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Retirement Plans Under Attack-What Are Plan Sponsors Doing Now?
This document summarizes a presentation on retirement plan compliance given by Jane Lee, Kenneth Robinson, and Carol Buckmann of Cohen & Buckmann, P.C. on March 15, 2018. It discusses the current landscape of increased IRS and DOL audits of retirement plans and ending of IRS determination letters. It provides an overview of using pre-approved plans, getting legal opinions on plan qualification, what agencies are auditing, new fees and penalties, and steps plan sponsors can take to prepare for audits and stay compliant. Questions from attendees are invited at the end.
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Retirement Plans Under Attack-What Are Plan Sponsors Doing Now?
- 1. Conduent Human ResourceServices Knowledge Resource Center Cohen & Buckmann, P.C. Retirement Plans Under Attack! What are plan sponsors doing now? Jane Lee Kenneth Robinson Carol Buckmann March 15, 2018
- 2. Agenda • The Landscape •How are IRS Determination Letters Used? • Should You Adopt a Pre-Approved Plan? • Law Firm Qualification Opinions Why Get a Legal Opinion? Who Might Request An Opinion? What Will Be Reviewed? If Problems Are Identified Even Pre-Approved Plans Have Issues • What Are Agency Audits Focusing On? • IRS Audit Closing Agreement Program • New Fees/Penalties • What Can Plan Sponsors Do? • Questions? March 15, 2018 2
- 3. March 15, 20183 The Landscape • The end of the IRS cycle determination letter program • Changes in IRS and DOL staffing levels • Increase in IRS and DOL audit activity IRS includes plan document review as part of audit Focus on RMD and NRD late payments • What will accountant opinions rely on? • How will this affect mergers and acquisitions? More important than ever to keep plans in compliance
- 4. March 15, 20184 How Are IRS Determination Letters Used? • Determination letter program continues – new plan, plan termination, prototype/volume submitter plan • Generally requested when DOL or IRS audit commences • Required for use of IRS EPCRS correction program • Requested for accountant’s opinion for Form 5500 filings • Evidence of plan qualification for due diligence in mergers and acquisitions What happens when the plan changes or the determination letter becomes stale?
- 5. March 15, 20185 Should You Adopt a Pre-Approved Plan? • What is a pre-approved plan? • Formerly known as a master, prototype or volume submitter plan Entity offering the pre-approved plan (the provider) obtains an IRS opinion letter for the plan Can be standardized or non-standardized ─ Standardized – a “safe harbor” that allows fewer design choices– must adopt plan as is ─ Non-standardized – minor modifications permitted but can affect reliance on opinion letter – plan sponsor can file for its own determination letter by filing Form 5307 • Advantages/disadvantages of a pre-approved plan Plan sponsor can rely on pre-approved plan’s IRS opinion letter, subject to limitations IRS required amendments incorporated into the plan document by the pre-approved plan provider Limits on plan design – some plans cannot be pre-approved, e.g., pension equity, straight stock bonus, ESOP holding preferred stock Special provisions, e.g., different compensation arrangements, could create an individually-designed plan anyway
- 6. March 15, 20186 Law Firm Qualification Opinions Why Get a Legal Opinion? • Plan qualification will become increasingly difficult to establish in the absence of current IRS determination letters • Accountants doing 5500 audits and lenders/buyers in corporate transactions will want assurances about acquired plans • Plan sponsors will want assurance that they have done things right: Preparing for possible IRS audit As a risk management control, since deductions are at stake As a way to do a self-audit, which makes EPCRS available if late adoption/non-adoption issues are discovered Review of EPCRS amendments, as IRS will no longer review them for qualification
- 7. March 15, 20187 Who Might Request An Opinion? • Plans with material amendments since their last determination letter • Just about all individually-designed plans, especially those with complicated benefit structures • Plans subject to special requirements, such as ESOPs • Plan sponsors anticipating selling their business • Buyers in M&A transactions • Plans subject to annual audit requirement
- 8. March 15, 20188 What Will Be Reviewed? • Start with compliance with applicable Required Amendments List (successor to the Cumulative List) • Compliance history – Were statutory, discretionary and interim amendments adopted on time? • Were amendments required by prior determination letters adopted on time? • Limits under EPCRS on ability to correct by plan amendment under self-correction procedures (SCP) • Are there problems with satisfaction of basic requirements? Safe harbor plan that fails to satisfy all requirements Failure to have non-discrimination testing language for (non-ROTH) after-tax contributions 415 language that doesn’t aggregate less than 80% owned affiliates Non-grandfathered money purchase 401(k) plan
- 9. March 15, 20189 What Will Be Reviewed? (cont’d) • Have there been past audits or VCP filings? If so, and they reflected document errors or required amendments, were they timely adopted? Did a required VCP amendment eliminate reliance on pre- approval letter? • Have prior determination letters been obtained on a regular basis? • Are prior determination letters qualified? Does an ESOP determination letter specifically refer to Code Section 4975(e)? • If there were plan mergers, have all protected benefits, rights and features been retained for pre- merger accruals/accounts? • For special types of plans, such as ESOPs, have all required provisions been included? Pass through voting Diversification rights Put option where stock is not publicly-traded • For a plan that has a long history or has been engaged in many corporate transactions, this review is more time-consuming
- 10. March 15, 201810 If Problems Are Identified • Sponsor should adopt retroactive amendments • VCP filing will probably be needed But note IRS position on scrivener’s errors • Opinion will flag deficiencies and what is being done about them • Opinions will state that they deal with form of plan only and do not extend to plan operations • Any other issues noted in review will be reported to client
- 11. March 15, 201811 Even Pre-Approved Plans Have Issues • Pre-approved plans can have many document issues: Incorrect completion of Adoption Agreement Failure to sign Adoption Agreement or Trust Agreement Late adoption of amendments or new pre-approved document Failure to preserve 411(d) protected benefits Have changes to documents converted the plan into an individually-designed plan? If an amendment is required in EPCRS, it could cause plan to lose pre-approval Correction under EPCRS could require a plan amendment and a VCP filing for approval Employer with multiple plans may not have completed Adoption Agreement or filed for determination letter re: Section 415/416 compliance
- 12. March 15, 201812 What Are Agency Audits Focusing On? • General Compliance Is the plan operating in accordance with its terms Are plan terms in compliance with rules and regulations • DOL focus – Plan fees and distributions (are participants getting their benefits on time) Launched large plan investigations initiative in 2015 ─ Started as an exploratory initiative in Pittsburgh region ─ Review of 5-6 plans – unpaid pension benefits in excess of $500 mill. (one plan had $120 mill. in late RMDs) ─ 2017 DOL fact sheet - $327 mill. in back benefits for terminated vested participants DOL audits have become more aggressive – contacting participants, interviewing fiduciaries • IRS focus – plan documents, distribution processing, partial plan terminations • Inter-agency referrals more common • How serious are they? In a survey of plan sponsors in 2016: 1/3 of survey group had a plan audited in past 2 years Large plans targeted – 50% of 25,000+ participant plans (DB and DC) were audited
- 13. March 15, 201813 IRS Audit Closing Agreement Program • If IRS finds errors during an audit, correction could be required under IRS Audit Closing Agreement Program (Audit CAP) • Audit CAP penalty is a negotiated amount based on facts and circumstances including the Maximum Payment Amount (MPA) • MPA is generally equal to the sum of the following for all open tax years: Tax on plan’s trust (IRS Form 1041), with interest and penalties on trust tax return Additional income tax resulting from loss of employer income tax deductions for plan contributions, with interest and penalties on plan sponsor’s tax return Additional income tax resulting from income inclusion for plan participants (Form 1040), including tax on distributions that were rolled over, with interest and penalties on participants’ tax returns
- 14. March 15, 201814 New Fees/Penalties • Voluntary Correction Program Certain plan document and operational failures can be corrected under the Voluntary Compliance Program (VCP) of the IRS Employee Plans Compliance Resolution System • VCP Fees Prior to January 2, 2018, fee for VCP submissions based on number of participants – maximum fee $15,000 On and after January 2, 2018, fee based on plan assets – maximum fee $3,500 • Reduced/Streamlined Fees • Previously there were reduced fees for correction of RMD late payments, defaulted plan loans and non-amender failures • Effective January 2, 2018, all VCP failures are subject to the same fee schedule based on plan assets
- 15. March 15, 201815 What Can Plan Sponsors Do? Be Prepared! • Review plans annually for IRS required amendments • Determine how to incorporate voluntary and required amendments while preserving the determination letters • Review Form 5500s before filing and follow-up on open issues – resource for IRS and DOL inquiries and audits • Review administrative procedures for best practices Does the plan notify terminated vested participants at NRD? Are benefits commenced automatically at RMD for terminated vested participants? Have the “missing participants” procedures been updated for latest guidance? How are late commencements handled – back payments, actuarial adjustment, combination of both? • Voluntary compliance reviews – limited and full scope Opportunity to identify problem areas and update administrative practices Can correct using IRS and DOL correction programs for fees vs. penalties
- 16. March 15, 201816 Questions?
- 17. Contact Information Jane Lee ConduentHR Services, LLC 420 Lexington, Suite 2220 New York, New York 10170-2200 212.330.1043 jane.lee@conduent.com Kenneth Robinson Conduent HR Services, LLC 420 Lexington, Suite 2220 New York, New York 10170-2200 212.330.1205 kenneth.robinson@conduent.com Carol Buckmann, Esq. Cohen & Buckmann P.C. 200 Park Avenue, Suite 1700 New York, NY 10166 212.489.9618 carol@cohenbuckmann.com March 15, 2018 17
- 18. © 2018 ConduentBusiness Service, LLC. All rights reserved. Conduent and Conduent Agile Star are trademarks of Conduent Business Services, LLC in the United States and/or other countries.
Editor's Notes
- #4 4 frozen DB plans audited by IRS – all less than 1,000 participants. So far, IRS hasn’t requested plan docs back to inception. Also, focused on late RMD/NRD payments and missing participant policy. Average exams 3-4 months to close (2 no change two still open) DOL audited 5 DB plans, 1 DC (5 frozen prior to audit, 1 frozen after audit began). 5 plans >10,000 participants. 3 closed with advisory on lost participant policies/.procedures. Average audit time 3 years.
- #13 5 of our most recent client DOL Audits involved frozen DB plans with >10,000 participants (one with >20,000 participants). One DC plan with less than 100 participants is still open after 3 years. 4 of our most recent IRS Audits involved frozen DB plans with less than 1,000 (One audit involves a DC plan).
- #14 Facts and circumstances-non-amender- prior DL, internal controls to ensure timely adoption of required amendments, extent of timely adopted amendment that is later found to not meet qualification requirements of the Code, extent sponsor has adopted other required amendments timely.