Three Letter Acronyms have Business Owners using Four Letter Words
Joseph W. Cole, II
Posted: 2/9/2010

A few recent examples of acronyms come to mind. Let's start with the relatively new federal agency, Immigration Compliance and Enforcement (ICE). Briefly, this is the agency that inspects and audits employee files and Form I-9, Employment Eligibility Verification. Now, improper completion of I-9's carries a monetary penalty. There are about forty different opportunities to create a mistake on each I-9 - with each mistake carrying a specific monetary penalty.

Another example is The American Recovery and Reinvestment Act (ARRA), or as it is commonly known, the "Stimulus Package." A major provision included in this legislation is the retroactive COBRA provision which created lots of additional paperwork, including the production and distribution of notices retroactively to displaced workers to provide them with a second opportunity to elect COBRA coverage. Another component of the legislation is that the Federal Government is subsidizing 65% of the premium, which is accomplished by putting an additional burden on the cash flow of small businesses as they must front the money to cover the government's share before they are reimbursed through tax filings.

There's another initiative with an acronym you should know about, this one from the IRS and is known as "LESE". This stands for Learn, Educate, Self–Correct and Enforce. This initiative relates to qualified retirement plans - basically your company sponsored 401(k) plan.

Recently the IRS completed a couple of activities that they defined as "projects."

Project #1 was an audit of Defined Contribution Plans with less than $250,000 but more than $100,000 in assets which is the classic arena of small business. They audited Form 5500's for these plans and discovered several common errors. One common error discovered was inadequate bonding of plan fiduciaries and persons who handle plan funds. Also, failure of those fiduciaries to adopt timely amendments to comply with statutory and regulatory changes. Two of the most frequent errors were failing to properly perform the Average Deferral Percentage (ADP) test and failing to make timely deposits into the plan's trust.

Project #2 focused on 401(k) plans with less than 10 participants, which typically provide a higher than average probability of being subjected to "Top-Heavy Rules." About half of the plans examined had one or more compliance errors. Some of the most common errors involved:

inadequate ERISA bonding,

failing to provide the required top-heavy minimum contributions,

making timely deposits into the plan's trust or employee account?,

correcting excess contributions,

satisfying minimum coverage rules, and

making required contributions in an ADP safe harbor plan.

According to the Employee Benefits Institute of America (EBIA), these projects reinforce the IRS's concern about small plan compliance. In fact, the IRS summary states, "The results revealed the expected - that various issues arise with more frequency in smaller plans due to less oversight and weaker internal controls." In its first newsletter of 2010, the IRS Director of Examinations cites 401(k) compliance as a top priority for 2010.

So, given that the IRS has now confirmed that many small business 401(k) plans lack what they deem to be appropriate fiduciary oversight, the most important question you should ask yourself is, "Are you confident that you are in compliance?" And, if not, "What would be the unintended consequences to your business and, most importantly, to you personally?"

Since the Pension Protection Act of 2006, tremendous fiduciary liability has been placed on anyone sponsoring a retirement savings plan. And, with the significant increase in new regulations that are also a part of the act, it can become quite difficult, if not impossible for a small business owner to be compliant.

Now, it is more important than ever to be mindful of new legislation and regulations that can affect your business and you personally.