Seven Simple Steps To Improve Plan Compliance


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Seven Simple Steps To Improve Plan Compliance

  1. 1. Seven Simple Steps You Can Take to Improve the Compliance of Your Plan Pension Pundits, LLC Ilene H. Ferenczy 404.320.1100 x102  Adam C. Pozek 651.204.2600 x107
  2. 2. What Is Plan Compliance? • A retirement plan provides many tax benefits for both the employer and the covered employees • Retirement plans must be operated by the responsible parties (the employer, the plan administrator, and the trustee) in accordance with: • Tax rules found in the Internal Revenue Code; • Fiduciary standards set out by ERISA (the basic law that applies to employee benefit plans) • Plan compliance is protecting the tax benefits, while ensuring that fiduciaries operate the plan in accordance with ERISA’s standards 2
  3. 3. What Will We Do Today? • Most companies do not know what they and their HR and finance staffs must do to keep the plan in compliance • We will outline several key ideas to help you in this process 3
  4. 4. But, Before We Start …. • Pension plans, 401(k) plans, and profit sharing plans are all called “qualified plans” • What does this mean? • The company gets tax deductions for contributions made to the plan • The employees are not taxed on contributions made on their behalf until they take the money out • The contributions are invested and held in a tax-exempt trust (no taxes paid on interest, dividends, etc.) • If the employee wants to keep the money tax-sheltered after employment termination, it can be rolled over to an IRA or other plan 4
  5. 5. But, Before We Start …. • However, there is no free lunch! • To get all those benefits, a qualified plan must meet many, many requirements outlined in the Tax Code • If the Plan fails to comply with these rules, the plan becomes “disqualified” • Loss of employer tax deductions • Tax-through of employee benefits • Trust loses tax-exempt status and must pay taxes • Rollovers are not permitted 5
  6. 6. But, Before We Start …. • Furthermore, ERISA outlines duties that people who handle the plan administration or assets owe to the participants • You must act for the exclusive purpose of providing benefits and defraying expenses • You must be prudent, like someone who understands benefits rules would be • You must not self-deal (i.e., use plan assets for your own benefit) • These are called “fiduciary duties” 6
  7. 7. But, Before We Start …. • So, what we are talking about today is • Keeping the plan qualified so that we retain these tax benefits! • Doing our duty to participants as good fiduciaries • How do we do that???? 7
  8. 8. Idea #1 Know How to Find Stuff in Your Plan 8
  9. 9. Your Plan Document • The law requires that all retirement plans be in writing • The IRS requires that plans: • Include certain provisions • Not include other provisions • Furthermore, the IRS interprets the “written plan” requirement to mean that you must actually do what the written plan says Your plan document is your bible! 9
  10. 10. What You Should Do • Make sure that whoever prepares your plan gives you a complete copy • Put the plan in a three-ring binder on an accessible shelf • Every time your document provider sends you new documents, put them in the binder, so that your document is always complete. • Anytime you think that your copy of the plan has problems, ask your document provider for a new copy of your entire plan 10
  11. 11. What You Should Do • Whenever you have a question about plan operations, look first at your plan document for answers • If you ask your advisors questions about your plan, ask them to show you the answer in your document so you get used to looking at the document • If the document is ambiguous, it does not address your question, or other problems arise, call your advisors 11
  12. 12. Idea #2 Never Assume 12
  13. 13. Basic Tenets of Retirement Plans • • • • You are subject to oversight by the IRS and DOL The rules are very specific in many cases The rules are overly complex in many cases The IRS and DOL commonly take positions that appear to make no sense, so the rules are not always intuitive • Just because your actions are “good” for the participants does not mean that they are okay • The result: you cannot assume anything! 13
  14. 14. What You Should Do • Never assume what a rule will be • Read the plan • Ask your advisors 14
  15. 15. Idea #3 Know What Needs to Be Done … And Who’s Doing It 15
  16. 16. There’s a Lot to Be Done … • Keeping in compliance with the Code and ERISA is not easy • Different people will have different responsibilities • You • Your accountant • Your attorney • Your TPA/consultant • Your recordkeeper • Your financial advisor • The plan trustee • Are there gaps in the services you are receiving? • Are you paying double to have things done twice? 16
  17. 17. What You Should Do • Use the Administrative Services worksheet to get an idea of all the steps to be handled • Have each advisor check the boxes on the worksheet to show what they do • Resolve duplication • Fill the gaps 17
  18. 18. Idea #4 Report Proper Data to Your Service Providers 18
  19. 19. Your Service Providers Depend on You • You need to give information to your service providers: • Payroll data • Census information (name, date of birth, date of hire, date of termination) • Participant elections and requests • Trust accounting information • Information about your company, changes in ownership, purchases or dispositions of subsidiaries 19
  20. 20. Beware of GIGO! • GIGO: Garbage In, Garbage Out • Do you understand what the service providers really need, or are you reporting … garbage? • If you are relying on one third party to report to the other (e.g., your payroll service to report to your recordkeeper), do they understand what the other needs? 20
  21. 21. What You Should Do • Discuss the actual information needed with the service providers • Work with your data providers to ensure that the correct information is being transmitted • Review your systems periodically to make sure that they continue to do what you thought they did 21
  22. 22. What You Should Do • Get someone (probably your attorney, accountant or consultant) to: • Review the various definitions of compensation in your plan • Review your payroll data system and reports • Clarify what payroll sources should be reported to your recordkeeper and how 22
  23. 23. Idea #5 Read Your Service Contracts 23
  24. 24. You Are Responsible for Compliance • Generally, your service providers owe their duties to you for good and accurate work • However, it is common for service contracts to: • Limit the services being provided to a scope that is different than what you may expect • Limit liability if an error is made • Permit delegation to independent contractors • Require your indemnification for their costs, but not indemnify you for yours 24
  25. 25. You Are Responsible for Compliance • Your ability to enforce the duties owed to you depends on what the contract says • If you enter into a contract on behalf of the plan, the law requires that the contract be reasonable • It is common for clients to sign service contracts without reading their terms 25
  26. 26. What You Should Do • Never sign a contract unless you know what it says • If you do not understand something, contact your attorney • Note, however: many attorneys feel that if they do not “find something,” their time is not well spent • Do not let the attorney make mountains out of molehills • Do not be afraid to attempt to negotiate terms that you do not like • Do not be afraid to walk away if there are terms that you cannot live with 26
  27. 27. Idea #6 Know What Things Cost 27
  28. 28. It’s Your Money … • If the company pays for plan services, you have a duty to the owners to know what you are getting and how much you are paying • If the plan pays for services, you have an obligation as a fiduciary to make sure: • The services being provided are necessary for the administration of the plan • The services are appropriate to be paid for by the plan • The fee for the services is reasonable 28
  29. 29. Whose Responsibility? • Services that are required to be paid for by the plan sponsor are called settlor functions • Design of the plan/amendment • Actions taken for the sole benefit of the sponsor (e.g., work done for the company’s own financials) • The plan may pay for services involved in the administration of the plan • It is a breach of fiduciary duties to pay settlor fees from the plan • If your attorney is paid by the plan, he or she works for the participants and you have no attorney-client privilege 29
  30. 30. What’s It Costing Us? • Many service providers are compensated through the fund expense ratio, so it is invisible to the plan sponsor and administrator • However, the plan fiduciary is responsible for ensuring that the fee paid by the plan is reasonable • You need to have some way to identify what you are paying • The Department of Labor just published regulations for disclosure of fees by service providers, which are effective 7/16/11 30
  31. 31. What You Should Do • Demand fee information from your service providers • When the new regulations are finalized, make sure to look for fee information and, if not received, demand it • Periodically, bid out your work to determine if the fees you are paying are reasonable compared to your service providers’ competitors • Hire a consultant if necessary 31
  32. 32. Idea #7 Keep Records of What You Do 32
  33. 33. Protect Yourself from Liability • If something goes wrong with the plan, there is some chance that the company and its executives who handle the plan administration will be held accountable • Your guilt or innocence as to the breach of your duties as a fiduciary is not based on outcome but on procedure • If you consider your actions carefully, get advice when needed, and exercise good judgment, you are likely going to be okay • But, how can you prove that you did this, particularly several years later when something goes to trial? 33
  34. 34. What You Should Do • Keep a “fiduciary file,” where you retain: • Records of meetings of the plan administration committee • Information provided by your advisors • Memoranda that affected the decisions you made • Correspondence relating to your decisions and actions or inactions • Remember: memoranda of what you remember is not persuasive, but memos produced contemporaneously with your actions are very convincing! 34
  35. 35. Conclusion 35
  36. 36. Compliance Ideas - Review 1. 2. 3. 4. 5. 6. 7. Know how to find stuff in your plan Never assume Know what needs to be done … and who is doing it Report proper data to your service providers Read your service contracts Know what things cost Keep records of what you do 36
  37. 37. More Information • Be aware of helpful websites • • • •* •* * Just a little shameless promotion!  37
  38. 38. QUESTIONS?
  39. 39. Contact Information Pension Pundits, LLC Ilene H. Ferenczy Adam C. Pozek Law Offices of DWC Consultants, Inc. Ilene H. Ferenczy, LLC 5 Brook Pasture Lane, Suite A 2200 Century Parkway, Suite 560 Essex, MA 01929 Atlanta, GA 30345 (651) 204-2600 x107 (V) 404.320.1100 x102 (V) (651) 204-2700 (F) 404.320.1105 (F) 39