Retirement News

for Employers

Helping Business Owners with Retirement Plans

Internal Revenue Service Tax Exempt and Government Entities

Volume 2, Summer 2005

Inside This Issue

Product Profile - SIMPLE

IRA Plans for Small

Businesses Publication

page 2

While We’re on the

Subject...

page 2

Choosing a Tax

Professional

page 3

Critical FewPoints...by

Michael Julianelle

(Director, EP Examinations)

page 4

The Fix Is In

page 4

The Filing Cabinet

page 6

Calendar of Events

and Deadlines

page 7

All The News That Fits

The Retirement Plans Community web page has a new look and now has more information

designed for members of the small business community.

We’ve gone to a “newsier” three-tiered approach on our landing page. The new look features

breaking news items like the new rules on benefit and contribution limits and other new guidance.

Our page now also features more information written just for business owners. Just go to our web

page and click on “Plan Sponsor/Employer” under the “Information For” heading on the left side of

the page.

We know that when it comes to retirement, a business owner’s needs and interests are different from

those of benefits professionals.

Here are just a few examples of the type of information available on the Plan Sponsor/Employer

section:

• A collection of one-page Checklists for IRA-based plans, such as SEPs, SARSEPs and

SIMPLE IRAs, that will help give you a better idea of whether your plan is meeting some of

the important retirement plan rules.

• An archive of our popular “The Fix Is In: Common Plan Mistakes” column – you no longer

have to go to the Retirement News for Employers archive. Instead, just click on “How Do

I...” and then select “Fix a Plan Mistake.”

• Retirement Tips for Employers features advice on choosing and

operating a retirement plan and it also has lots of links to

plain-language publications that the IRS has on retirement

plans.

And, of course, there’s much more.

Next on our “To Do” list is creating more content on retirement

for employees and plan participants. We’ll have information on

receiving distributions from retirement plans, tips on retirement

planning and, you guessed it, lots more – and all of it designed

just for employees and plan participants.

Let us know what you think of our redesign by emailing us at

RetirementPlanComments@irs.gov.
Summer 2005 Retirement News for Employers

Product Profile – SIMPLE IRA Plans for Small

Businesses Publication

Have you considered establishing a SIMPLE IRA plan for your small business? Does your

small business already sponsor a SIMPLE IRA plan? Either way, you may have questions

about some of the rules and requirements of a SIMPLE IRA plan.

The IRS and U.S. Department of Labor’s Employee Benefits Security Administration

(EBSA) have jointly issued a publication to provide answers to your questions. SIMPLE

IRA Plans for Small Businesses (Publication 4334) is a plain-language publication that

provides you with basic information dealing with establishing and operating SIMPLE IRA

plans, such as:

• Choosing a financial institution

• Adopting a written plan

• Enrolling employees

• Employee contributions

• Employer contributions

• Depositing and investing contributions

• Communicating with employees

• Reporting to the government

• Distributions

The publication provides an example of how a SIMPLE IRA plan works. In addition, it

discusses the EBSA and IRS correction programs to help SIMPLE IRA plan sponsors

correct plan errors, protect participants and keep the plan’s tax benefits. Finally, the

publication provides additional resources for your use if you need more in-depth

information.

The publication, as well as additional information on SIMPLE IRA plans, can be found on

the IRS and EBSA websites, www.irs.gov/ep and www.dol.gov/ebsa. Copies of the

publication can be ordered by calling either (800) 829-3676 (IRS) or (866) 444-3272

(EBSA). Both numbers are toll-free.

While We’re on the Subject...

Speaking of SIMPLE IRA plans, here’s some more information on these valuable retirement

plans:

• As we reported in the Winter 2005 Edition of the Retirement News for

Employers, Employee Plans started a new examination program of SIMPLE IRA

plans. Early examination results show a substantial number of SIMPLE IRA plans

have not been amended for the changes required by the passage of the Economic

Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). SIMPLE IRA plans

needed to be amended for EGTRRA by adopting the March 2002 revision of IRS

model Forms 5304-SIMPLE or 5305-SIMPLE by December 31, 2002 or the

approved EGTRRA plan of the prototype plan sponsor by the required due date for

prototype plans. Failure to do so has caused these plans to be considered nonamenders. If you think this applies to your plan, you may want to seek the advice of

your financial institution or a benefits professional.

2
Summer 2005 Retirement News for Employers

• EP has developed another tool for your use to assist you in reviewing the operational

requirements of your SIMPLE IRA plan. The SIMPLE IRA Checklist (Publication

4284) is a one-page list of 10 questions highlighting some of the basic requirements for

operating the plan. It is available in paper and online versions. It provides a quick review

to see if some basic requirements in operating a SIMPLE IRA plan have been met.

However, it does not cover all plan requirements and it should not be used as a complete

plan review.

• The Retirement Plans Community web page has additional information on

choosing, establishing, operating and terminating a SIMPLE IRA plan. The SIMPLE IRA

Resource Library includes Frequently Asked Questions on SIMPLE IRA Plans. Check

out these resources by selecting “Plan Sponsor/Employer,” then “Types of

Retirement Plans,” and clicking on “SIMPLE IRA.”

SIMPLE IRA Plan Questions, Simple Answers.

Choosing a Tax Professional

Many business owners and individuals hire tax professionals, such as tax

attorneys, certified public accountants and enrolled agents. These

professionals may even represent you before the IRS.

However, did you know that you are legally responsible for your

information return and its attachments (such as Form 5500, its schedules

and supporting documentation)? It’s true. And this includes being

responsible for the data stated on your retirement plan information return.

Most tax professionals provide excellent service for their clients. After all,

it’s in their best interest as well as yours to follow the rules. However,

there are some tax professionals who, for a variety of reasons, push the

envelope too far.

So consider the following as some tips from the IRS when it comes to

choosing a tax professional:

1. Be certain that your tax professional discloses all the pertinent

 information (i.e., assets, determination letter, participant data, etc.) on

 your information return.

2. Consider the following in choosing a tax professional:

a. Can they represent you before the IRS?

b. Will they be available after the information return has been filed?

c. Do they belong to a professional organization that provides continuing education

and holds its members accountable to a code of ethics?

3. Never sign a blank information return.

4. The Better Business Bureau, State Boards of Accountancy for CPAs, State Bar

 Associations or State Attorney General’s offices may provide information regarding tax

 professionals who have had legal problems in the past representing their clients.

For more tips, go to the Retirement Plan Community web page, select “Plan Sponsor/

Employer” under the “Information For” heading on the left side, and then click on “Retirement

Tips for Employers.”

CONTACTING

EMPLOYEE PLANS

The Retirement News for Employers welcomes your

comments about this issue and/or your suggestions for

future articles.

Send comments/suggestions to:

EP Customer Education & Outreach

SE:T:EP:CEO

1111 Constitution Avenue, N.W., PE-4C3

Washington, D.C. 20224

or FAX (202) 283-9525

or E-Mail: RetirementPlanComments@irs.gov

For EP Taxpayer Assistance:

For retirement plans technical and procedural

questions:

Please call (877) 829-5500

Or visit the EP Customer Account Services section at

www.irs.gov/ep.

For questions relating to retirement income, IRAs,

Roth IRAs, educational IRAs, medical savings

accounts and section 125 cafeteria plans:

Please call (800) 829-1040

For further Employee Plans Information: Go to

www.irs.gov/ep.

3
Summer 2005 Retirement News for Employers

Critical FewPoints...by Michael Julianelle (Director, EP

Examinations)

My office is responsible for conducting audits of the operations of retirement plans by analyzing

applicable books and records. If plan mistakes are identified during an examination, help to fix

them may be available through our Audit Closing Agreement Program. In this and future editions

of the Retirement News for Employers, I will share with you my office’s critical areas of focus

and results from our examination/enforcement work. My goal is that this information will benefit

you and your employees participating in retirement plans by avoiding making some common plan

mistakes or worse becoming involved in abusive transactions or schemes.

Some of my “Critical FewPoints” that are vital to the success of EP Examinations include:

• Shutting down abusive transactions or schemes involving retirement plans. These

abuses usually involve ways to shelter all or most of the employer’s business income from

tax or take excessively large deductions. Right now, examinations are being performed

on S Corp ESOP and 412(i) plans. Also, we are sending soft contact letters to inform

plan sponsors that IRS knows these plans have the abusive potential and asking these

sponsors to work with us in resolving these issues.

• Monitoring pension funding in conjunction with the U.S. Department of Labor and the

Pension Benefit Guaranty Corporation.

• Increasing compliance contacts via specialized initiatives and through the Employee

Plans Compliance Unit (EPCU). EPCU identifies returns for compliance activities and

uses soft contact approaches to question return items, which will possibly resolve issues

without a full examination.

You can access information on EP’s examination/enforcement results at www.irs.gov/ep. Plus

the web page has an Examination Process Guide which gives you a better understanding of our

examination process from start to finish and includes sections on resolving issues,

communications, and the appeals process.

4

The Fix Is In: Common Plan Mistakes

In each issue of the Retirement News for Employers we’ll present a common mistake that

happens in retirement plans. We’ll describe the problem, how it happened, how to fix it and

how to lessen the probability of the problem happening again. This edition of the column

focuses on “Vesting Errors in Defined Contribution Plans.”

The Issue

Many of you have a 401(k) plan or some other form of qualified defined contribution

retirement plan. A qualified defined contribution plan must meet various requirements of the

minimum vesting standards found in section 411 of the Internal Revenue Code in order to

maintain its status as a qualified plan. The minimum vesting standards are designed to ensure

an employee will vest, that is, be entitled to, their accrued benefit within a certain time period.

An employer should think of vesting as ownership of the plan benefit by the participant. As is

true with the minimum age and service requirements for eligibility purposes, the law provides

some options in complying with the minimum vesting requirements. When you established your

plan, you made certain plan design choices that relate to these requirements.
Summer 2005 Retirement News for Employers

5

An employee’s rights to retirement benefits are determined through the application of a vesting schedule. A

vesting schedule defines vesting in terms of percentages which are in turn determined based on the

employee’s number of years of service.

Generally, the plan’s vesting must satisfy the legal requirements under one of two minimum schedules: “fiveyear cliff” vesting or “seven-year graded” vesting. Under five-year cliff vesting, employees must be 100%

vested once they’re credited with no more than five years of service. Prior to completing the fifth year of

service, the employee’s vesting percentage may be any percentage, including zero. This schedule is known

as “cliff” vesting because the employee typically will jump from no vesting to 100% vesting once the

employee completes the fifth year of service. Under seven-year graded vesting, employees must be 100%

vested once they’re credited with no more than seven years of service. Since 100% vesting can be delayed

longer under this option, the law requires that a minimum vesting percentage apply to earlier years. The

minimum percentages are as follows:

Upon completion of 3 years of service – 20% vesting;

Upon completion of 4 years of service – 40% vesting;

Upon completion of 5 years of service – 60% vesting; and

Upon completion of 6 years of service – 80% vesting.

Important Note: The forfeiture of the non-vested amount can only occur after the expiration of 5 years of

little or no service or, if the plan provides, upon payment of the vested amount if a provision is made for a

future buy-back of forfeited amounts. Forfeitures can be allocated to the remaining participants based on a

pre-chosen formula or used to reduce future plan contributions.

The Problem

To properly comply with the vesting rules, employers must maintain service records for

all employees. Vesting schedules generally refer to “years of service” when assigning a

vesting percentage. If these records are incorrect, or if a mistake is made when applying

participant data to a vesting schedule, participants will receive incorrect benefit amounts

upon leaving the plan. The amounts can be in excess of what is permissible or less than

what was due to the participant. The failure to properly follow the vesting rules of the

plan can cause the plan to lose its qualified status.

The Fix

Employers may get relief from treatment of their plans as nonqualified through the

Employee Plans Compliance Resolution System (EPCRS) by correcting the

vesting failures. The Self-Correction Program (SCP) or Voluntary Correction Program

(VCP) can be used to correct the mistakes. In order to fix the mistake under SCP,

generally the mistake must be fixed within two years after the end of the plan year in

which the failure occurred. Unless the failure can be classified as insignificant, VCP must

be used after this time.

There is more than one way to correct vesting failures under EPCRS. One way is to use

the Contribution Correction Method. A failure in a defined contribution plan to apply

the proper vesting percentage to an employee’s account balance that results in forfeiture

of too large a portion of the employee’s account balance may be corrected using this

method. The employer makes a corrective contribution on behalf of the employee

whose account balance was improperly forfeited in an amount equal to the improper

forfeiture. The corrective contribution is adjusted for earnings. If, as a result of the improper forfeiture, an

amount was improperly allocated to the account balance of another employee, no reduction is made to the

account balance of that employee.

How to Subscribe to

Retirement News for

Employers

The Retirement News for

Employers will be issued only

through IRS e-mail. For your

free subscription, please go

to the Retirement Plans

Community web page and

subscribe online by selecting

“Newsletters” under “Related

Topics.” All editions of the

Retirement News for

Employers will be archived at

the Retirement Plans Community

web page.

For your convenience, we

have included Internet links

to referenced materials

throughout the electronic

version of Retirement News

for Employers. These links

are identified on the printed

version by the underlined

text. The electronic version

may be found at the

Retirement Plans Community

web page.
Summer 2005 Retirement News for Employers

The Filing Cabinet

Forms – you can’t live with them, you can’t live without them. Just like you use forms when running your

business – everything from spreadsheets to receipts to invoices – you also use forms when dealing with a

retirement plan.

2005 Form 5500 Now Available for Viewing

With its Media Release of July 25, 2005, DOL/EBSA, along with the IRS and Pension Benefit Guaranty

Corporation announced the release of the 2005 Form 5500. This represents the earliest the form,

schedules and related instructions have been made available and reflects the government’s continued

commitment to improve the Form 5500 filing process.

The most significant changes to the form are:

• The elimination of the Schedule T (Qualified Pension Plan Coverage Information);

• Refinement of the Schedule B (Actuarial Information) and its instructions on the reporting of

investment returns, actuarial assumptions and the summary of eligibility and benefit provisions used

in valuations; and

6

3⁄4 Example: Employer E maintains a profit-sharing plan which provides

that forfeitures of account balances are reallocated among the account

balances of other eligible employees on the basis of compensation. During

the 2003 plan year, Employee R terminated employment with Employer E

and elected and received a single-sum distribution of the vested portion of his

account balance. No other distributions have been made since 2003.

However, an incorrect determination of Employee R’s vested percentage

was made resulting in Employee R receiving a distribution of less than the

amount to which he was entitled under the plan. The remaining portion of

Employee R’s account balance was forfeited and reallocated.

Correction: Employer E uses the contribution correction method to

correct the improper forfeiture. Thus, Employer E makes a contribution on

behalf of Employee R equal to the incorrectly forfeited amount (adjusted for

earnings) and Employee R’s account balance is increased accordingly. No

reduction is made from the account balances of the employees who received

an allocation of the improper forfeiture.

Another way to correct these errors is by use of the Reallocation Correction

Method. Generally, the account balance of the employee who incurred the

improper forfeiture is increased by an amount equal to the amount of the improper

forfeiture and the amount is adjusted for earnings. The account balance of each employee who shared in the

allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated

to that employee’s account.

Making Sure It Doesn’t Happen Again

Calculating the vesting percentage of participants receiving benefit payments accurately and timely is vital for

employers maintaining defined contribution plans. The plan document, employee data, etc., should be

carefully reviewed to ensure that employees are correctly credited with vesting service. When a participant

is receiving a benefit pay out, a quick check of the employee’s vesting percentage can prevent these errors

before they occur.

However, keep in mind that despite all of your good efforts, mistakes can happen. In that case, the IRS can

help you correct the problem and retain the benefits of your qualified defined contribution retirement plan.

IRS employees

contributing to this edition

of the Retirement News for

Employers are:

Evelyn DeWald,

Larry Isaacs,

Michael Julianelle,

Joyce Kahn,

Teresita Laureano,

Peter McConkey,

Todd Newman,

Mark O’Donnell,

Nancy Payne,

Keith Ruprecht,

John Schmidt,

Brenda Smith-Custer

and Susan Taylor
Summer 2005 Retirement News for Employers

• Updated instructions for the Schedule A (Insurance Information) that reflect the latest DOL/

EBSA guidance on the reporting of insurance fees and commissions.

Informational copies of the form, schedules and instructions are available for viewing on the EBSA web

site and the Retirement Plans Community web page by clicking on “EP Forms & Publications”

under the “Related Topics” section.

Filers are also invited to contact the EFAST Help Line for general assistance by calling (866) 463-3278.

To Be Discontinued: Package X

The IRS intends to discontinue Package X, Informational Copies of Federal Tax Forms (a 3-volume set

of reference forms) after this summer. The decision to discontinue this product reflects the IRS transition to

electronic media and communications. The IRS noted that all of the forms are available on its web page.

This move will save the agency nearly $2 million in production and distribution costs.

In addition, the Publication 1796, IRS Tax Products (a CD-ROM equivalent to Package X), is available

for purchase from the superintendent of documents under the Government Printing Office and the

National Technical Information System.

Let’s Just Take It One Three-Month Period at a Time

Operating a retirement plan can be a time-consuming job. There are deadlines, not just for reports and forms

but also for making contributions. There are conferences and seminars. And then there is information you

need to give to participants.

So to help you navigate the retirement plan timeline, here is our month-by-month look at some of the important

moments in the months to come. Please note that all of the filing dates below are for calendar year plans -

adjust the dates for non-calendar year plans:

August 23-25: IRS Nationwide Tax Forum – Las Vegas, NV.

August 30-September 1: IRS Nationwide Tax Forum – Chicago, IL.

September 15: Deadline for making final required minimum contributions for 2004 calendar year money

purchase and defined benefit plans.

October 15: Third quarterly contribution due date for 2005 calendar year defined benefit plans.

October 17: File the 2004 Form 5500, Annual Return/Report of Employee Benefit Plan or Form 5500-

EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan with DOL/EFAST

for those who filed for a 2 1/2 month extension prior to August 1.

November 1: Last date for employers with SIMPLE IRA plans or SIMPLE 401(k) plans to notify eligible

employees of salary reduction rights and of the type of employer contribution to be made.

For a comprehensive list of upcoming EP Educational Events, visit the Retirement Plans Community web

page, select “Educational Services” under “Related Topics”and then “Upcoming EP Educational

Events.”

= conference

= contribution

= file forms

Department of the Treasury Publication 4278 (8-2005)

Internal Revenue Service Catalog Number 37968B

www.irs.gov 7