Retirement Plan Compliance Being Scrutinized by The IRS

The IRS is scrutinizing retirement plans with participant loan balances.  The IRS is concerned that Plans have not been following, or are abusing, the rules for loans from retirement funds. As a result, the Employee Plans Compliance Unit (EPCU) sent out letters to Form 5500-EZ filers identified in their records as having participant loans in excess of $50,000 per participant.  The project is intended to ensure sponsors are complying with participant loan limits, and that income tax is paid on excess amounts, and that Plans then correct the underlying procedures allowing this to happen.   Failure to comply does carry the risk that the Plan may lose its tax-favored status.

Participant loans must meet the following standard requirements:

• The Plan must allow for participant loans.
• Loans must have a legally enforceable agreement stating the date of the loan, the amount, a reasonable interest rate, and the repayment schedule. The maximum loan amount is 50% of the vested account balance or $50,000, whichever is less.  An exception exists for situations where the vested account balance is less than $10,000.  
• Generally, the participant must make payments at least quarterly of principal and interest. 
•  Generally, the loan must be paid back in 5 years or less, however there are exceptions if the loan is for a main home or if the participant is performing military service during the 5 year period of the loan. 

If these rules are not followed, then the loan may be considered to be a “deemed taxable distribution”.  

If the Plan has not followed these rules, options may exist for voluntary correction programs.  The IRS is also looking at loan balances in larger plans.

More information can be found at http://www.irs.gov/Retirement-Plans/Form-5500-EZ-Excess-Participant-Loans-Project. 

If you have any questions, or if you need help in reviewing your Plan’s compliance, please contact Janet Cookson at jcookson@katzabosch.com, Josh Sutherland, CPA at jsutherland@katzabosch.com, or Katie Fortwengler, CPA at kfortwengler@katzabosch.com.

Posted in: EPCU, IRS, KatzAbosch, loans, Managing Retirement Plans, retirement funds, retirement plans