Retirement plans your own duty

Practice Pointers. By Rita M. Schwager, amednews contributor. Feb. 18, 2002.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question I recently heard of a colleague nailed with huge payments to the Internal Revenue Service for problems with his retirement plan. I have a profit-sharing plan and a pension plan. I let my accountant and my broker do the paperwork. I look at my investments and discuss this with my broker, and I write checks to put money into the plans. Other than that, I don't get involved. I certainly don't understand the rules for my plans. Should I be concerned? How can I protect myself?

Answer Usually retirement plan documents designate a trustee. If you have invested the plan money with a brokerage firm, that company has a trustee responsibility to provide you with an accounting of the plan assets, as well as other professional fiduciary responsibilities related to the maintenance of the money in the account.

But more than likely, you are listed as the trustee. If there are problems, you will be held accountable. You can be held accountable for plan performance, for theft of plan assets, for making the proper contribution for each participant, for making sure that all employees eligible to participate are included, for giving proper notification to all employees regarding the plan itself. Failure in any one of these areas could cause a problem for you.

The IRS and the Labor Dept. have jurisdiction over your plan. These agencies have provided some relief in correcting errors, but that relief is more in the line of not disqualifying your plan if an error is made.

They have allowed for reduced penalties if you discover an error and voluntarily confess to a mistake. But if an error is made that affects your employees, you will be required to "make your employees whole," if you undercontributed on their behalf.

That means you must give the employees the unfunded amount, as well as any earnings that would have been earned during the entire time the money should have been in the plan.

Conversely, if you overfunded your employees' accounts, you cannot take that back. Overfunding the plan could still expose you to penalties.

These rules put you in a difficult position as trustee. Plan documents and rules are technical and hard to understand. It would be difficult to determine if your professionals are handling your plan correctly.

The best you can do is hire a professional who is experienced with retirement plans. Some brokers understand plans and their features. They do a good job of helping you with a plan that will work for your particular practice, your needs and your budget.

They are good resources for telling your employees of plan features and getting initial paperwork completed. They do not usually get involved in determining eligibility of employees for participation or in calculating the amount of the employees' annual contribution.

Determining eligibility and correct payment amounts for participants requires expertise in retirement plan work. Persons qualified for this assignment might be a CPA, a pension attorney or a firm that specializes in plan administration.

Some profit-sharing and pension plans have very straightforward calculations. Others can be quite complex, especially if your plan is top-heavy, when you have participant terminations, if you rehire a former plan participant or are faced with other special circumstances.

For example, many employers feel an employee would not qualify for a plan contribution in the year in which they left their employment. This may or may not be true. Each plan addresses this. You may have made an election in the plan adoption agreement on how to handle this. But if your plan is top-heavy, to satisfy the top-heavy rules, you may have to make a contribution to a terminated employee.

You will need to establish procedures for keeping annual paperwork on track. Usually the practice administrator handles this. Not only are you required to tell employees about your plan when they are hired and eligible to participate, but you are also required to give participants certain information regarding their rights with respect to their plan each year.

When a plan participant terminates employment or reaches retirement age, there are specific elections regarding the form of distribution of the participant's retirement account money. It is your responsibility to make sure this is attended to in a correct and timely manner.

Your role as the plan trustee includes many opportunities for error. You should educate yourself on what your role should be, hire experienced, qualified people to help, and make sure you have internal controls so every responsibility is carried out.

Finally, ask questions of your professionals. There have been numerous changes in retirement plan contribution rules and limits, as a result of the latest tax legislation. Some questions that would be appropriate are:

How will the recent changes in tax law affect my retirement plans? Who is responsible for updating my plan for the recent changes?
Do I still need both the profit-sharing and pension plans to reach the maximum contribution level, or can I eliminate the pension plan?
Is there a more cost-effective plan that will allow me to contribute the maximum amount?
If I keep my current plans, are there any changes you would recommend, and how much will it cost to make those changes?
Who is keeping all the paperwork associated with the plan and the participant accounts, and is the paperwork complete and up-to-date?
How do we determine whether a participant gets a contribution if they quit during the year?

If the professionals handling your plan cannot answer these questions or, worse, don't seem to understand the questions, you should be looking for new advisers. You are the trustee, and you are ultimately responsible for what your professionals do.

Practice Pointers is provided by the St. Louis-based accounting and management consulting firm Stone Carlie & Co. LLC. The author and publisher are not rendering professional advice and assume no liability in connection with its use. Consult with professional advisers regarding your specific situation. Readers are invited to submit questions to the Business Editor (bob.cook@ama-assn.org).