Benefit Plans focus on the future plan benefit to be paid to plan participants from the plan. In general, a defined benefit plan promises a future benefit to plan participants as calculated according to a formula as defined in the plan documents. Defined benefit plans use the services of an actuary to calculate the contribution required by the plan sponsor to meet the future plan benefit obligations based on a set of assumptions and expectations and current law. Changes in the assumptions and actual investment performance results affect the plan sponsor's annual required contribution to the plan.

Defined Contribution Plans, on the other hand, focus on an allowable or required contribution to the plan by plan participants and/or the plan sponsor. In general, a defined contribution plan requires an individual account for each participant and provides benefits based on amounts contributed by plan participants and/or plan sponsors, investment earnings (loss) experience, allocations of expenses, and allocation of forfeitures. Common examples of defined contribution plans include 401(k) plans, profit-sharing plans, and money purchase plans. Profit-sharing plans may be discretionary or non-discretionary and include matching contributions, supplemental contributions, and safe harbor plans.

In order to ensure your plan was prepared in compliance with current laws and regulations, you should seek advice of ERISA counsel annually to review your plan for any updates needed. In order to gain further assurance that your plan is in compliance with current laws and regulations, you should submit your current plan documents to the IRS for review and obtain a determination letter from the IRS. The IRS will issue a determination letter with a specific date regarding your individual plan if your written plan documents are in compliance with the current laws and regulations.

Assuming your plan documents are in compliance with current law and regulations, you must still make sure you are operationally compliant ' that you are actually following your plan documents in practice. Unfortunately, you cannot understand your plan by reading one plan document. You must read, understand, comply with, and be responsible for many plan documents, which may include the following:

• Basic plan document;
• Adoption agreement;
• Summary plan description;
• Trust agreement;
• Investment adviser agreement;
• Investment policy agreement;
• Investment manager agreement;
• Third-party administrator contract;
• Trustee reports;
• Actuarial report;
• Plan financial statement;
• Summary annual report;
• Insurance contracts; and

Form 5500.Focusing on the basic terms of the plan documents and adoption agreement, the key terms in your firm's pension plan document relate to the following:

• Eligibility to participate in the plan;
• Definition of compensation;
• Contributions and funding arrangements

1.  Employee contributions allowed, withheld, remitted, received, and receivable

2.  Plan sponsor contributions allowed, required, received and receivable, and allocation thereof

3.  Participant rollovers from other plans;

• Participant loans and repayments;
• Distributions from the plan and benefit payments;
• Expenses paid by the plan, participants or plan sponsors;
• Investments of the plan

1.  Investment options

2.  Investment earnings allocation.

In order to determine if your firm is operating its plan in compliance with the plan documents, you must understand the above agreements and arrangements, as well as understand the key features of your unique pension plan.

Common Problems with Operating Pension Plans

Some firms are not operating their plans in accordance with their plan documents or current laws and regulations. Significant liabilities may exist if a plan is not being operated properly. These liabilities may be in the form of additional required contributions to the plan, disallowance of otherwise tax-deductible contributions, or interest and penalties due to the IRS or DOL. Below are some common problems I have found in my 25 years of experience in auditing pension plans. Most problems arise from firms not knowing the details of their plans, having less than ideal internal controls, or experiencing a turnover in personnel responsible for certain functions of the pension plan.

Eligibility and Notification

Some plans do not properly notify employees when they are eligible to participate. Some plans use inaccurate participant data information. Plan sponsors must notify employees of their eligibility to participate in the firm's employee pension plans. Usually this notification is satisfied at an employee orientation upon hiring, as summarized in an employee handbook or as communicated in annual “open enrollment” notices. Eligibility rules include age and service requirements. To monitor proper eligibility, make sure you keep accurate records, referred to as census information, for employees including social security number, date of birth, date of hire, hours worked during the year, gender, and date of termination. This participant data is vital for determining eligibility to participate in the plan as well as determining a participant's right to receive a benefit. This participant data must be secured at the highest level to prevent inadvertent changes to previously accurate information as well as to reduce the risk of fraud.

Compensation

Some firms use an incorrect definition of compensation when calculating eligible compensation. Each pension plan uses a specific definition of “compensation” for calculating eligible employee deferrals, matching contributions, other employer discretionary or required contributions, and the amounts to be used in actuarial calculations. A firm may elect different definitions of compensation for different types of contributions as well. For example, compensation may be defined one way for employee deferrals (gross wages), but another way for the firm's contribution (gross wages excluding bonuses). Sometimes the definition is more complicated and refers to various IRS code sections that need to be reviewed. Eligible compensation may consider compensation for the whole plan year or just from the date an employee was eligible to participate. The plan documents should be clear on this, and if they are not, make sure you clarify the terms with your third-party administrator and the creator of the plan document. If the wrong definition of compensation is used, your plan may have a “missed employee deferral opportunity” or improperly calculated and remitted employer contributions ' both of which must be corrected. The corrections of these errors can often be very costly in terms of an additional financial obligations as well as loss of participants' confidence in the proper management of their pension plan.

Timely Remittances of Participant Contributions

When a plan sponsor withholds an employee's desired 401(k) contribution from an employee's eligible gross wages, the withholding must be remitted as soon as practicable, i.e., when it can be segregated properly from other assets, but no later than 15 business days after the month end during which it was withheld from the employee. Practically, there is probably no reason why your employee 401(k) withholdings cannot be remitted to the pension plan and allocated to participants' accounts within one to three business days after payroll is paid. Some employers used to routinely hold onto employees' withholdings and remit them on the last day possible, even if they could have submitted them earlier. This is unacceptable. Late remittances are considered loans from the plan to the employer who is holding onto them, and in some instances can be considered fraud by employers. Employers with late remittances must take corrective action and remit the late funds as well as lost earnings to the plan. These late remittances may be subject to penalties and are required to be reported as late on the pension plan's annual reporting to the IRS, Form 5500. They are also required to be disclosed in the plan's audited financial statements, if an audit is required or otherwise performed.

During January 2010, the DOL finalized rules and created a safe harbor remittance period for small plans. A small plan is generally a pension plan covered under ERISA with less than 100 eligible participants. The safe harbor rule requires that any 401(k) contributions withheld from an employee's paycheck must be remitted to the qualified plan no later than seven business days from when the amounts were withheld. This rule applies to withholdings for 401(k) contributions as well as for participant loan repayments. This safe harbor rule does not apply to large plans under ERISA ' generally those plans with 100 of more eligible participants. At the 2010 AICPA National Conference on Employee Benefit Plans in May 2010, representatives from the DOL were asked about this and responded that they do not expect a safe harbor rule for large plans any time in the near future.

To reduce the risk of additional liabilities or fraud, review, document, and implement internal controls surrounding timely remittances so that your firm can remit employee withholding within one to three business days routinely. Any deviations should be clearly documented as to the reason why and what was changed to prevent a delay in the future. Any remittances deemed late must be reported to the DOL.

Contributions

Once in a while, firms are not clear about their obligations to make their employer contributions and do not make them, or make them after the due date. Sometimes the obligation does not become apparent until the pension consultant sends a letter with instructions to the employer to make a contribution, or after the plan has been audited by a certified public accountant (“CPA”), the IRS, or the DOL. In certain instances, a firm may assume all employer contributions are discretionary, but shockingly learn that they are not discretionary at all. A firm may be required to make a mandatory contribution in order to comply with discrimination rules or pass top-heavy testing requirements, or because it has implemented a “safe harbor plan.” These required employer contributions are defined in the plan and may be 3% of eligible compensation. Missed required employer contributions can result in large, unexpected liabilities for the plan sponsor.

Miscalculation of Plan Forfeitures

Certain contributions by an employer may be subject to vesting. Participants are always 100% vested in the portion of their participant accounts related to employee contributions. However, the right for employees to take the portions of their participant accounts related to the employer contributions may be dependent upon how long they have been employed at the firm. For example, if an employee is 80% vested in his employer portion of his participant account, then when he leaves, he can generally take 80% of that account with him upon termination of employment. If participant data are wrong as to the date of hire or date of termination, then the percentage vested may be miscalculated. As a result, upon distribution of a participant's account from the plan to a participant, more or less may have been distributed than what should have been if the vesting percentage were calculated properly. Imagine the difficulty of trying to get back an overpayment made to a participant who has left your employment. Likewise, imagine having to submit additional funds to the plan to make up for forfeitures calculated improperly and also used for other purposes. Be aware that there are special rules upon 100% termination of the plan. In this circumstance, all participants become automatically 100% vested in their employer portions of their accounts. Likewise, if there is a partial termination, then terminated participants become automatically 100% vested as well. Generally, a partial termination occurs if 20% or more of the workforce is terminated. In the recent economic crisis, you can bet that there have been a great number of partial terminations due to significant layoffs at some companies.

Misuse of Plan Forfeitures

Plan documents specify how an account forfeiture must be used. Forfeitures may be reallocated to certain plan participants, as described in the plan, used to fund future employer contributions, used to pay certain plan expenses, or a combination thereof. If plan forfeitures are applied incorrectly, the firm may have to contribute more to the plan to fund the required use of the forfeitures.

Bonding

Some plan officials (fiduciaries) are not covered adequately by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss due to dishonesty and fraud. Sometimes individuals with opportunity, access, and incentive misuse plan assets. Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan should be bonded. The DOL requires fidelity bonds equal to 10% of the value of beginning-of-year plan assets or a required maximum of $500,000 and a required minimum of $1,000. To make sure you plan is always covered, consider purchasing a bond that is formula driven to comply with ERISA regulations at all times rather than purchasing a fixed amount of coverage.

Reporting Compliance

Some plans are not in compliance with IRS or DOL reporting requirements. A large plan must be audited annually by a CPA firm. The IRS and DOL may select any plan to be audited for compliance with laws and regulations, as well as the plan documents. Audits of pension plans and of CPA firms performing audits of pension plans have increased dramatically over the past few years in an effort to protect participants' assets, ensure firms are complying with laws, regulations and the terms of their plan documents, and to monitor that CPA firms are providing quality audits. Under ERISA, the plan must file an annual report, Form 5500, to the IRS. For a calendar year end, the Form 5500 is due initially by July 31. Under a qualified extension request, the due date may be extended to Oct. 15. All large plans and certain small plans must require an audited financial statement be attached to the Form 5500. Plan sponsors who file late Form 5500s or incomplete Form 5500s, may be subject to penalties.

Conclusion

If you are involved in the administration of your firm's pension plan, first and foremost, make sure you know how your retirement plan really works. This requires a team effort at your firm among the management team, finance, accounting and payroll departments, and human resource personnel. Through annual education and training, you can operate your pension plan in compliance with ERISA in an efficient and cost-effective manner while improving the security of retirement benefits for plan participants.

To learn more about your plan, read your plan documents and talk to your plan advisers. To learn more about your compliance requirements, go to www.dol.gov/ebsa.

K. Jennie Kinnevy, a member of this newsletter's Board of Editors, is the director of the Law Firm Services Group at Feeley & Driscoll, P.C. (http://www.fdcpa.com/). The Law Firm Services Group provides tax, accounting, business advisory, and consulting services to law firms. Based in Boston, Kinnevy can be reached at [email protected] or by phone at 617-456-2407.

Most law firms sponsor some type of retirement plan for their employees, but how many plan administrators really know their plan? As a plan fiduciary, what are your responsibilities related to the operation of your pension plan? Read on to find out about your responsibilities as plan fiduciary, key features of your plan about which you should be intimately familiar, and some common problems associated with operating retirement plans.

Knowing Your Fiduciary Responsibilities

The Employee Retirement Income Security Act, known as ERISA, set the standards for operating and managing employee benefit plans. Administering a qualified pension plan falls under this set of standards. As a sponsor of a pension plan, it is your responsibility to protect the interests of your plan participants. Specifically, your fiduciary responsibilities include the following:

• Know and follow your written plan documents: You must understand the terms of your plan, ensure the terms are up-to-date with current laws and regulations under ERISA, and review them for compliance with the Internal Revenue Code (“IRC”). It is your responsibility to avoid prohibited transactions, make timely remittances of participants' contributions, make timely employer contributions to fund benefits, make required disclosures to participants and their beneficiaries, and timely file reports with the Internal Revenue Service (“IRS”) and the U.S. Department of Labor (“DOL”).
• Act prudently: If the plan administrator lacks an expertise, he or she should act prudently and hire an outside expert to perform that particular function. Years ago, many plan sponsors made their own investment decisions. Today, plan sponsors hire outside investment managers and advisers to help select investment options, to monitor investment performance, and to educate plan participants about their investment choices.
• Select and monitor your third-party vendors and administrators: You can outsource certain services provided to the plan, such as payroll accounting, investment management, actuarial services, and plan record keeping, but you can never outsource your ultimate responsibility. It is the plan sponsor's responsibility to make sure outsourced functions are being completed properly and in a timely manner. This requires review, control, and oversight by the plan sponsor. Monitor your service providers carefully after making sure they are qualified to do the job in the first place. It is also your responsibility to make sure any services and expenses paid for by the plan are reasonable.
• Diversify plan investments: Plan assets may consist of a combination of participant-directed and non'participant-directed investment accounts. Plan sponsors should offer a variety of investment choices from which the plan participants can choose to invest their self-funded retirement accounts. A portfolio of diversified investments will include investments that vary based on nature and risk. To limit liability and reduce fiduciary risk, consider bringing in an outside investment adviser periodically to educate participants about the nature and risk of investment options so they can choose options that match their needs and risk tolerance. For non'participant-directed accounts, it is also important to create and follow a prudent investment strategy that reduces and balances risk over time and safeguards investment assets. The main purpose of offering a pension plan is to provide benefits to participants in the future.

Other best practices among plan fiduciaries include the following:

• Create a pension committee from interested and competent individuals at the firm to oversee the operations of the pension plan.
• Document the processes used to meet the plan sponsor's fiduciary responsibilities.
• Document the approval of members of the pension committee and hiring of third-party vendors who are competent.
• If applicable, organize a pension audit committee. Create an audit committee charter that defines the committee's role in hiring the plan auditor and overseeing the pension audit.
• Disseminate information to eligible participants so they can make informed investment decisions.
• Obtain a fidelity bond to meet or exceed the level required by law to protect the plan against any issue that may arise from fraud or dishonesty as covered specifically under the fidelity bond insurance.
• Meet with ERISA counsel to make sure your plan is updated to comply with current laws and regulations.

Following Your Plan Documents

There are two general types of pension plans ' defined benefit plans and defined contribution plans.

Defined Benefit Plans focus on the future plan benefit to be paid to plan participants from the plan. In general, a defined benefit plan promises a future benefit to plan participants as calculated according to a formula as defined in the plan documents. Defined benefit plans use the services of an actuary to calculate the contribution required by the plan sponsor to meet the future plan benefit obligations based on a set of assumptions and expectations and current law. Changes in the assumptions and actual investment performance results affect the plan sponsor's annual required contribution to the plan.

Defined Contribution Plans, on the other hand, focus on an allowable or required contribution to the plan by plan participants and/or the plan sponsor. In general, a defined contribution plan requires an individual account for each participant and provides benefits based on amounts contributed by plan participants and/or plan sponsors, investment earnings (loss) experience, allocations of expenses, and allocation of forfeitures. Common examples of defined contribution plans include 401(k) plans, profit-sharing plans, and money purchase plans. Profit-sharing plans may be discretionary or non-discretionary and include matching contributions, supplemental contributions, and safe harbor plans.

In order to ensure your plan was prepared in compliance with current laws and regulations, you should seek advice of ERISA counsel annually to review your plan for any updates needed. In order to gain further assurance that your plan is in compliance with current laws and regulations, you should submit your current plan documents to the IRS for review and obtain a determination letter from the IRS. The IRS will issue a determination letter with a specific date regarding your individual plan if your written plan documents are in compliance with the current laws and regulations.

Assuming your plan documents are in compliance with current law and regulations, you must still make sure you are operationally compliant ' that you are actually following your plan documents in practice. Unfortunately, you cannot understand your plan by reading one plan document. You must read, understand, comply with, and be responsible for many plan documents, which may include the following:

• Basic plan document;
• Adoption agreement;
• Summary plan description;
• Trust agreement;
• Investment adviser agreement;
• Investment policy agreement;
• Investment manager agreement;
• Third-party administrator contract;
• Trustee reports;
• Actuarial report;
• Plan financial statement;
• Summary annual report;
• Insurance contracts; and

Form 5500.Focusing on the basic terms of the plan documents and adoption agreement, the key terms in your firm's pension plan document relate to the following:

• Eligibility to participate in the plan;
• Definition of compensation;
• Contributions and funding arrangements

1.  Employee contributions allowed, withheld, remitted, received, and receivable

2.  Plan sponsor contributions allowed, required, received and receivable, and allocation thereof

3.  Participant rollovers from other plans;

• Participant loans and repayments;
• Distributions from the plan and benefit payments;
• Expenses paid by the plan, participants or plan sponsors;
• Investments of the plan

1.  Investment options

2.  Investment earnings allocation.

In order to determine if your firm is operating its plan in compliance with the plan documents, you must understand the above agreements and arrangements, as well as understand the key features of your unique pension plan.

Common Problems with Operating Pension Plans

Some firms are not operating their plans in accordance with their plan documents or current laws and regulations. Significant liabilities may exist if a plan is not being operated properly. These liabilities may be in the form of additional required contributions to the plan, disallowance of otherwise tax-deductible contributions, or interest and penalties due to the IRS or DOL. Below are some common problems I have found in my 25 years of experience in auditing pension plans. Most problems arise from firms not knowing the details of their plans, having less than ideal internal controls, or experiencing a turnover in personnel responsible for certain functions of the pension plan.

Eligibility and Notification

Some plans do not properly notify employees when they are eligible to participate. Some plans use inaccurate participant data information. Plan sponsors must notify employees of their eligibility to participate in the firm's employee pension plans. Usually this notification is satisfied at an employee orientation upon hiring, as summarized in an employee handbook or as communicated in annual “open enrollment” notices. Eligibility rules include age and service requirements. To monitor proper eligibility, make sure you keep accurate records, referred to as census information, for employees including social security number, date of birth, date of hire, hours worked during the year, gender, and date of termination. This participant data is vital for determining eligibility to participate in the plan as well as determining a participant's right to receive a benefit. This participant data must be secured at the highest level to prevent inadvertent changes to previously accurate information as well as to reduce the risk of fraud.

Compensation

Some firms use an incorrect definition of compensation when calculating eligible compensation. Each pension plan uses a specific definition of “compensation” for calculating eligible employee deferrals, matching contributions, other employer discretionary or required contributions, and the amounts to be used in actuarial calculations. A firm may elect different definitions of compensation for different types of contributions as well. For example, compensation may be defined one way for employee deferrals (gross wages), but another way for the firm's contribution (gross wages excluding bonuses). Sometimes the definition is more complicated and refers to various IRS code sections that need to be reviewed. Eligible compensation may consider compensation for the whole plan year or just from the date an employee was eligible to participate. The plan documents should be clear on this, and if they are not, make sure you clarify the terms with your third-party administrator and the creator of the plan document. If the wrong definition of compensation is used, your plan may have a “missed employee deferral opportunity” or improperly calculated and remitted employer contributions ' both of which must be corrected. The corrections of these errors can often be very costly in terms of an additional financial obligations as well as loss of participants' confidence in the proper management of their pension plan.

Timely Remittances of Participant Contributions

When a plan sponsor withholds an employee's desired 401(k) contribution from an employee's eligible gross wages, the withholding must be remitted as soon as practicable, i.e., when it can be segregated properly from other assets, but no later than 15 business days after the month end during which it was withheld from the employee. Practically, there is probably no reason why your employee 401(k) withholdings cannot be remitted to the pension plan and allocated to participants' accounts within one to three business days after payroll is paid. Some employers used to routinely hold onto employees' withholdings and remit them on the last day possible, even if they could have submitted them earlier. This is unacceptable. Late remittances are considered loans from the plan to the employer who is holding onto them, and in some instances can be considered fraud by employers. Employers with late remittances must take corrective action and remit the late funds as well as lost earnings to the plan. These late remittances may be subject to penalties and are required to be reported as late on the pension plan's annual reporting to the IRS, Form 5500. They are also required to be disclosed in the plan's audited financial statements, if an audit is required or otherwise performed.

During January 2010, the DOL finalized rules and created a safe harbor remittance period for small plans. A small plan is generally a pension plan covered under ERISA with less than 100 eligible participants. The safe harbor rule requires that any 401(k) contributions withheld from an employee's paycheck must be remitted to the qualified plan no later than seven business days from when the amounts were withheld. This rule applies to withholdings for 401(k) contributions as well as for participant loan repayments. This safe harbor rule does not apply to large plans under ERISA ' generally those plans with 100 of more eligible participants. At the 2010 AICPA National Conference on Employee Benefit Plans in May 2010, representatives from the DOL were asked about this and responded that they do not expect a safe harbor rule for large plans any time in the near future.

To reduce the risk of additional liabilities or fraud, review, document, and implement internal controls surrounding timely remittances so that your firm can remit employee withholding within one to three business days routinely. Any deviations should be clearly documented as to the reason why and what was changed to prevent a delay in the future. Any remittances deemed late must be reported to the DOL.

Contributions

Once in a while, firms are not clear about their obligations to make their employer contributions and do not make them, or make them after the due date. Sometimes the obligation does not become apparent until the pension consultant sends a letter with instructions to the employer to make a contribution, or after the plan has been audited by a certified public accountant (“CPA”), the IRS, or the DOL. In certain instances, a firm may assume all employer contributions are discretionary, but shockingly learn that they are not discretionary at all. A firm may be required to make a mandatory contribution in order to comply with discrimination rules or pass top-heavy testing requirements, or because it has implemented a “safe harbor plan.” These required employer contributions are defined in the plan and may be 3% of eligible compensation. Missed required employer contributions can result in large, unexpected liabilities for the plan sponsor.

Miscalculation of Plan Forfeitures

Certain contributions by an employer may be subject to vesting. Participants are always 100% vested in the portion of their participant accounts related to employee contributions. However, the right for employees to take the portions of their participant accounts related to the employer contributions may be dependent upon how long they have been employed at the firm. For example, if an employee is 80% vested in his employer portion of his participant account, then when he leaves, he can generally take 80% of that account with him upon termination of employment. If participant data are wrong as to the date of hire or date of termination, then the percentage vested may be miscalculated. As a result, upon distribution of a participant's account from the plan to a participant, more or less may have been distributed than what should have been if the vesting percentage were calculated properly. Imagine the difficulty of trying to get back an overpayment made to a participant who has left your employment. Likewise, imagine having to submit additional funds to the plan to make up for forfeitures calculated improperly and also used for other purposes. Be aware that there are special rules upon 100% termination of the plan. In this circumstance, all participants become automatically 100% vested in their employer portions of their accounts. Likewise, if there is a partial termination, then terminated participants become automatically 100% vested as well. Generally, a partial termination occurs if 20% or more of the workforce is terminated. In the recent economic crisis, you can bet that there have been a great number of partial terminations due to significant layoffs at some companies.

Misuse of Plan Forfeitures

Plan documents specify how an account forfeiture must be used. Forfeitures may be reallocated to certain plan participants, as described in the plan, used to fund future employer contributions, used to pay certain plan expenses, or a combination thereof. If plan forfeitures are applied incorrectly, the firm may have to contribute more to the plan to fund the required use of the forfeitures.

Bonding

Some plan officials (fiduciaries) are not covered adequately by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss due to dishonesty and fraud. Sometimes individuals with opportunity, access, and incentive misuse plan assets. Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan should be bonded. The DOL requires fidelity bonds equal to 10% of the value of beginning-of-year plan assets or a required maximum of $500,000 and a required minimum of $1,000. To make sure you plan is always covered, consider purchasing a bond that is formula driven to comply with ERISA regulations at all times rather than purchasing a fixed amount of coverage.

Reporting Compliance

Some plans are not in compliance with IRS or DOL reporting requirements. A large plan must be audited annually by a CPA firm. The IRS and DOL may select any plan to be audited for compliance with laws and regulations, as well as the plan documents. Audits of pension plans and of CPA firms performing audits of pension plans have increased dramatically over the past few years in an effort to protect participants' assets, ensure firms are complying with laws, regulations and the terms of their plan documents, and to monitor that CPA firms are providing quality audits. Under ERISA, the plan must file an annual report, Form 5500, to the IRS. For a calendar year end, the Form 5500 is due initially by July 31. Under a qualified extension request, the due date may be extended to Oct. 15. All large plans and certain small plans must require an audited financial statement be attached to the Form 5500. Plan sponsors who file late Form 5500s or incomplete Form 5500s, may be subject to penalties.

Conclusion

If you are involved in the administration of your firm's pension plan, first and foremost, make sure you know how your retirement plan really works. This requires a team effort at your firm among the management team, finance, accounting and payroll departments, and human resource personnel. Through annual education and training, you can operate your pension plan in compliance with ERISA in an efficient and cost-effective manner while improving the security of retirement benefits for plan participants.

To learn more about your plan, read your plan documents and talk to your plan advisers. To learn more about your compliance requirements, go to www.dol.gov/ebsa.

K. Jennie Kinnevy, a member of this newsletter's Board of Editors, is the director of the Law Firm Services Group at Feeley & Driscoll, P.C. (http://www.fdcpa.com/). The Law Firm Services Group provides tax, accounting, business advisory, and consulting services to law firms. Based in Boston, Kinnevy can be reached at [email protected] or by phone at 617-456-2407.