This case is typical of what entrepreneurs face regarding qualified retirement plans, says Goldberg. The complexity and ever-changing nature of federal plan rules contribute to the problem.
Take the example of the Small Business Job Protection Act of 1996, which brought about a number of changes in retirement plans. One change involved modifying the nondiscrimination rules for 401(k) plans, says Dennis Coleman, a principal with Pricewaterhouse-Coopers. As you know, nondiscrimination rules provide guidance for determining which employees are highly compensated for retirement plan purposes. Therefore, retirement plans were required to reflect this change.
Although this act makes administering retirement plans easier, "employers still have to amend their plans to comply with these and other technical rules," Coleman explains. Too often, entrepreneurs aren't aware of the need to make changes or they incorrectly believe the plan's administrator is making the changes for them, says Goldberg.
In addition to the complexity and changing rules, many employers, like the podiatrist mentioned earlier, use "prototype plans" offered by banks and brokerage houses to set up their retirement plans, and that can get them into trouble as well. Often, those institutions overlook mistakes employers make on the prototype plans, and they may even add mistakes of their own. Banks and investment houses maintain that they are not responsible for plan defects, declaring that the plan's terms are the responsibility of the business that establishes it.
As you review your retirement plan, keep in mind that the IRS randomly audits plans. In addition, the IRS has taken steps to make it easier to uncover retirement plans that may not be in compliance. Under a recently issued revenue procedure, the IRS now requires that banks, brokerage firms and mutual funds maintain and provide to the IRS, when requested, lists of employers that have adopted their prototype plans. The institutions must also alert companies of any steps they must take to remain in compliance.
As a result of this change, the IRS can now not only go to banks, brokers and mutual funds and request those lists, but also ask which employers have been notified about noncompliance issues, explains Goldberg, who declares that "It's a new ballgame."