Webinar Slides: Common Errors in Qualified Plans


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Original air date:
Aug. 19, 2014
Repeat broadcast on Aug. 28, 2014. More info at http://www.mhmcpa.com

This webinar will focus on the common operational and document failures for qualified retirement plans, including 401(k), 403(b), profit sharing and defined benefit pension plans, and provide practical solutions and alternatives for correcting those mistakes. It will also discuss the importance of having strong internal controls and discuss plan sponsor best practices. Finally, we will discuss how to prepare for an audit if your plan is selected for review.

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Webinar Slides: Common Errors in Qualified Plans

  1. 1. CBIZ & MHM Executive Education Series™ Common Errors in Qualified Plans Presented by: Hal Hunt, Cindy Dwyer & Craig Kovarik of Husch Blackwell August 19, 2014
  2. 2. #CBIZMHMwebinar Co-presented by 2  To view this webinar in full screen mode, click on view options in the upper right hand corner.  Click the Support tab for technical assistance.  If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. Before We Get Started…
  3. 3. #CBIZMHMwebinar Co-presented by 3  This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.  External participants will receive their CPE certificate via email immediately following the webinar. CPE Credit
  4. 4. #CBIZMHMwebinar Co-presented by 4 The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. Disclaimer
  5. 5. #CBIZMHMwebinar Co-presented by 5 Today’s Presenters Hal Hunt, CPA Shareholder 913.234.1012 | hhunt@cbiz.com Hal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25 years of diverse experience with EBP accounting, auditing and compliance issues, he is also a member of the firm’s Professional Standards Group as EBP subject matter expert. As the EBP National Practice Leader, Hal is responsible for providing internal training, along with providing technical support to engagement teams, serving as engagement quality reviewer and developing resource tools for our EBP audit professionals. He served on the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) Executive Committee and is currently a member of the EBPAQC ESOP Task Force. Cindy Dwyer, CPA Shareholder 913.234.1022 | cdwyer@cbiz.com Cindy is the President of MHM Retirement Plan Solutions and a Shareholder of Mayer Hoffman McCann P.C. She supervises staff, oversees technical research, and provides quality control services. She has previously served as the national Chairperson of the American Institute of Certified Public Accountants Employee Benefits Technical Resource Panel (TRP) and currently serves as an advisory member of the TRP. Additionally, Cindy has been a recurring speaker at the American Institute of Certified Public Accountants National Conference on Employee Benefit Plans. Cindy is also a committee member and former chair of the Employee Benefits Institute sponsored by UMKC School of Law.
  6. 6. #CBIZMHMwebinar Co-presented by 6 Today’s Presenters Craig Kovarik Partner, Husch Blackwell 816.983.8249 | craig.kovarik@huschblackwell.com Craig is a partner of Husch Blackwell's Employee Benefits and Executive Compensation Practice Group and counsels clients on complex ERISA, tax and other legal matters. He has significant experience in pension, 401(k), employee stock ownership plans (ESOP) and other qualified retirement plan matters; supplemental retirement, deferred compensation and other nonqualified retirement arrangements; stock options, restricted stock and other equity-based compensation plans and executive employment agreements; and insured and self- insured medical, dental, life and other welfare-benefit plans.
  7. 7. #CBIZMHMwebinar Co-presented by 7 ‹#› #MHMWe binar Today’s Agenda 1 2 3 4 5 6 Overview and Background Top Ten Failures Found in VCP Other Common Failures What to Expect When You Are Expecting the IRS or DOL How Failures Affect the Annual Plan Audit Internal Controls
  9. 9. #CBIZMHMwebinar Co-presented by 9 Qualified Plans  Defined contribution  Account based plans  401(k), profit sharing, 403(b), money purchase pension, and ESOPs  Defined benefit pension  Traditional pension plans (e.g., final average pay)  Cash balance pension plans
  10. 10. #CBIZMHMwebinar Co-presented by 10 Non-Qualified Plans  Plans that are not intended to satisfy section 401(a) or 403(b) of the U.S. Internal Revenue Code  Section 409A deferred compensation agreements  Section 457(b) and Section 457(f) plans for tax exempt entities
  11. 11. #CBIZMHMwebinar Co-presented by 11 Government Regulation  Internal Revenue Service / Department of Treasury  Department of Labor  Pension Benefit Guaranty Corporation (PBGC)  ERISA pre-emption of state laws  Church plans and governmental plans
  12. 12. #CBIZMHMwebinar Co-presented by 12 Internal Revenue Service  “Qualified” plan status  Tax favored status  Deductible employer contributions  Deferred taxation of employee accounts
  13. 13. #CBIZMHMwebinar Co-presented by 13 IRS Enforcement  IRS Audits  Limited IRS reviews (aka compliance check)  IRS determination letter program  Participants complaints (?)
  14. 14. #CBIZMHMwebinar Co-presented by 14 What is the #1 best way to comply with the terms of a plan and operationally avoid most errors?
  15. 15. #CBIZMHMwebinar Co-presented by 15 Read the plan!
  16. 16. #CBIZMHMwebinar Co-presented by 16 Mistakes Do Happen They can almost always be fixed!
  17. 17. #CBIZMHMwebinar Co-presented by 17 Employee Plans Compliance Resolution System (EPCRS) General principle: Correct the mistake so that the plan and participants are in the same position they would have been in absent the mistake.
  18. 18. #CBIZMHMwebinar Co-presented by 18 Employee Plans Compliance Resolution System (EPCRS)  Three component programs  SCP: self-correction without IRS involvement  VCP: self-correction with IRS approval and compliance fee  CAP: formal closing agreement following audit
  19. 19. #CBIZMHMwebinar Co-presented by 19 EPCRS – What’s your Choice? Audit Cap Voluntary Correction Self Correction Cost of Correction IRS Fees $0 Time Involved
  20. 20. #CBIZMHMwebinar Co-presented by 20 Employee Plans Compliance Resolution System (EPCRS)  Document failures  Inclusion of bad plan provision or absence of required provisions  Failure to timely adopt required plan amendments  Operational failures  Failure to follow plan terms  Retroactive plan amendment generally prohibited  Demographic failures  Fail IRS eligibility or participation requirements
  21. 21. #CBIZMHMwebinar Co-presented by 21 Employee Plans Compliance Resolution System (EPCRS)  Significant vs. Insignificant Operational Failures  Facts and circumstances  Number of participants affected  Years at issue  Dollars at issue  Insignificant errors can be fixed under SCP at any time  Significant errors may be fixed:  under SCP during 2-year window period  Under VCP at any time
  22. 22. #CBIZMHMwebinar Co-presented by 22 Employee Plans Compliance Resolution System (EPCRS)  Correction includes “lost earnings”  Actual earnings  Earnings of plan as a whole  Department of Labor earnings calculator  Other reasonable method
  24. 24. #CBIZMHMwebinar Co-presented by 24 Top Ten Failures Found in VCP #1 Failure to amend the plan for tax law changes by the end of the period required by the law
  25. 25. #CBIZMHMwebinar Co-presented by 25 Adoption of Plan Amendments  “Plan Document Failure” – plan provision or absence of plan provision that, on its face, violates requirements under Internal Revenue Code  Failure to timely adopt discretionary or required plan amendments  Discretionary amendments generally must be adopted no later than last day of the current plan year  Required amendments normally must be adopted no later than last day of the current plan year unless deadline extended by IRS (remedial amendment period)  Prototype documents
  26. 26. #CBIZMHMwebinar Co-presented by 26 Adoption of Plan Amendments (continued)  Adoption requires both signature and date  Who has authority to adopt amendments (board, officer, committee?) Best Practice: Maintain a plan document book (both hard copy and electronic) which includes all plan documents, service contracts, SPDs, and key participant communication document. Review this document annually – like brushing your teeth!
  27. 27. #CBIZMHMwebinar Co-presented by 27 Top Ten Failures Found in VCP #2 Failure to follow the plan’s definition of compensation for determining contributions
  28. 28. #CBIZMHMwebinar Co-presented by 28 Plan Compensation (continued)  IRC Section 401(a)(17) – Limit on includible compensation (e.g. $260,000 for 2014)  IRS Section 401(c)(2) – Definition of earned income for self- employed persons  IRC Section 404(a)(12) – Definition for deductions  IRS Section 414(q)(4) – Definition for determining HCEs  IRC Section 414(s) – Definition for nondiscrimination testing  IRC Section 414(u) – For veteran’s reemployment privileges  IRC Section 415 – Maximum annual additions and benefits  IRC Section 416 – Top heavy allocations
  29. 29. #CBIZMHMwebinar Co-presented by 29 Plan Compensation (continued)  Safe Harbor definitions  Non-safe harbor definition: Subject to nondiscrimination testing  Plan’s definition may not discriminate in favor of HCEs  Compare average percentages of non-HCEs and HCEs (plan definition divided by safe harbor definition)  Average for each group and compare  De minimis rule
  30. 30. #CBIZMHMwebinar Co-presented by 30 Plan Compensation (continued) Common Mistakes 1. Failure to follow plan’s definition of compensation (e.g., treatment of stock option gains, imputed life insurance income, manual or off cycle paychecks) 2. Include (exclude) compensation from plan entry 3. Treatment of severance pay 4. Self-employment earnings 5. IRC 401(a)(17) limit – elective deferrals from pay in excess of limit 6. Failure to coordinate HR and Payroll systems
  31. 31. #CBIZMHMwebinar Co-presented by 31 Top Ten Failures Found in VCP #3 Failure to include eligible employees in the plan or the failure to exclude ineligible employees from the plan
  32. 32. #CBIZMHMwebinar Co-presented by 32 Eligibility and Enrollment  Entry date issues (monthly, quarterly, semi-annually)  Auto-enrollment and auto escalation  Employment anniversary vs. fixed annual date for all employees  Employees paid on different payroll basis (weekly vs. bi- weekly)  Employee contribution elections  How do you document employee initial elections?  How do you document changes in employee elections?  What happens if error is made but employee does not call this your attention for many months or years?
  33. 33. #CBIZMHMwebinar Co-presented by 33 Definition of “Eligible Employee”  Part-time employees  Leased employees  Student interns  Temporary employees  Employees of brother-sister companies or subsidiaries
  34. 34. #CBIZMHMwebinar Co-presented by 34 Treatment of Rehires  General rule: Once an employee satisfies the requirements for participation, the employee cannot be required to re-satisfy the eligibility requirements  Key Concept: Once a participant, always a participant  Rehired employee should be allowed to restart participation effective on his or her date of hire (i.e., not the next Plan entry date unless Plan specifically provides otherwise) Best Practice: Establish internal policy for handling rehires. Remember, your rehire policy for other employment purposes will likely be different from your policy for your retirement plan.
  35. 35. #CBIZMHMwebinar Co-presented by 35 Top Ten Failures Found in VCP #4 Failure to satisfy plan loan provisions
  36. 36. #CBIZMHMwebinar Co-presented by 36  Participant loans don't conform to the requirements of the plan document and IRC Section 72(p).  General Requirements  Limited to 5 years (exception for residential loans)  Reasonable interest rate  Meet dollar limit of IRC 72(p)  Amortized in level payments of principal and interest at least quarterly Plan Loans
  37. 37. #CBIZMHMwebinar Co-presented by 37  Exceptions for leave of absences  May suspend repayments for up to one year while the participant is on a leave of absence.  May not extend the loan’s maximum repayment period.  Upon return from leave of absence, must make additional payments to ensure repayment within the five-year-period by either:  increasing the payments over the rest of the loan, or  keeping the payments the same, but making a catch up payment for the missed payments during the leave of absence.  Note: A plan may suspend loan payments for more than one year for an employee performing military service. In this case, the employee must repay the loan within five years from the date of the loan, plus the period of military service. Plan Loans
  38. 38. #CBIZMHMwebinar Co-presented by 38  The plan administrator may allow for a “cure period” that would allow a participant to make up for a missed payment. The cure period cannot go beyond the end of the second quarter following the quarter in which the missed payment was due.  If the loan violated the plan document terms or IRC Section 72(p), the plan sponsor has two choices. It may be able to:  Correct under VCP by requesting the amount of the loan to be taxed in the year of correction  request relief from reporting the loans as taxable distributions to participants from the IRS under the VCP Plan Loans NOTE! Self-correction is not an option for this error.
  39. 39. #CBIZMHMwebinar Co-presented by 39 Top Ten Failures Found in VCP #5 Impermissible in-service withdrawals.
  40. 40. #CBIZMHMwebinar Co-presented by 40  In-Service distributions – other than hardship  Common to have at age 59 ½ for all sources  Certain sources may be available prior to age 59 1/2  Prior to age 59 ½ not available for:  401(k)  Safe Harbor  Qualified Non-Elective Source Pre-Retirement Distribution
  41. 41. #CBIZMHMwebinar Co-presented by 41  Hardship distributions were not properly made  Reasons for failures  Plan does not allow hardships  Hardship made from ineligible source  Neglected record keeping  Immediate and heavy financial need Hardship Distributions
  42. 42. #CBIZMHMwebinar Co-presented by 42  Reasons for failures (cont’d)  Watch for abuse/bad management  Identical requests from multiple employees  Only highly-compensated employees make requests  Have rank-and-file been notified of this plan feature?  Electronic Hardship applications Hardship Distributions
  43. 43. #CBIZMHMwebinar Co-presented by 43  Finding the mistake  Review plan – ensure it allows hardships  Review hardship procedures  Review all hardship distributions  Ensure each one was completed according to the plan Hardship Distributions
  44. 44. #CBIZMHMwebinar Co-presented by 44  Fixing the mistake  Plan document does not allow for hardships  Retroactive amendment  Hardships do not meet plan terms or IRC rules  Possible repayment to plan Hardship Distributions Hardship distributions may be subject to the 10% early distribution tax on distributions made prior to reaching age 59 ½.
  45. 45. #CBIZMHMwebinar Co-presented by 45 Top Ten Failures Found in VCP #6 Failure to satisfy age 70 1/2 minimum distribution rules.  50% Excise tax  SCP – need to make the distribution  VCP– need to make the distribution and used to request Excise tax waiver
  46. 46. #CBIZMHMwebinar Co-presented by 46 Top Ten Failures Found in VCP #7 Employer eligibility failure Employer adopts a plan that it legally is not permitted to adopt
  47. 47. #CBIZMHMwebinar Co-presented by 47 Top Ten Failures Found in VCP #8 Failure to pass the ADP/ACP nondiscrimination tests under IRC 401(k) and 401(m)
  48. 48. #CBIZMHMwebinar Co-presented by 48  ADP/ACP was not corrected timely  ADP and ACP tests reasons for failures  Not running the tests  Misclassification of employees  Highly and non-highly compensated  Ownership attribution rules  Not including all eligible employees in the test (non participating)  Definition of compensation  Not understanding who the “employer” is ADP/ACP Nondiscrimination Testing
  49. 49. #CBIZMHMwebinar Co-presented by 49  Two methods to correct- when corrected late  Qualified non-elective contributions (QNEC)  One-on-one method (still requires a refund to HCEs)  Correction  Within 12 months following plan year end – OK  Otherwise, correct using EPCRS ADP/ACP Nondiscrimination Testing 12/31/13 03/15/14 To avoid excise tax 12/31/14 Self Correction Period 12/31/16 Must use VCP for correction QNEC or refund with one-on-one method required QNEC or Refund
  50. 50. #CBIZMHMwebinar Co-presented by 50 Top Ten Failures Found in VCP #9 Failure to properly provide the minimum top-heavy benefit or contribution under IRC 416 to non- key employees  Corrective contribution  Vesting correction
  51. 51. #CBIZMHMwebinar Co-presented by 51 Top Ten Failures Found in VCP #10 Failure to satisfy the limits of IRC 415 #10 Failure to satisfy the limits of IRC 415  Not as common as once was  Lesser of 100% of Compensation or $52,000 (2014 indexed)
  53. 53. #CBIZMHMwebinar Co-presented by 53 Other Common Failures  Deduction of incorrect amounts (e.g., payroll system does not align with plan’s definition of compensation)  Failure to withhold from irregular payroll checks  Failure to deduct from discretionary or one-time bonuses  Failure to implement an employee’s election to change his or her deferral amount  IRS general correction principle  Employer must contribute one-half of the lost deferral opportunity Employee Contributions
  54. 54. #CBIZMHMwebinar Co-presented by 54 Employee Contributions (continued)  Deductions from “regular pay” after severance from employment  2½ month rule  Payment is regular compensation for services  Payment would have been paid to employee prior severance from employment if the employee had continued in employment
  55. 55. #CBIZMHMwebinar Co-presented by 55 Employee Contributions (continued)  Deductions from leave cash outs and deferred compensation  2½ month rule  Accrued sick leave, vacation or other leave  Deductions from “other post-severance payments”  All other amounts excluded even if paid within 2½ months  For example, severance pay is not eligible
  56. 56. #CBIZMHMwebinar Co-presented by 56 Employee Contributions (continued)  Termination is year 1 but paid in year 2  Include if satisfy the definition of compensation and paid within the 2½ month period?  Exclude because individual is not an “eligible employee” in year 2?  Timely correction of excess contributions and excess aggregate contributions
  57. 57. #CBIZMHMwebinar Co-presented by 57 Other Common Failures  DOL Rules and Regulations  Earliest date contributions can be segregated from general assets, but  No later than the 15th business day of the month following the month in which the contribution is withheld  15th business day is not a safe harbor!  Small plan safe harbor of 7 business days is not a safe harbor for large plans  Rules apply equally to participant contributions made to defined benefit and health and welfare plans  H&W plans look to 90 days  If participant loans are processed through payroll same rules apply Timely Deposit of Elective Deferrals
  58. 58. #CBIZMHMwebinar Co-presented by 58 Voluntary Fiduciary Correction Program – it’s easy to use Fact Sheet can be found at: http://www.dol.gov/ebsa/faqs/faq_vfcp.html#section2 VFCP Model application form: http://www.dol.gov/ebsa/calculator/2006vfcpapplication.html Prepare VFCP Checklist: http://www.dol.gov/ebsa/calculator/2006vfcpchecklist.html Calculate the lost earnings on the late deposits and allocate them back to the participants. Online calculator: http://askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx) or by using the returns on the actual funds, which ever is higher Timely Deposit of Elective Deferrals
  59. 59. #CBIZMHMwebinar Co-presented by 59 Excise Tax 15% for the prohibited transaction and File Form 5330 OR May qualify for relief from the excise tax and no Form 5330 is required Late deposits were transmitted not more than 180 days from when withheld The Employer has NOT taken advantage of the VFCP program during the 3 years prior to the submission Must send a notice to the participants within 60 days of filing the VFPC – model notice – However waived if: Excise tax is $100 or less, The “excise tax” is paid to the plan, Form 5330 or detailed computation provided to DOL Timely Deposit of Elective Deferrals
  60. 60. #CBIZMHMwebinar Co-presented by 60  Online calculator and display of IRS rates and factors on EBSA website.  Model Application Form available on EBSA website.  Includes online compliance assistance tools and reduced documentation requirements. DOL Audit VFCP is Easy to Use
  61. 61. #CBIZMHMwebinar Co-presented by 61  Calculation of match using wrong definition of compensation (e.g., exclude bonus)  Failure to follow plan’s matching formula  Calculation of match on payroll by payroll basis vs. calendar year basis  Employer’s practice is not consistent with the plan document  For example, employees who stop and restart contributions during the year  Failure to make year-end true-up match  Making true-up contributions for those employees who max out during the year but not others Other Common Failures Employer Matching Contributions
  62. 62. #CBIZMHMwebinar Co-presented by 62 Other Common Failures  Failure to track hours of service  Two method to credit hours: (1) hours method or (2) elapsed time method  Hours method  Actual hours worked  Equivalency method (9 hours per day, 45 hours per week or 190 hours per month) Vesting Issues
  63. 63. #CBIZMHMwebinar Co-presented by 63 Vesting for Rehires  Once vested, always vested  Never lose credit for prior of service  Example: Employee has 2 yrs. of vesting service at termination and is rehired: employee will have 2 yrs. of vesting service  Break in service rules  If 5-year break in service, future service will not be taken into account for purposes of determining old account benefit; however, old service counts for future benefit
  64. 64. #CBIZMHMwebinar Co-presented by 64 Vesting for Rehires (continued)  5-year break in service  If employee has a 5-year break in service, future service will not be taken into account for purposes of determining old account benefit  However, old pre-break service counts for future benefit
  65. 65. #CBIZMHMwebinar Co-presented by 65 Vesting for Rehires (continued)  Forfeiture of non-vested account balance  Earlier of: 5-year break in service or distribution of participant’s vested balance  Upon rehire, employee has 5 year period to repay prior account balance and have forfeited balance restored  Does plan administrator have obligation to notify employee at the time of rehire?
  66. 66. #CBIZMHMwebinar Co-presented by 66 Other Common Failures  100% vesting required upon plan termination  Complete termination vs. partial termination  Partial termination  Semi-bright line test: 20% reduction in workforce  Multiple plan yrs.  Multiple transactions  Formula for determining 20% reduction Partial Plan Termination
  67. 67. #CBIZMHMwebinar Co-presented by 67 Other Common Failures  Failure to maintain historical records (yrs. of service, eligible compensation)  Changes in third party record keepers  Overpayment of pension benefits due to administrative errors  Retention of plan documents is critical Calculation of Pension Benefit
  68. 68. #CBIZMHMwebinar Co-presented by 68 Other Common Failures  Distributions upon attainment of Normal Retirement Age  Participant consent required until later of:  Participant’s attainment of normal retirement age  Termination of employment  Participant’s completion of 10 yrs. of participation  Lost participants  Immediate vs. deferred distribution  IRA rollovers  Minimum required distributions (age 70½)  Hardship withdrawals Distribution of Plan Benefits
  70. 70. #CBIZMHMwebinar Co-presented by 70 Audit Triggers  List various audit triggers  Late deposits reported on 5500  No Fidelity bond  ER Securities – value NOT changing  Lots of $ in “other”
  71. 71. #CBIZMHMwebinar Co-presented by 71  Plan document  Trust agreement  Summary plan description  Summary annual report  Form 5500 for the last 3 years  IRS qualification letter  Fidelity bond DOL Audit What to Expect During an IRS Audit
  72. 72. #CBIZMHMwebinar Co-presented by 72  Identity of the fiduciaries  Service provider contracts  Plan’s written investment policies  Fiduciary liability policy  Payroll records, ledgers, journals, cancelled checks DOL Audit Other Information
  73. 73. #CBIZMHMwebinar Co-presented by 73 What to Expect during a DOL Audit  Employee Benefit Security Administration (EBSA)  Fiduciary responsibilities  Prohibited transactions  Civil and criminal enforcement
  74. 74. #CBIZMHMwebinar Co-presented by 74 Sample Request Letter
  75. 75. #CBIZMHMwebinar Co-presented by 75 Sample Document and Information Request • Signed plan documents • Signed amendments • Signed trust agreements, if applicable • Summary Plan Description • Summary of Material Modifications • Loan policy document • Most recent IRS Determination Letter • IRS Form 5500 series , including all schedules– last three years • 5310 filings for prior plan mergers, consolidations, or spin-offs, for prior five years • Audited financial statements • Plan’s payroll records/contribution reports • Plan’s financial records (trust reports, bank account statements, allocation records) The examiner will need copies of the items identified below and, in addition, may request copies of other information reviewed. It should be noted that additional records might be requested following a review of these items. • Loan records • Latest fidelity bond • Individual benefit statements that have been issued to two participants • Copy of latest fiduciary liability policy • Most recent participant allocation statements • Most recent Summary Annual Report • Participant Loan Promissory Notes • Any / all corrective actions/ government filings • Collective bargaining agreements relating to plan participation • Investment due diligence materials • Signed service provider contracts and all invoices and billing statements
  77. 77. #CBIZMHMwebinar Co-presented by 77  No plan is perfect. Noncompliance happens.  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.  Auditor’s responsibility is to assess the impact of the compliance violation in the context of the financial statement audit. Responsibilities
  78. 78. #CBIZMHMwebinar Co-presented by 78  Lack of understanding of plan provisions  Complex plan terms & definitions (i.e. compensation)  Dramatic shift in number of individually designed plans to prototype plans  Pressure on service providers to control costs  Acquisitions and dispositions (personnel & benefits)  TURNOVER – staff at plan sponsor or at service provider  Failure to consult legal counsel  Ineffective internal control Root Causes of Operational Violations
  79. 79. #CBIZMHMwebinar Co-presented by 79  Process to monitor new legislation and impact on plan document and operations. Typically engage ERISA counsel to monitor law changes and draft required amendments to the plan.  Process to timely receive required amendments to a prototype document. Process to ensure that amendments are timely executed.  Maintenance of signed and dated copies of plan document and any amendments.  Review of plan document and Summary Plan Description (SPD) to ensure that terms match. Plan Sponsors – Best Practices
  80. 80. #CBIZMHMwebinar Co-presented by 80 Audit Implications  Errors could result in a material impact on the financial statements  Determination of error and correction; can be very time consuming and costly  Impact on timely completion of the audit
  81. 81. #CBIZMHMwebinar Co-presented by 81 Nonexempt Transaction – Note Example  (10) Nonexempt Transactions  Certain employee contributions and participant loan repayments were not remitted to the trust within the time frame specified by the Department of Labor’s Regulation 29 CFR 2510.3-102, thus constituting nonexempt transactions between the Plan and the Company for the year ended December 31, 20X3. Plan management corrected the deposits including lost interest on September 20X4.
  82. 82. #CBIZMHMwebinar Co-presented by 82 Supplemental Schedule - Example Schedule 1ABC COMPANY 401(k) SAVINGS PLANEIN: 99-XXXXXXXPlan Number: XXXSchedule H, Line 4a – Schedule of Delinquent Participant ContributionsYear ended December 31, 20X3Participant contributionsTotal that constitute nonexempttransferred late to Planprohibited transactionsTotal fullyCheck here if lateContributionscorrectedparticipant loanContributionsContributionspendingunderrepayments arenotcorrectedcorrection inVFCP andincluded: Xcorrectedoutside VFCPVFCPPTE 2002-51$ See accompanying independent auditors’ report.
  83. 83. #CBIZMHMwebinar Co-presented by 83 Noncompliance – Impact on the Audit  If we become aware of information concerning an instance of noncompliance or suspected noncompliance with laws and regulations, we should obtain:  An understanding of the nature of the act and the circumstances in which it has occurred and  Further information to evaluate the possible effect on the financial statements.  Discuss with management and, when appropriate, those charged with governance  Evaluate implications of noncompliance in relation to other aspects of the audit  Auditor’s risk assessment  Reliability of written representation
  84. 84. #CBIZMHMwebinar Co-presented by 84  Determine if there is a related internal control deficiency.  Severity of the deficiency  Impact on the audit  Consider the following in communication with those charged with governance:  Compliance failure  Description of the related internal control deficiency  Description of the potential impact on the financial statements and level of deficiency  Deficiency/Significant Deficiency/Material Weakness  Uncorrected misstatements  Corrected misstatements Noncompliance – Control Deficiency
  85. 85. #CBIZMHMwebinar Co-presented by 85 Noncompliance – Written Representation From Management  Consider the following in the representation from Plan management:  Description of management’s understanding of the operational failure  Description and status of the correction/intended correction  Status of consultation with ERISA legal counsel  Assessment of the materiality of any unrecorded adjustments to the financial statements “We are aware of certain operational, plan document, or demographic issues that, if not properly corrected, could be treated by the IRS as qualification failures. We will be taking steps to correct these issues. If necessary, the tax qualification issues will be resolved directly with the IRS. Accordingly, we believe that the plan will retain its tax-qualified status.”
  86. 86. #CBIZMHMwebinar Co-presented by 86 Noncompliance – Note Disclosures  Management to consider the following additional note disclosures:  Description of the operational failure  Description and status of the correction/intended correction  Management’s assessment of-  Impact on the plan financial statements  Impact on the plan’s tax status
  88. 88. #CBIZMHMwebinar Co-presented by 88  Fiduciary obligations  Effective controls  reduce the risk of asset loss  help ensure that plan information is complete and accurate  financial statements are reliable  laws and regulations are complied with  Protections to plan  Minimizes opportunities or unintentional errors or intentional fraud  Helps discover small errors before they become big problems Why Internal Controls are Important to Your Plan
  89. 89. #CBIZMHMwebinar Co-presented by 89  Internal control is a process  General characteristics:  Policies and procedures that provide for appropriate segregation of duties to reduce the likelihood that deliberate fraud can occur  Personnel qualified to perform their assigned responsibilities  Sound practices to be followed by personnel in performing their duties and functions  A system that ensures proper authorization and recordation procedures for financial transactions What is Internal Control?
  90. 90. #CBIZMHMwebinar Co-presented by 90  Determine your plan’s control objectives over:  Investments  Contributions  Benefits (distributions or other withdrawals)  Participant data (eligibility, benefit accumulation, vesting)  Participant loans  Administrative expenses  Record retention  Establish, document and communicate your internal controls How to Establish Cost-Effective Controls
  91. 91. #CBIZMHMwebinar Co-presented by 91  Internal control is only effective when properly designed and operating as intended—important to monitor over time  Activities should address:  Are internal controls in place and operating?  Is the system working as designed?  Are exceptions and problems identified and resolved promptly?  Are the controls periodically reviewed? Monitoring Your Controls is Critical
  92. 92. #CBIZMHMwebinar Co-presented by 92  Communication in writing is required  “significant deficiencies”  “material weaknesses”  Examples  Lack of segregation of duties  Lack of internal expertise  Insufficient monitoring of activities of third-party administrators/custodians  Material misstatements in accounting records Auditor’s are Required to Communicate Internal Control Deficiencies
  93. 93. #CBIZMHMwebinar Co-presented by 93  It starts with audit planning.  Your plan auditor may review your benefit plan’s internal controls and identify best practices and areas for improvement.  Specific Examples:  Assist with financial statement preparation and footnote disclosures  Offer advice on technical issues  Provide research materials  Make recommendations How Your Plan Auditor can Help You
  94. 94. #CBIZMHMwebinar Co-presented by 94 Examples of Selected Internal Controls  Loans receivable from plan participants and related interest income are properly reported  Loans are made only with proper authorization based on guidelines established in the plan instrument in conformance with ERISA and tax requirements.  Entries to detailed loan records are reconciled with cash disbursements and receipts records.  Interest income is periodically calculated in accordance with rates established in the plan instrument and properly accrued.  Detailed records maintained by third-party administrator are reconciled with trustee’s/asset custodian’s reports.  Records are periodically reviewed for past-due amounts.
  95. 95. #CBIZMHMwebinar Co-presented by 95  Access to cash receipts, cash receipts records, and contribution records is suitably controlled to prevent or detect within a timely period the interception of unrecorded cash receipts or the abstraction of recorded cash receipts.  Cash is independently controlled upon receipt.  Cash receipts are deposited intact daily.  Checks are restrictively endorsed upon receipt. Examples of Selected Internal Controls
  96. 96. #CBIZMHMwebinar Co-presented by 96  Access to cash receipts, cash receipts records, and contribution records is suitably controlled to prevent or detect within a timely period the interception of unrecorded cash receipts or the abstraction of recorded cash receipts.(Cont.)  Responsibility for receiving and processing contributions is adequately segregated.  Bank accounts are reconciled monthly.  Past-due contributions are investigated on a timely basis.  Access to computerized contribution records is limited to those with a logical need for such access. Examples of Selected Internal Controls
  97. 97. #CBIZMHMwebinar Co-presented by 97  Contributions are recorded at the appropriate amount and in the appropriate period on a timely basis.  Sponsor or employer payroll records are compared with contribution calculations. In the case of multi-employer plans, some form of periodic payroll audit is performed.  Initial controls are established over contribution records for both employer and participant contributions (e.g., salary reduction amounts, after tax and rollovers).  Clerical accuracy of contribution forms is checked.  Subsidiary contribution records are reconciled to the trustee/asset custodian or third-party administrator reports. Examples of Selected Internal Controls
  98. 98. #CBIZMHMwebinar Co-presented by 98  Contributions are recorded at the appropriate amount and in the appropriate period on a timely basis. (Cont.)  Contribution forms are reconciled to cash receipts ledger and bank deposits.  Control totals for participant and employer contributions are maintained.  Contribution receipts are issued to participants containing notices requesting reviews of discrepancies.  Participant contributions are remitted to the trust within guidelines prescribed by Department of Labor regulation. Examples of Selected Internal Controls
  99. 99. RESOURCES
  100. 100. #CBIZMHMwebinar Co-presented by 100 Where to Get More Help
  101. 101. #CBIZMHMwebinar Co-presented by 101  http://www.irs.gov/Retirement Resources
  102. 102. #CBIZMHMwebinar Co-presented by 102 Resources
  103. 103. #CBIZMHMwebinar Co-presented by 103 Resources
  104. 104. #CBIZMHMwebinar Co-presented by 104  http://www.dol.gov/ebsa/compliance_assistance.html#section3 Resources
  105. 105. #CBIZMHMwebinar Co-presented by 105 Questions?
  106. 106. #CBIZMHMwebinar Co-presented by 106  Join us for these courses:  10/9 & 10/21: ERISA Plan Internal Controls and Your Fiduciary Responsibilities  12/9 & 12/17: Understanding Your Employee Benefit Plan’s Investments  Read these related publications:  Whitepaper: Plan Sponsor's Guide to Retirement Plan Investments  Employee Stock Ownership Plan Primer If You Enjoyed This Webinar…
  107. 107. #CBIZMHMwebinar Co-presented by 107 Connect with Us linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc linkedin.com/company/ cbiz-mhm-llc @cbizmhm youtube.com/user/ BizTipsVideos slideshare.net/CBIZInc MHM CBIZ