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How to Find and Correct Plan Errors
- 1. HOW TO FIND AND CORRECT PLAN ERRORS GAIN CONTROL berrydunn.com
- 2. AGENDA • Where do plan sponsors make most mistakes? • Plan audits – what are those pesky auditors up to? • How to find, correct, and prevent a plan error GAIN CONTROL
- 3. WHERE DO PLAN SPONSORS GO WRONG? Compensation • Most common error: operations do not match document − Plan document controls − Non-cash taxable fringe benefits – included or excluded? − Limited to $250,000 (2012 limit) – adjusted annually (applies to employer contributions only) − Different compensation definitions for employee and employer contributions − Allowing deferrals equal to 100% of compensation GAIN CONTROL
- 4. WHERE DO PLAN SPONSORS GO WRONG? Eligibility • Not following the proper Entry dates • Excluded classes of employees (e.g. per diem) • Age and years of service requirements • Different requirements for employee and employer contributions GAIN CONTROL
- 5. WHERE DO PLAN SPONSORS GO WRONG? Distributions Participant loans • Plan documents control • Plan documents control − Hardship withdrawals − Improper amount − In-service distributions − Improper repayment − Force outs? − Default loan timing GAIN CONTROL
- 6. WHERE DO PLAN SPONSORS GO WRONG? Plan Document • Required plan amendments (e.g., EGTRRA, PPA) Failure to sign! • Maintaining signed amendments or documents • Timely elective plan amendments for plan changes − Compensation − Eligibility − Distribution provisions GAIN CONTROL
- 7. WHERE DO PLAN SPONSORS GO WRONG? Miscellaneous • Timely deposit of participant contributions • Failing to file Form 5500 or other forms e.g., welfare benefit plans! • Not retaining copies of signed salary reduction agreements • Overall review of the plan (e.g. investment performance, plan documents, etc. GAIN CONTROL
- 8. WHAT DO AUDITORS DO, ANYWAYS? • Read the plan document for basic requirements • Test samples of transactions • Obtain an understanding of internal controls • Verify filings are made timely • Review results of non-discrimination testing • Verify employee deferrals are remitted timely GAIN CONTROL
- 9. WHAT DON’T AUDITORS DO? • An audit is not a complete, comprehensive review of your plan document or the Plan’s operations • Auditors do not find every instance of error or fraud • Auditors don’t test every transaction GAIN CONTROL
- 10. WHAT IS PARTICIPANT DATA TESTING? • Select sample of employees and/or participants • Obtain census, payroll reports and participant account information • Verify indicative data between plan and employer records • Determine participants’ eligibility to participate • Verify contribution rates GAIN CONTROL
- 11. WHAT IS PARTICIPANT DATA TESTING? • Agree gross wages to W-2 or other substantive documentation • Reconcile gross wages to plan wages • Recalculate employee and employer contributions • Reconcile recalculated contributions to plan records GAIN CONTROL
- 12. WHAT IS PARTICIPANT DATA TESTING? Distributions Participant Loans • Verify eligibility • Proper amount • Proper Authorization • Terms within limits • Verify amount • Repayment − Gross amount − Withholding − Vesting GAIN CONTROL
- 13. OOPS, WE MADE A MISTAKE! NOW WHAT? Correct affected Plan Years • Self-Correction – No filing with the IRS • Voluntary Correction Program – must file with the IRS • Audit Closing Agreement Program (CAP) – Not good! GAIN CONTROL
- 14. OOPS, WE MADE A MISTAKE! NOW WHAT? Compensation – but the plan document is wrong!! Oops – we underfunded the employee • Recalculate contributions for all affected employees − Fix all affected plan years − Employer is responsible for these contributions − Employee contributions – fund a minimum of 50% of lost contributions, − Employer contributions – fund 100% of lost contributions • Adjusted for lost earnings – Generally not the DOL rate! • Correct operations prospectively − Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of compensation GAIN CONTROL
- 15. OOPS, WE MADE A MISTAKE! NOW WHAT? Compensation – but the plan document is wrong!! Oops – we overfunded the employee • Recalculate contributions for all affected employees − Employee contributions – refund 100%, plus applicable earnings − Same plan year – correct outside of the plan − Employer contributions – forfeit 100%, plus applicable earnings − Is it material? Does it matter? • Correct operations prospectively − Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of compensation GAIN CONTROL
- 16. OOPS, WE MADE A MISTAKE! NOW WHAT? Compensation – we want to amend the plan document • Avoid ambiguous terms in the Plan document • Describe what’s included, rather than excluded Depends on the type of Plan document • Keep it simple! • Make amendments effective at the beginning of the plan year! GAIN CONTROL
- 17. OOPS, WE MADE A MISTAKE! NOW WHAT? Eligibility – but the plan document is wrong!! Oops – we excluded an eligible participant • Recalculate contributions for all affected employees − Employer must fund these corrective contributions − Employee contributions – fund a minimum of 50% of lost contributions − What is the lost contribution − Employer contributions – fund 100% of lost contributions • Determine lost earnings • Correct operations prospectively − Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of compensation GAIN CONTROL
- 18. OOPS, WE MADE A MISTAKE! NOW WHAT? Eligibility – but the plan document is wrong!! Oops – we included an ineligible participant • Amend plan to permit affected employees to participate Must not be Highly Compensated Employees • Refund contributions? GAIN CONTROL
- 19. OOPS, WE MADE A MISTAKE! NOW WHAT? Eligibility – but the participant never returned an enrollment form!! • Employer contribution – if no matching requirement, participant should be given the contribution • Qualified default investment alternative • Keep constant communication with the employee GAIN CONTROL
- 20. OOPS, WE MADE A MISTAKE! NOW WHAT? • Untimely deposits of participant contributions − Calculate lost earnings − Fund 100% of the lost earnings − File with the DOL under the Voluntary Fiduciary Correction (VFC) Program? • Failure to file Form 5500 − File the required form(s) under the DOL Delinquent Filer Voluntary Correction (DFVC) Program − Pay penalty of $2,000 per plan, per year, limited to $4,000 GAIN CONTROL
- 21. OOPS, WE MADE A MISTAKE! NOW WHAT? No signed salary reduction agreement • Perform a self audit of participant files • Send confirmations to participants with their current deferral election and ask them to sign the confirmation • Request participants to fill out a new form • Require all new hires to sign a form during orientation • Checklist GAIN CONTROL
- 22. OOPS, WE MADE A MISTAKE! NOW WHAT? Participants received excess contributions • Maintain list of annual limits each year (2012 limits) − Compensation $250,000 (employer contributions only) − Salary Deferral Contributions: $17,000 − Catch-up contributions $5,500 GAIN CONTROL
- 23. OOPS, WE MADE A MISTAKE! NOW WHAT? Overall review of the plan • Assign oversight responsibilities to a group − Review investment performance − Review SSAE 16 (formerly SAS 70) reports − Review and approve plan amendments • Perform self audits by randomly selecting employees and recalculating their contributions • Consider an independent Plan review GAIN CONTROL