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Common Audit Issues and What Do Benefits Professionals
Common Audit Issues and What Do Benefits Professionals
Common Audit Issues and What Do Benefits Professionals
Marcia S. Wagner
AUDIT MATTERS AND
INTERNAL CONTROLS
2
Types of IRS Audits
There are 2 types of IRS audits—Employee Plans Team
Audits (“EPTA”) and non-EPTA audits.
◦ EPTA audits are audits of large employer plans a plan or plans
with 2,500 or more participants.
An EPTA audit approaches an audit with the view that the initial
investigation of the employer’s internal controls should direct the
nature and depth of the remainder of the audit.
◦ A non-EPTA audit focuses on specific qualification issues raised
at beginning of the audit.
Specific industry;
Market segment with particular issues; and
Specific problem such as defaulted loans or mergers and acquisitions.
◦ Not the focus on internal controls of EPTA audit.
3
Triggers for IRS Audits
Selection of plan for non-EPTA audit by IRS is
generally random with respect to a particular
plan.
However, IRS may select a group of plans with
similar characteristics.
◦ Past IRS audits have focused upon plans with self-
employed individuals; plans with investments in
nonparticipant loans; and plans that have terminated
without filing a Form 5310, the form used to request
a favorable determination by IRS on a plan
termination.
4
Triggers for IRS Audits
Criteria for selecting cases for EPTA are historical
evidence, overall IRS objectives, and risk analysis.
◦ Emerging issues;
◦ Market segment impact;
◦ SEC/government filings;
◦ Form 5500 returns; and
◦ Referral information from
DOL;
Complaints;
Field input;
Tax shelter information; and
Media attention.
◦ Impact on plan participants;
◦ Input from Employee Plans Compliance Unit; and
◦ Withdrawal of Voluntary Compliance Program (VCP) requests.
5
Triggers for DOL Audits
From DOL perspective, participant complaints is
a chief reason for filing.
In addition to being tipped off by plan
participants about possible issues, other
regulators, such as IRS or SEC, may notify DOL of
a matter for further investigation.
Audit or investigation may be launched as part
of DOL’s national enforcement projects.
DOL may also select a plan for audit based on
unusual information reported or omitted on
Form 5500.
6
Triggers for DOL Audits
◦ Form 5500 red flags include:
Excessive administrative fees.
Uncommon investments, such as:
◦ partnerships and joint ventures;
◦ real estate;
◦ employer securities;
◦ employer real property;
◦ tangible personal property;
◦ loans to nonparticipant;
◦ Failure to transmit employee contributions;
◦ Loans or leases in default;
7
Triggers for DOL Audits
◦ Nonexempt party-in-interest transactions;
◦ Fraud or dishonesty losses;
◦ Hard to value assets; and
◦ Insufficient bonding.
Some audits occur randomly as the result of a
selection of a plan in the regional office’s
geographic area.
Reports in social media or the press, such as a
significant corporate transaction.
8
Internal Controls
12
Missing Terminated Vested Participants
In recent years, this has been a hot button topic
for the DOL.
Participants leaving significant amounts on the
table, especially in tax-qualified defined benefit
plans.
No clear guidance with respect to ongoing
plans, particularly ongoing defined benefit
pension plans.
◦ In absence of clear guidelines, this area is a concern,
because of aggressive positions taken by DOL regional
offices:
13
Missing Terminated Vested Participants
14
Late Movement of Elective
Deferrals Into 401(k) Plans
For small plans, plans with fewer than 100 participants,
participant contributions must be deposited into the
plan no later than the 7th business day following the day
the amount would have been payable to the participant
as wages in cash.
◦ If done treated as having been contributed to the plan as soon
as such amounts are contributed on the earliest date such
amounts can reasonably be segregated from employer’s general
assets.
For other pension plans, maximum period is the 15th
business day of the month following the date in which
the amounts would otherwise have been received by
the employer in cash.
◦ This period is not a safe harbor.
15
Late Movement of Elective
Deferrals Into 401(k) Plans
16
Late Movement of Elective
Deferrals Into 401(k) Plans
17
Committee or Trustees Meetings
ERISA does not specify the frequency of committee meetings.
◦ A function of plan size.
◦ A minimum of two semi-annual meetings should be scheduled.
Some plans hold quarterly meetings.
The prudence of an investment decision is determined based
on the actions taken by the plan fiduciaries at the time the
investment decision was made or is being monitored, and
does not depend on the performance of the particular
investment.
Committee or trustees minutes should document fully why
an investment decision was made.
◦ Important that minutes be reviewed by counsel, to ensure there
are no inadvertent ERISA violations.
18
Investment Policy Statement
No requirement under the Code or ERISA that a plan
have an investment policy statement, but DOL will
inquire about this, and it is a fiduciary best practice.
◦ Investment decisions should be consistent with Investment
Policy Statement.
19
Payment of Expenses From Plan Assets
20
Payment of Expenses From Plan Assets
If an expense is a settlor matter, it cannot be paid from
plan assets.
◦ A discussion with ERISA counsel or a consultant may contain
both settlor and fiduciary.
Example: Discussion about low rate of participation in 401(k) plan,
an administrative matter, becomes a settlor discussion if counsel or
consultant suggests as a possible fix adoption of a safe harbor plan.
21
Plan Documents
In IRS audit, examiner will request plan documents, all
plan amendments since last restatement; a favorable
IRS determination letter; and Board or Committee
action evidencing adoption of plan amendments.
◦ Issue: Plan sponsors sometimes fail to execute, or fail to execute
in a timely manner, plan amendments.
Example: If a plan sponsor submitted proposed amendments in
connection with a request for a favorable determination letter, such
amendment needs to be adopted by the 91st day after date of
favorable determination letter.
A restatement of a prototype plan needs to be executed.
22
Plan Documents
◦ Agent will also verify that plan sponsor has adopted appropriate
amendments to comply with statutory and administrative
changes.
◦ If a plan sponsor makes a discretionary change to a plan--one
not required by statute or IRS guidance--amendment needs to
be adopted by the end of the plan year in which it first takes
effect.
Internal control questions:
◦ Who has responsibility for ensuring that the plan document is
amended in a timely fashion?
◦ What is the process for correcting errors that are discovered in
plan document?
Wagner Law Group’s Private Determination Letter Program
23
Plan Documents
24
Correct Application of Plan Terms
25
Correct Application of Plan Terms
Example: Includes normal regularly recurring payment of base
salary, but excludes special payments.
◦ Should spot check a sample of plan participants to confirm that
plan’s vesting and compensation rules have been properly
applied.
◦ If they have not been properly applied, may be possible to self-
correct before an IRS audit.
Internal Control Questions:
◦ What is the plan’s definition of compensation?
◦ Who determines that participant’s compensation is based upon
the payroll information?
◦ Who verifies that a participant’s compensation used for plan
purposes matches the plan definition of compensation?
26
Correct Application of Plan Terms
Avoid this error.
◦ Know plan document and all modifications, and compare to
operational procedures.
◦ Know what third party administrators agreed to provide.
Are they relying on plan sponsor for all information?
◦ If possible, consider simplifying the plan’s definition of
compensation and using the same definition for multiple
purposes.
27
Eligible Participants
Agent will determine whether all eligible employees are
participating in the plan.
Internal control questions:
◦ Who determines when an employee is eligible to participate in
the plan?
◦ What steps does this person take to determine if an employee is
eligible to participate?
◦ How does this person track the amount of service that this
person has completed?
◦ How is an employee’s date of birth verified?
◦ Who is responsible for maintaining personnel records?
28
Eligible Participants
◦ How is information from personnel records shared with the plan
administrator?
◦ What steps are taken to notify employees that they are eligible
to participate in the plan?
Avoid this error by conducting annual self-audit and
comparing plan operation to plan terms.
◦ Date of hire;
◦ Date of birth;
◦ Hours of service; and
◦ Entry date.
29
Eligible Participants
Review plan document.
Inspect payroll records.
◦ Inspect W-2 Forms.
30
Top Heavy Testing Errors
If the plan is a small plan, the agent will determine
whether the plan is top-heavy and, if so, whether the
plan is being operated in accordance with its top-heavy
procedures.
Internal control questions:
◦ Who completes the annual top-heavy testing for the plan?
◦ Who determines which participants are key employees?
31
Nondiscrimination Testing Errors
The agent will verify that the allocations and/or accruals
under the plan are not discriminatory under Code
Section 401(a)(4).
◦ The agent’s review will be limited if the plan is a safe harbor
401(k) plan.
Internal control questions:
◦ Who completes the annual nondiscrimination testing for the
plan?
◦ Who determines which participants are highly compensated?
Who reviews the annual testing to ensure that the correct data
was used?
Who determines if there are any related employers that could
cause a controlled group or an affiliated service group to exist?
32
Nondiscrimination Testing Errors
33
Excess Elective Deferrals
34
Loans
Error: Plan loans do not comply with the requirements
of Code Section 72(p) such as 5-year terms and
substantial level amortization or are prohibited
transactions Code Section 4975.
Avoid error by reviewing each participant loan,
including loan amount, term of the loan, and repayment
terms.
Ensure there are procedures in place to prevent loans
that would be prohibited transactions or would violate
Code Section 72(p).
35
Loans
Internal control questions:
◦ Who verifies the plan’s loan provisions?
◦ How does a participant request a loan from the plan?
◦ How are loan applications reviewed and approved?
◦ Who reviews and approves requests for loans?
◦ Who determines a participant’s maximum loan
amount?
◦ How is the loan delivered from the trust to the
participant?
36
Hardship Withdrawals
If hardship withdrawals have been made and the plan
does not provide for them, the plan should be amended
retroactively to allow for hardship distributions.
If impermissible hardship withdrawal distributions have
been made, participants should return the amounts
distributed plus earnings.
Avoid this error by familiarity with the Plan’s hardship
withdrawal provisions, and ensuring these provisions
are followed.
Ensure plan administrators and payroll offices share the
plan’s hardship distribution information.
37
Hardship Withdrawals
Internal control questions:
◦ Are distributions only made on account of an
immediate and heavy financial need and only for the
amount necessary to satisfy that need?
◦ Is the amount of the hardship withdrawal in excess of
the amount needed to relieve the financial need of an
employee?
◦ Can the need be satisfied from other resources
reasonably available to the participant?
◦ Are records maintained of all information used to
determine eligibility for a hardship withdrawal?
38
TAX & BENEFIT
REFORM INITIATIVES
39
Trump August 31st Executive
Order on Retirement
Three issues with respect to retirement.
Encourage formation of open MEPS
◦ A professional employer Organization (“PEO”) – an example of
an open MEP. Referred to as association retirement plans under
Executive Order.
Issue similar in part to that addressed by DOL in Association Health
Plan Regulations
◦ No restrictions on participants in multiple employer
plans under Internal Revenue Code 413(c).
Distinguishable from multiemployer plans for union employees.
◦ DOL had traditionally taken a narrow view, requiring a
common interest or other organizational relationship
beyond the providing of benefits.
DOL Advisory Opinion - 2012-04A.
40
Trump August 31st Executive
Order on Retirement
◦ Open MEPs are not a violation of ERISA, just more
burdensome.
Separate SPDs, Form 5500s, and separate bonding required.
◦ DOL could loosen restrictions, in same manner as
with Association Health Plans.
Treasury Department would modify “one bad apple”
rule.
◦ Rule - An action by one participating employer that
disqualifies its plan would apply to all other plans.
Reduce notification and reduce paperwork.
Updating of electronic disclosure requirements under DOL and
IRS regulations.
41
Trump August 31st Executive
Order on Retirement
Update mortality assumptions for calculating required
minimum distributions for IRAs and tax-qualified
defined contribution plans.
◦ Last updated in 2002.
Updating mortality tables will decrease the minimum required
distributions und IRAs and tax-qualified defined contribution plans.
42
Tax Cut and Jobs Act
A number of provisions affecting tax-qualified plans and
403(b) plans were introduced in the House and Senate
versions, but most deleted from final Act.
Extended rollover period for loan offset.
43
Bipartisan Budget Act
44
Bipartisan Budget Act
Allow an individual to recontribute to an IRA or tax-
qualified plan an amount withdrawn (plus earnings)
pursuant to an IRS levy and later returned to the
individual by the IRS.
Special disaster related rules for individuals impacted
by California wildfires.
Creation of a Joint Committee on Solvency of
Multiemployer Pension Plans.
45
Acceleration of Funding for
Tax Qualified Plans
Change in tax rate increases the value of a
corporate deduction to a tax qualified plan for
the 2017 tax year.
◦ $1,000,000 contribution for a defined benefit plan or
profit sharing plan worth $350,000 in 2017.
◦ Worth only $210,000 in 2018.
◦ Ancillary consequences of increasing funded status of
plan .
Possible reduction of PBGC premiums
May allow for or affect LDI strategy
Facilitate derisking activity such as transfer to third party
carrier.
46
Missing Participant Legislation
Retirement Savings Lost and Found Act of 2018.
◦ Introduced by Senators Elizabeth Warren and Steven
Daines.
◦ Update of 2016 legislation.
Would create an Office of Retirement Savings Lost
and Found.
◦ A central location of retirement plan information for
retirees.
Would create an online searchable database.
◦ Plan participants could search for plan, contact plan
administrator.
Database would be updated based upon information provided to IRS.
47
Missing Participant Legislation
Employers would be required to report “forced
transfers” to IRS.
◦ Forced transfers occur when (a participant has left
employment and cannot be found or participant did not
notify plan where his account should be sent).
Plan must provide for these contingencies for forced transfers to
occur.
◦ If participant’s account balance is $1,000 or less, he or she
can be paid in cash.
◦ If account balance or value of accrued benefit is between
$1,001 and $5,000, amount can be transferred to an IRA.
Dollar cap on forced transfers would be increased
from $5,000 to $6,000.
48
Missing Participant Legislation
Employers would report forced transfer
information to IRS.
◦ Name of participant.
◦ Name and address of IRA issuer that received the
account.
◦ Account number.
◦ If annuity purchased, name and address of annuity
issuer and annuity contract number.
Plan administrator making a forced transfer of
$1000 or less must send the distribution to the
Office of Retirement Savings Lost and Found or
to an IRA established by the Secretary of
Treasury on behalf of participant. 49
Missing Participant Legislation
One attempt to contact the individual at the last known
address by certified mail or by electronic email if that is
only address on record.
◦ If the first attempt to contact the individual was by mail
and was unsuccessful, one additional step is required.
◦ If the first attempt to contact the individual was by
electronic email, 2 additional steps are required.
Check with administrator of a retired plan or plan
sponsor’s records for an updated address.
Make one attempt to contact a designated beneficiary.
At least one search using free electronic search tool.
Use a commercial locator service.
50
Automatic Retirement Plan
Act of 2017
51
Automatic Retirement Plan
Act of 2017
52
Automatic Contribution Plan
Act of 2017
56
Automatic Retirement Plan
Act of 2017
57
Automatic Retirement Plan
Act of 2017
Common ownership or common business
purpose would no longer be required.
Would provide relief from “one bad apple”
requirement for MEPs.
◦ Currently, disqualifying action of one employer affects
all participating employers.
Employers would be relieved of all fiduciary and
administrative responsibility (other than
remitting contributions and providing necessary
information) if the designated MEP provider.
58
Other Proposed Legislation
Retirement Plan Modernization Act would
increase the forced cash out limit from $5,000
to $7,600.
◦ Would be indexed for inflation after 2018.
Increasing Access to Secure Retirement Act of
2017.
A fiduciary in a defined contribution plan
selecting an insurance carrier to provide lifetime
benefits would satisfy the requirement that
carrier be financially capable if:
59
Other Proposed Legislation
◦ It obtained representations from insurers such
as they are appropriately licensed and in
compliance with state regulatory
requirements.
◦ Insurer must notify the fiduciary of any
change in circumstances.
◦ Fiduciary cannot be aware of facts that would
cause it to question the insurer’s
representations.
60
Receiving Electronic Statement to
Improve Retirement Earnings Act
Any document permitted or required to be
disclosed to a participant under ERISA could be
provided electronically if:
◦ the electronic system used (email or website) was
“designed to result in effective access to the document”;
◦ the system permits participants to select among specific
electronic delivery options, to change that selection, or
elect to receive paper documents (at no additional cost);
◦ the system protects the confidentiality of participant’s
personal information; and
◦ an annual paper notice is provided describing the
participant’s current selection and the right to change.
61
Retirement Enhancement and Savings
Act of 2018
Bipartisan legislation introduced by Senators Hatch
and Wyden.
Would eliminate barriers to the use of MEPs.
Would remove 10% cap under an auto enrollment
safe harbor plan.
Increase the credit for a small employer pension
plan start up costs.
Create a new small employer automatic open
enrollment credit.
No plan loans through credit cards or similar
arrangements.
62
Retirement Enhancement and Savings
Act of 2018
◦ Existing arrangements before September 21,
2016, would be grandfathered.
◦ Would prohibit loans of $1,000 or less, and
loans with or on premises of liquor store,
casino, gaming establishment, or adult
entertainment establishment.
Provide for portability of lifetime income options
under Code Sections 401(a), 403(b), and 457(b).
Would deem custodial account held by IRS
approved nonbank trustees pursuant to
termination of a 403(b) plan to be an IRA.
63
Retirement Enhancement and Savings
Act of 2018
Clarify which individuals can be covered by church
controlled organizations under Code Section 403(b)
(9).
Plans adopted by the filing due date (including
extensions) would be treated as in effect on the close
of the year.
IRS and DOL would effectuate a combined annual
report (Form 5500) for similar defined contribution
plans.
Benefit statements provided to defined contribution
plan participants would include a lifetime income
disclosure at least once every 12-month period.
64
Retirement Enhancement and Savings
Act of 2018
Provide a fiduciary safe harbor for the selection of a
lifetime income provider.
Modification of nondiscrimination rules for closed
plans to permit existing participants to continued
to accrue benefits.
Modify required minimum distribution rules upon
death of participant in defined contribution plan or
IRA owner.
◦ For aggregate account balances in excess of $450,000,
distributions must be completed by the end of the 5th year
after the participants (or IRA owner’s death).
65
Tax Reform 2.0
Rep. Brady indicated the following will be part
of Tax Reform 2.0.
Universal savings account – a fully flexible
savings tool for families.
◦ Probably with no connection to employment.
Code Section 529 would be modified to cover
payment of student debt-1st tier
Baby Savings.
◦ Allow families to access their own retirement
accounts penalty tax-free for expenses for a new
child(birth or adoption).
◦ Permissible to replenish in future.
66
Protecting Taxpayers Act
Bipartisan proposal by Senators Cardin and
Portman.
Except as otherwise provided in regulations, all
inadvertent plan violations may be self-
corrected without IRS.
◦ Exception- violations identified by IRS on audit prior
to any employer action that demonstrates a
commitment to implementing a self-correction.
IRS would be directed to publish additional safe
harbor means of correcting an inadvertent
violation, including how to determine lost
earnings. 67
Protecting Taxpayers Act
Any plan loan violation that is corrected through
the use of an IRS approved safe harbor would be
treated as meeting the requirements of the DOL’s
Voluntary Fiduciary Correction Program.
IRS would be directed to expand EPCRS to cover
inadvertent IRA errors for which the IRA owner is
not at fault.
◦ Ex.-waiver of the excise tax for failure to satisfy required
minimum distribution provisions.
IRS would be permitted to waive excise taxes if an
inadvertent required minimum distribution failure
is by plan or IRA custodian within 180 days.
68
Cybersecurity
Despite calls for action from the ERISA Advisory
Council in 2011 and 2016, the DOL has not issued
specific guidance to plan administrators.
Many commentators believe that inaction by plan
sponsors followed by an improper disclosure of
participant personal information, will constitute a
breach of fiduciary duty.
◦ Plaintiffs will clearly allege this, but no assurance that they
will prevail.
◦ Even if DOL issues general guidance to plan sponsors, it
may not address the issue of whether cybersecurity is a
fiduciary obligation and the preemption of state laws
dealing with cybersecurity.
69
Cybersecurity
70
Fiduciary Rule Status
71
Fiduciary Rule Status
Plan sponsors have become more sensitive to
issue of identifying fiduciaries.
◦ Historically, recordkeepers not regarded as ERISA
fiduciaries.
Their functions ministerial in nature.
72
SEC Proposed Regulation
Best Interest
73
SEC Proposed Regulation
Best Interest
74
Litigation Against Plan Sponsors
Plan sponsors in several recent cases have been
successful in defeating claims of breach of fiduciary
duty.
◦ Relatively easy to draft copy-cat claims, but difficult to
prove them.
◦ Establishing that fund A cost less and performed better
than Fund B does not establish that it was imprudent to
select fund B.
◦ Plaintiff must establish appropriate benchmark.
◦ No fiduciary duty under ERISA to select the best
performing fund.
◦ Fact that a fund performed below market does not
establish that the methodology for selecting the fund was
flawed.
75
Litigation Regarding Recordkeeper
76
Litigation Regarding Recordkeeper
77
_______________________________
COMMON AUDIT ISSUES AND
WHAT DO BENEFITS
PROFESSIONALS NEED TO KNOW
ABOUT TAX REFORM?
______________________________________
Marcia S. Wagner
marcia@wagnerlawgroup.com
www.wagnerlawgroup.com
A0368082.PPTX