Avoiding Federal Penalties with your Nonprofit Retirement Plans

If your nonprofit’s retirement plans do not comply with Department of Labor (DOL) and Internal Revenue Service  (IRS) regulations, then your nonprofit may be jeopardizing the ways that your employees save for retirement. However if you know what your plan should and should not offer its enrollees, you can avoid a “noncompliance” investigation, and hopefully save your retirement plan from disqualification.nonprofit retirement plans

Planning for Participants                    

Retirement plan regulation contains a variety of specific terms that you will need to know in order to makes your retirement plan accords with federal regulations, and to determine whether or not you will need a “plan audit.” Chief among the things you’ll need to know about your plan is how many eligible participants it should accommodate. Eligible participants are defined on IRS form 5500 and are split into three group:

  1. Active Participants – individuals who are employed by your nonprofit, who could receive future retirement benefits through your sponsored plan, and who receive or could receive credited service
  2. Retired or separated participants – individuals who are no longer working for your nonprofit, but who receive or could receive benefits from your plan
  3. Deceased participants – Former employees of your nonprofit organization who passed away, but whose relatives are receiving benefits or are eligible to receive benefits from your nonprofit organization’s retirement plan.

It’s important to remember that for accounting purposes, you need to record the number of eligible participants in your retirement plan, not just the individuals who actively contribute or receive benefits from the retirement plan offered by your nonprofit. At Gurman & Company we’ve seen nonprofits make mistakes because they only counted active participants in their retirement plans, or because they only considered active participants and retired/separated participants. These organizations had to pay a high price for an easily remedied accounting error.

Addressing an Audit

If the number of people affiliated by these three distinctions in your nonprofit is in the 80-120 range, then your nonprofit can qualify itself as a “small plan” for regulatory purposes and avoid a requisite audit. However if the number of eligible participants exceeds 120, then your nonprofit qualifies as a “large plan” and federal law requires that you undergo a plan audit.  The audit will make sure that your plan is compliant with relevant regulations for nonprofit retirement plans.

The DOL and the IRS auditors will primarily examine how effectively your retirement plan accords with their standards, and also how effectively your plan upholds the provisions it stipulates in your plan agreement. People in your Human Resources and Payroll departments should be aware of the different stipulations in your plan agreement, including:

  • Definition of compensation
  • Distribution of benefits
  • Eligibility information
  • Loans

If regulators find that your provisions are unclear, or that the execution of your nonprofit retirement plan does not accord with the stated provisions, than your nonprofit plan may be considered noncompliant.

Repairing Your Non-compliant Status

The DOL and the IRS expect that nonprofits will come forward with noncompliance issues before the departments discover them through audit investigations. To encourage such behavior, the IRS operates a system where nonprofit plan sponsors can remedy plan defects and noncompliance issues. The IRS set up the Employee Plans Compliance Resolution System to specifically address noncompliance issues. The system splits error reports into three separate types of corrections:

  1. Self-Correction Program: nonprofits can correct failures without notifying the IRS
  2. Voluntary Correction Program: Nonprofits can contact the IRS any time before a scheduled plan audit to receive IRS approval for changes to the nonprofit’s retirement plan in exchange for a small fee
  3. Audit Closing Agreement Program: The nonprofit must pay a sanction and correct a plan failure when it’s discovered through an audit

Considering the frequent scrutiny that your nonprofit’s retirement plan will face, you should make sure it accords with federal retirement plan standards. If you are unsure of whether your nonprofit’s retirement plan can withstand DOL and IRS scrutiny, contact a qualified nonprofit accountant in the Washington, DC area immediately.