IRS Audit Project Finds Low Bonding Coverage Problem
When the Internal Revenue Service (IRS) put about 50 Form 5500 filings to the test recently, the plans filing the annual reports flunked on one major issue—buying enough fiduciary bond coverage for their fiduciaries and administrators.
The IRS said in a Web site posting that plans generally are required under Title I Section 412 of the Employee Retirement Income Security Act (ERISA) to carry the fiduciary bond insurance equal to at least 10% of the dollar value of their plan’s trust. Plans should carry insurance or bonding of no less than $1,000 or more than $500,000.
Plans in the audit sample had assets of less than $250,000 but more than $100,000, IRS said. Half of the cases selected for the exam project involved 401(k) plans.
On the heels of the inadequate bonding came failure to amend and comply with current law and regulatory guidance as the second most common regulatory miscue. Tax agency officials cautioned that an amendment or compliance failure “specifically affects the qualified status of the plan, so care should be taken to ensure that timely amendments are made to ensure that the plan remains qualified.”
The IRS said the audits revealed common plan errors, such as failures to make timely deposits of elective deferrals or to properly test for nondiscrimination.
The tax agency also performed a second audit project on about 50 small 401(k) programs of three to eight participants. There, the IRS said, about half showed at least one compliance problem—most frequently the low bonding coverage issue followed by failure to follow top heavy rules requiring minimum contributions.
More information about the IRS audit project is here.