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Getting your plan ready for an audit — part 3 of 3

Here is a final group questions from the IRS to get your company ready for an EBP audit: 

1)      Are elective deferrals limited to the amounts under IRC 402(g) for the calendar year?

Be sure that the amount of elective deferrals does not exceed the 2010 limit of $16,500 for traditional or safe harbor 401(k) plans. For SIMPLE 401(k) plans, the amount is $10,500. An exception to the limit is catch-up contributions for participants who are age 50 or over at the end of the calendar year. For 2010, traditional or safe harbor 401(k)’s can catch up with an additional $5,500; SIMPLE 401(k) plan participants can add $2,500. 

2)      Have you timely deposited employee elective deferrals?

Not making timely deposits of your employee elective deferrals puts your company in the ‘prohibited transaction’ category, which results in an excise tax. Be sure that you have a policy in place with your payroll provider to determine the earliest date possible for separating the deferral deposits from general assets. Set up a procedure to make deposits and document accordingly. 

3)      Do participant loans conform to the requirements of the plan document and IRC 72(p)?

Your plan document needs to include a list of rules for participants to follow when taking a loan from a 401(k) account. Briefly, IRS code 72(p) says that:

–          The loan must be in writing and legally enforceable.

–          The loan amount cannot be more than $50,000 or 50% of the vested balance, whichever is less.

–          The loan must be on a repayment schedule at least quarterly, and be repaid within five years.

–          There are exceptions for leaves of absence, but the loan must still be repaid within five years.

 4)      Were hardship distributions made properly?

Employers can make the determination about hardship distributions, and definitions of hardship need to be included in the plan document. Examples of hardship are unexpected large medical bills, significant education tuitions, saving a home from foreclosure or funeral expenses for a close family member. You need to review the hardship distributions at the end of each year to make sure that the distribution is in alignment with provisions in your plan document.

For more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

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