Employee Benefit Plan Audits: Asking the Right Questions and - - PowerPoint PPT Presentation

Employee Benefit Plan Audits: Asking the Right Questions and Avoiding Critical Errors

Identifying Underfunded Plans, ESOP Valuation Mistakes, 403(b) Eligibility Issues and Other DOL Hot Buttons Today’s faculty features:

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Presenting a live 110-minute teleconference with interactive Q&A

Crystal Ekanayake, Partner, Assurance Services, Gallina, Sacramento, Calif. Kriste Naples-DeAngelo, Partner, Pension Services Group, EisnerAmper, Bridgewater, N.J. Jessie Kanter, Manager of Quality Assurance, BlumShapiro, Providence, R.I.

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Employee Benefit Plan Audits: Asking the Right Questions and Avoiding Critical Errors

Jessie Kanter, BlumShapiro JKanter@BlumShapiro.com November 25, 2013 Kriste Naples-DeAngelo, EisnerAmper kriste.deangelo@eisneramper.com Crystal Ekanayake, GALLINA CEkanayake@gallina.com

Today’s Program

Slide 8 – Slide 22 High Risk Areas and the Most Common Plan Errors [Kriste Naples-DeAngelo] Additional Considerations and Best Practices [Jessie Kanter] We found a mistake, what do we do? [Crystal Ekanayake] Slide 34 – Slide 43 Slide 23 – Slide 33

High Risk Areas and the Most Common Plan Errors

Presented by: Kriste Naples-DeAngelo CPA, MBA, CGMA

Opening Thoughts?

• Plans Are Seldom Perfect. Noncompliance and errors

do occur.

• Plan Administrator is responsible for Plan’s tax qualified

status.

• Plan management is responsible for maintaining

compliance of the Plan which includes processes performed by third party service providers.

• Auditors’ responsibility is to assess the impact of the

compliance failure in the context of the financial statement audit.

9

Focus of Presentation

Fiduciary Duties

• Exclusive Benefit Rule – to operate the Plan for the exclusive

benefit of plan participants and their beneficiaries

• Prudent Man Rule - ERISA 404(a)(1)(B) – with care, skill, prudence

and diligence

• Operate the plan according to the terms of the Plan -

Operating outside the governing terms can result in disqualification of the Plan and breach of duty.

• Diversified and appropriate investments – to manage the risk of

loss of the investments

• Reasonable plan expenses

10

• Failure to recognize that the Plan is subject to audit
• Misconception with regard to who is responsible for the Plan
• Failure to properly apply the Plan’s provisions:
• Improper application of definition of compensation
• Improper application of plan’s eligibility provisions
• Distribution Issues
• Loan Issues
• Failure to follow participant elections
• Paying administrative expenses
• Improper use of forfeitures/lack thereof in accordance with the terms of

the Plan

• Untimely participant deferrals and lack of reconciliation of deferrals

to deposits into the Plan

11

High Risk Areas and the Most Common Errors Noted During a Plan Audit

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Failure to recognize that the plan needs to be audited!

• Required by ERISA to be attached to Form 5500 filings with excess
• f 100 eligible participants (beg. of yr.)
• Exemptions from the audit requirement –

– General rule - plans with < 100 participants – Plans electing to file as “small plan” under the 80-120 participant rule

• BE CAREFUL- includes ALL ELIGIBLE participants whether

participating or not and people that still have account balances

12

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Misconceptions with Regard to Responsibility

Generally Plan Sponsor:

• Determines provisions and how to
• perate
• Determines investment policy

including investment options

• Authorizes transactions
• Provides accurate and complete

information (e.g. payroll records)

• Reviews output (e.g. distribution

reports, trust statements)

• Establishes internal controls for

the Plan

• Evaluates service providers

Generally Service Provider:

• Sets up Plan on recordkeeping

and/or trust systems based on Plan provisions and investment options

• Receives and processes

transactions according to instructions from information received and Plan provisions

• Maintains Plan and participant

records

• Provides output (e.g. distribution

reports, trust statements

14

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Improper Application of Definition of Compensation- #1

• Eligible Plan Compensation is critical for accurately calculating

employee deferrals, employer contributions, ADP and ACP testing and benefit accruals

• Know the definition of compensation per the Plan document

– Initial year - full year for participation or from entry date? – Is it the same for deferrals, match and discretionary contribution-BE CAREFUL?

• Verify if it includes bonuses, vacation, overtime, commissions and/or

fringe benefits

• Ensure that the Plan’s payroll provider has coded wages properly to

match the Plan’s provisions and if there are conversions or upgrades with the payroll provider ensure that they are in line with the plan

• If errors occur, may need to amend the Plan and make participants

whole and correct prior years

15

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Improper Application of Plan’s Eligibility Provisions

• Missed Entry Date – too late
• Entry allowed too early
• Time requirements (immediate, 1 month, 1 year)
• Entry dates (immediate, 1st of each month, quarter or year)
• Different eligibility provisions for deferrals and employer contribution
• Excluding eligible people into the Plan (part time, subcontractors,

certain division)

• Allowing ineligible people into the Plan (part time people or excluded

class or division)

16

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Distributions

• Has the participant received correct amount?
• Any trailing deferrals?
• Any trailing earnings allocation?
• Make sure participant account goes to zero
• Was it timely?
• Is the vesting correct?
• Acquired a group of employees that may receive credit for

prior service

• Hardship withdrawal
• Do they meet the criteria of the plan document?

The process can be outsourced but not the responsibility

17

High Risk Areas and the Most Common Errors Noted During a Plan Audit

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Participant Loans (Notes Receivable)

• Failure to comply with the loan policy/provisions
• Payments are not being withheld and remitted to the Plan
• Loan payments are subject to the same requirements as

employee contributions

• Are loans in default?
• Has a 1099 been issued?

Failure to comply with Participant elections

• Error in set up of initial participant contribution elections and

investment options

• Failure to follow change of deferral % and investment option

changes

• Failure to restart contributions in subsequent year when they met

the prior year limit

• Failure to set up loan repayments

19

High Risk Areas and the Most Common Errors Noted During a Plan Audit

Kriste Naples-DeAngelo, CPA, MBA, CGMA

Kriste Naples-DeAngelo is a Partner in the firm’s Pension Services Group and the Partner- in-Charge of the Bridgewater

• ffice’s Pension Services Group.

With more than 25 years in the public accounting profession, Kriste is responsible for managing numerous employee benefit plan audits and consulting with plan sponsors. She has extensive knowledge of accounting and technical reporting standards, and has assisted clients with their annual audit and reporting requirements for both defined benefit and defined contribution plans. Kriste's management skills, coupled with her auditing and employee benefit plan experience, provide clients with superior service, organization and knowledge. She works with plans for both public and private company plan sponsors and assists public companies with all aspects of SEC reporting, compliance and filings, including 11K's. Kriste has gained a reputation as an expert speaker on employee benefits and frequently presents on national webcasts, regional teleconference calls and seminars, and Certified Professional Education courses. In addition, she has written articles and presented to various professional groups on 403(b) plans, the audit regulations and various other employee benefit plan topics. Kriste graduated from Kean University with a B.S. in Management Science and earned her M.B.A. from Centenary College. She is a member of the American Institute of Certified Public Accountants, New Jersey Society of Certified Public Accountants, American Society of Pension Professionals & Actuaries and the New Jersey Chapter of the Worldwide Employee Benefits

• Network. Kriste has been an Adjunct Professor at

Centenary College teaching undergraduate accounting courses.

Contact information: 732-243-7142 kriste.deangelo@eisneramper.com 20

EisnerAmper LLP is an independent member firm of PKF International Limited IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Slide Intentionally Left Blank

Administrative expenses

• Are expenses are allowed to be paid from Plan assets?
• Multiple plans – one cannot pay the expenses of another plan
• Settlor expenses cannot be paid out of plan assets:
• Legal or consulting services related to establishment of plan (design,

analysis of future costs to employer, adding new features that are not required by law)

• Expenses that can be paid by the plan (recordkeeping, discrimination testing,

audit fees, plan amendments when required by law, transactional expenses, i.e. loans, benefit payments etc.

• Other professional fees- if required to maintain plan

23

Improper Use of Forfeitures or Lack Thereof

• Must comply with Plan document

Reduce Future Employer Contributions Pay Plan Expenses Allocated to participant accounts

• Plan may provide for different treatment for different types of forfeitures

(rare)

• Annual allocation is required - forfeitures may not sit unallocated in the
• Plan. At least once per year the account should go to zero.

24

Delinquent Participant Deferrals and Contribution Errors

• Participant contributions constitute “Plan Assets” and an employer is required

to segregate employee contributions from its general assets as soon as practicable, but in no event shall the date occur later than the 15th business day of the following month in which amounts are contributed by the employee

• r withheld from their wages. (not a safe harbor)
• DOL View – If employer can deposit into plan in one day, then that will be the

standard used by the DOL

25

Delinquent Participant Deferrals and Contribution Errors

• Small plans (<100 participants) regulation 7 business days
• Large companies are more sophisticated and have more

resources so they can probably deposit sooner than the 7 day rule that the small plan must comply with

• Prohibited transaction subject to 15% excise tax (lost interest)

under IRC 4975- report and pay it on form 5330

• Errors may occur in the calculations of employer contributions
• Complexities exist for plans with multiple allocations of employer

contributions

26

• Know who is a fiduciary and what their role is - DOCUMENT
• Know their fiduciary responsibilities
• Read the plan document at least annually and refer to it often.

Don’t guess!

• When hiring a Service Provider, make sure that they are

qualified (financial condition, experience with retirement plans of similar size, how many employee benefit plans they service)

• DOCUMENT the hiring process and due diligence
• Use a Qualified Auditor
• Maintain ERISA attorney relationship
• Review the 5500 filing in detail

27

Enlist the Work of Specialists

• Third Party Administrators
• Compliance assistance
• 5500 preparation and filing
• Voluntary corrections
• Non-discrimination
• Plan amendments
• Investment Advisors
• Benchmarking investments
• Investment policy statements
• Investment committee assistance
• Auditor/CPA Advisors
• ERISA Counsel

28

 Monitor Service Provider

− Review Service provider performance − Read service agreement, if applicable − Read any reports that they provide − Review fees charged − Follow up on complaints from participants − Review of SOC 1(service organization controls) – Type II

(formerly SAS 70) of recordkeeper and or custodian

− Review the user controls from the SOC 1 – Type II report

29

• Identify those charged with governance and

hold regular meetings & document discussions and decisions surrounding the plan

• DOCUMENT, DOCUMENT & DOCUMENT!

30

Jessie Kanter, CPA is a manager of quality control at BlumShapiro, the largest regional accounting firm based in New England. Jessie specializes in audits of employee benefit plans. Jessie has been managing employee benefit plan audits for many years and assists clients in meeting their annual reporting and compliance requirements for defined contribution, defined benefit and health and welfare plans. In addition, Jessie provides plan sponsors and administrators with the information and tools they need to improve their policies, procedures, and controls for management of employee benefit plans. Jessie has been an expert speaker on employee benefit plan issues and routinely teaches firm sponsored seminars related to employee benefit plans and other accounting and auditing topics.

Phone: 401-330-2727 Email: JKanter@BlumShapiro.com

32

Jessie Kanter, CPA BlumShapiro 50 Holden Street Providence, RI 02908 401-330-2727 Jkanter@BlumShapiro.com www.blumshapiro.com

Contact Information

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WE FOUND A MISTAKE, WHAT DO WE DO?

Crystal Ekanayake, CPA, GALLINA

Let’s Put This Into Perspective

• No One is Perfect – Mistakes Happen
• It is Better for Plan Sponsors to Identify and Correct

Mistakes

• Correct Mistakes in a Timely Manner and Corrections

Are Cost-Effective

• If Plan Sponsors “Roll the Dice” and Hope “Time

Heals All Wounds”, Corrections Can Be Very Expensive

35

Available Correction Programs

Department of Labor (DOL)

• Has primary jurisdiction over

fiduciary standards, reporting and disclosure requirements (resembles IRS EPCRS program)

• VFCP – Voluntary Fiduciary

Correction Program

• DFVCP – Delinquent Filer

Voluntary Correction Program Internal Revenue Service (IRS)

• Has primary jurisdiction over

the qualified status of plans (EPCRS)

• Employee Plans Compliance

Resolution System(3 programs)

• SCP – Self Correction Program
• VCP – Voluntary Correction

Program

• Audit CAP – Audit Closing

Agreement Program

36

Department of Labor Programs

Use When A Fiduciary Breach Occurs (Prohibited Transaction)

• Use Voluntary Fiduciary Correction Program (VFCP) to

Correct a Prohibited Transaction

• DOL Website Lists 19 Specific Prohibited Transactions That

Fall Under the VFCP

• Allows Plan Fiduciary to Correct the Breach and Restore

Any Resulting Losses

• Goal is to Restore the Plan to the Financial Position

Assuming the Transaction Had Never Occurred

37

Internal Revenue Service Programs

Use When an Operational Defect or Error Occurs

• May Use Self Correction Program or Voluntary Correction

Program

• IRS Issues a 401(k) Fix It Guide to Assist Plan Sponsors
• Recommend Plan Sponsor Consult with ERISA Counsel or

Specialist to Determine Best Course of Action

38

Self Correction Program

• Authorized Under Revenue Procedure 2013-12
• Operational Failure = When Written Terms of the Plan Are

Not Followed

• Plan Sponsors May Self Correct Operational Failures Under

the Self Correction Program (SCP)

• Insignificant Operational Failures May Be Corrected at Any

Time Under SCP

• Significant Operational Failures May Be Corrected Under

SCP if Corrected Before the End of the Plan Year Following the Plan Year When the Failure Occurred

39

Voluntary Correction Program

• The Voluntary Correction Program Results in a Compliance

Statement Issued That Formally Approved the Correction

• Some Plan Sponsors Want a Formal IRS Approval of Their

Correction

• Avoidance of Large Audit Compliance Fees or Audit Closing

Agreement Sanctions if IRS Discovers Issues During an Audit

• r Determination Letter Application
• Plan Will Not be Audited by the IRS During the Time the

VCP Application is Being Reviewed (Protective Benefit)

40

Delinquent Filer VC Program

• Assists Plan Sponsors Who Filed a Late Form 5500 or Failed

to File a Form 5500

• Penalty Payment Required (DOL Has Online Calculators)
• Filing Under DFVCP Program is Fairly Straightforward

41

Voluntary Fiduciary Correction Program

• VFC Program Includes 19 Specific Transactions
• VCP Program Provides Relief From Excise Taxes for 6

Specific Transactions

• Recommended That ERISA Counsel Be Consulted Before

Filing Under VFC Program

42

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