Why Does the IRS Require Summary Plan Descriptions?
When a new employee begins their job, you do a paper or digital document dump of everything from a job description to an employee handbook. If your new hire qualifies as a participant or beneficiary of your 401-k or another ERISA-governed retirement plan, you must also include a Summary Plan Description in that stack of critical documents. If they don’t qualify immediately, you must provide a Summary Plan Description within 90 days after they do. If the plan changes, you must provide an update.
A Summary Plan Descriptions contains the following:
- Plan name and type
- Eligibility requirements
- Type of benefits and when they’re available
- Collective bargaining agreement details
- Pension Benefit Guaranty Corporation Termination Insurance information
- Contribution sources and contribution calculation method
- Plan termination provisions
- Claims and dispute resolution for denied benefits
- ERISA rights
This Summary Plan Description is an ERISA guideline that makes sure employees have a full understanding of their benefits and access when they qualify. The IRS also has a vested interest in your Summary Plan Description, but why?
It’s All About the Money
When a young employee begins a career with your company, retirement isn’t on their list of immediate concerns. Connecticut and Massachusetts millennials are more concerned with child care, building their own businesses, and paying off student loans. That’s what CNNMoney found out earlier this year when they interviewed millennials about Retirement savings.
Twenty-somethings might not care about 401-Ks or retirement benefits for a decade or so. In fact, many of your employees won’t think about holding your company accountable for retirement funds until they’re just about old enough to gain access to the money. Does anyone even care about their Summary Plan Description? Nobody’s keeping track… except maybe the IRS.
Retirement plans are on IRS’s list of Abusive Tax Transactions
While some companies make mistakes in administering retirement plans, others commit fraud intentionally. When a company claims certain transactions solely to reduce their tax liability, the IRS considers them “abusive tax shelters.” The IRS is committed to the identification, analysis, and examination of tax shelter schemes such as abusive 401-K accelerated deductions, Roth IRA transactions, and other “listed transactions.”
Failure to Comply Could Disqualify Your Plan
The Summary Plan Description is just one of the steps you must take to maintain ERISA and IRS compliance. If you fail to comply with ERISA guidelines, it could disqualify your retirement plan under IRS Codes. Here are a few of the consequences:
- Employee’s deductible contributions may be added to their gross income.
- Disqualification limits your plan deductions.
- Your plan trust will owe taxes on trust earnings.
The IRS Wants to Help you Stay Compliant
The IRS wants to track down companies whose retirement plans haven’t complied with the IRS Code, but there’s good news. Businesses that have been fudging their plan data for extra tax benefits or simply making mistakes have the opportunity to correct their errors. Not only does the IRS provide a Guide for Plan Requirements, they also offer a Plan Fix-It Guide.