There are a few simple steps that can be taken during the planning phase of the audit in order to gain efficiencies during the fieldwork phase. You should be in communication with your auditor before the Plan’s year-end date. This is the best time to come to an agreement about the terms, timing and fees associated with the audit.
Once an agreement has been reached, your auditor can begin planning the audit. You can help your auditor to achieve successful planning by doing the following:
- Discuss any issues encountered by the Plan in the year under audit.
- Communicate when your team is available to work with the auditor.
- Ensure the auditor has access to the Plan’s Third Party Administrator website.
- Request and forward the audit package from the Third Party Administrator to the auditor.
- Fully read and respond to audit communication before fieldwork.
- Ask any questions you have as soon as possible.
Upfront communication allows your auditor to assess risk and schedule staff with the appropriate experience and expertise. Confirming the fieldwork dates also helps your auditor to schedule adequately skilled associates. Ensuring that the auditor has access to any necessary online platforms and the audit package as soon as it is available will allow them to import the trust trial balance into the audit software. The trial balance will be used in every phase of the audit, so timely importing is key.
Your auditor will be sending requests for client prepared schedules, forms which include important inquiry items and sample selections. Keep lines of communication open, and reach out to your auditor with any questions, especially when you need clarification regarding items requested. Answering inquiry items and supplying the auditor with schedules and support requested well before the fieldwork dates allows your auditor to work through the more routine audit documentation. It also allows them to reassess whether staffing is appropriate before fieldwork. Finally, it allows everyone involved to be focused on more difficult audit areas during fieldwork, which is the time everyone has committed to being focused on, and available for, the audit.
Following these steps will result in the most efficient use of everyone’s time.
By Kristi RayPosted on July 12 2016 by admin
A determination letter is a formal document from the Internal Revenue Service (IRS) that declares a retirement plan to be operating within the Employee Retirement Income Service (ERISA) guidelines. If the plan meets all the requirements, it becomes certified as a qualified plan and is then eligible for applicable tax benefits.
Earlier this year, the IRS released Notice 2016-03, which explains that expiration dates on determination letters that were issued prior to January 4, 2016 will no longer be applicable. This is in preparation for the 2017 changes that will result in a determination letter being applicable until the plan’s termination with few exceptions.
As a result of the IRS’s need for efficiency, new changes are coming to the determination letter for qualified retirement plans. Effective January 1, 2017, in relation to the recent IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, plans will only need to apply upon initial qualification of a plan and upon the plan’s termination. A plan sponsor who amends an individually designed plan will be unable to receive an IRS opinion letter. Changes made by the amendment do not affect the tax-qualified status of the plan.
The changes coming in 2017 have a significant impact on plan sponsors. This announcement has already resulted in an immediate elimination of off-cycle determination letter applications with the exception of new plans effective July 21, 2015 through December 31, 2016. Furthermore, a qualified plan’s determination letter is relied on by auditors, used in mergers and acquisitions and by the IRS. The IRS is ultimately the entity that states a plan is tax-qualified. As a result of no longer reviewing a plan’s amendment applications, plan sponsors ostensibly have no reassurance that the IRS will discover qualification errors in the future. Ultimately, this results in an inability to rely on a plan’s determination letter especially in the case of a merger or acquisition.
Additionally, the plan sponsors will see a loss in the remedial amendment period under §401(b) which is a period where a plan can amend their plan to retroactively comply with the qualification requirements.
I expect the IRS to come out with additional clarification on the coming changes and effects on the determination letter. The ultimate impact of these changes may lessen the reliance that is placed on the determination letter held by plans.
By Sherry L. Staggs
IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, https://www.irs.gov/pub/irs-drop/a-15-19.pdf
IRS Notice 2016-03, Revisions to the Employee Plans Determination Letter Program Regarding Cycle A Elections, Determination Letter Expiration Dates, and Extension of Deadlines for Certain Defined Contribution Pre-Approved Plans, https://www.irs.gov/pub/irs-drop/n-16-03.pdfPosted on May 17 2016 by admin
The Department of Labor (“DOL”) has been working on revisions to the current “Fiduciary” Conflict of Interest Rule for multiple years but on April 8, 2016, the DOL’s final rule was posted to the Federal Register which is effective June 7, 2016 and applicable beginning April 10, 2017.
The rule now defines who is a “fiduciary” for separate instances:
- An employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”)
- A plan (including an individual retirement account (“IRA”)) under the Internal Revenue Code of 1986 (“Code”).
The final rule amends the regulatory definition of fiduciary investment advice in 29CFR 2510.3-21 to replace the prior restrictive five-part test with a new definition that better mirrors the language in ERISA and the Code. The final rule provides that a person who renders investment advice if they provide for a fee or other compensation, director or indirect, certain categories or types of advice including:
- A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.
- A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, distributions, or transfers from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.
- Excluded from the new rule in providing general investment education on retirement saving and “order-taking” whereby a broker is simply executing a buy or sell order without any recommendation.
While this rule change will impact advisers, the DOL sought to preserve business models for delivery of investment advice by publishing new exemptions from ERISA’s prohibited transaction rules that would permit firms to continue to receive many common types of fees, as long as they are willing to adhere to applicable standards aimed at ensuring that their advice is impartial and in the best interest of their customers. The DOL is also publishing exemptions that accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.
Overall, the final rules will likely result in structural changes for many financial service companies and broker-dealers. In addition, it is likely that many insurance companies that offer investment services could implement changes to their structure and business models. Look for future blog posts that discuss the new DOL exemptions (84-24 and the Best Interest Contract Exemption) and other impacts of the new rule.
By Kevin C. Bach, CPA, CVAPosted on April 12 2016 by admin
As a Plan Sponsor, you have important fiduciary responsibilities which, according to the Employee Benefits Security Administration (“EBSA”) within the Department of Labor (“DOL”), include:
- Acting solely in the interest of plan participants and their beneficiaries
- Carrying out duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses
Carrying out these responsibilities will require expertise in a variety of areas, and establishing a plan committee is a great first step in covering these areas.
401(k) Plan Committee Members – Your 401(k) plan committee should include a variety of individuals, and depending on your plan’s needs, will fall into two categories:
- Permanent Members:
- Plan Fiduciary (should be indicated on your plan documents)
- At least one member of senior management (e.g. CFO, COO)
- The company’s legal counsel
- External Vendors (can include representatives from the plan’s record keeper, trustee, and/or investment adviser)
- Temporary Members (alternating new members into the committee on an annual or other basis):
- Committee Secretary (a person to be responsible for documenting all committee meetings and decisions)
- Plan Participant(s) (voluntary representation for current participants)
Establishing a Charter – Once the structure of the committee members has been established, the next item on your agenda should be establishing your plan committee’s charter. This charter should define the plan committee’s purpose, responsibilities, and its processes for conducting reviews and resolving issues. You may also define how often you will meet, required attendees versus optional attendees, and/or file retention policies for plan committee meeting minutes.
401(k) Plan Committee Meeting Topics – Most of your meetings will probably focus in on the plan’s investments. Work with your investment adviser and have them present an investment review at least annually. If your plan does not have an investment policy statement, you can also ask your adviser for a template that can be adopted for use by the plan. Additional items to discuss may include:
• Plan administration topics
• Enrollment updates
• Client service issues
• Regulatory updates
• Reasonableness of plan fees
• Review of service auditor’s report provided by your custodian or trustee
Having an effective 401(k) plan committee will bring additional knowledge and expertise to your plan and will provide the crucial oversight that can not only help you carry out ERISA’s five responsibilities noted above, but also reduce legal and fiduciary risk related to your 401(k) plan.
By Audrey D. RichardsPosted on March 29 2016 by admin
As plan auditors we are frequently asked how long documents relating to a plan should be retained by the plan sponsor. Like anything related to the Internal Revenue Service (IRS), there is no one simple answer. Before discussing some general guidelines on record retention, let’s discuss some general responsibilities of the plan sponsor to operate a plan successfully.
First and foremost, a plan sponsor should select and retain a qualified Third Party Administrator (TPA), to ensure both the plan sponsor and the TPA has the same goal of administering a retirement plan for the benefit of the employees. Secondly, the plan sponsor is required to have a written plan document which outlines the provisions of the plan. These plan documents are periodically amended to keep them current with IRS requirements. Lastly, the plan sponsor must communicate the plan provisions to the participants through Summary Plan Descriptions and Summary of Material Modifications. Plans must be operated in accordance with the current plan document and the items listed above must be able to be substantiated to the IRS.
Just like with individual and business tax returns, benefit plans are subject to audit and records should be retained for substantiation. The Employee Retirement Income Security Act (ERISA) requires records to be retained for six years; however, records to determine an employee’s benefit must be retained until after the employee withdraws their benefit. Below are some general guidelines on retirement plan record retention:
By Leslie Lee, CPAPosted on March 17 2016 by admin
Required minimum distributions (RMDs) are minimum amounts certain participants (or retirement account owners if the participant has passed) must take as distributions from their account on an annual basis. Generally, RMDs begin the year in which the participant reaches the age of 70 ½ or the year in which the participant retires, provided they are not a 5% or greater owner of the Company. Depending on the terms of the Plan, the initial RMD can be delayed until April 1st of the year following attainment of the two criteria previously noted. For all subsequent years, the RMD must be made by December 31st. An important thing to note is the December 31st RMD will still be due even if the initial RMD was withdrawn in the same year.
RMDs are calculated each year by dividing the prior December 31st account balance by the life expectancy factor published by the IRS. There are three different life expectancy tables to choose from based on the participant’s individual situation:
- Joint and Last Survivor Table – to be used if the sole beneficiary of the account is a spouse and the spouse is more than ten years younger than the participant
- Uniform Lifetime Table – to be used if the sole beneficiary of the account is not a spouse and the spouse is not more than ten years younger than the participant
- Single Life Expectancy Table – to be used by a beneficiary after the participant has died
These tables can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
RMDs must be calculated separately for each account a participant owns. Certain types of retirement accounts require the distributions to be made from each account as calculated; however, in some instances the withdrawal can be made from only one account or any combination of accounts owned. RMDs may be calculated by a Plan sponsor or custodian; however, it is ultimately the participant’s responsibility to ensure this is done. The penalty for not withdrawing the full amount of a calculated RMD or withdrawing the amount after the deadline is a 50% tax on the amount not withdrawn.
By Crystal L. Becerril, CPAPosted on February 16 2016 by admin
Plan sponsors have an option to incorporate a true-up provision into their employee benefit plan(s). True-up adjustments are done at the end of the plan year in order to ensure that the amount of employer matching contributions is grossed up to maximum allowable benefit per the plan document; they protect the less savvy participants from receiving a lesser employer match.
Since employer contributions are typically made as a percentage of period compensation, there is frequently a difference between the sum of employer contributions throughout the year and the amount of employee contributions calculated on total compensation at the end of the year. For instance, if the employer matches 100% of employee contributions, up to 6% of total compensation:
- A participant who contributes 4% for the first half of the year and 10% for the last half of the year – without a true-up provision this participant would only receive employer matches equal to 4% of compensation for the first half of the year and the maximum of 6% for the last half of the year; or,
- A participant who contributes 25% of their compensation each paycheck, and they max out during the year, will not receive employer matches during their max out period because they are no longer able to make employee contributions – without a true-up provision this participant would only receive 6% of compensation up until max out and then nothing for the rest of the year.
With a true-up provision both of these employees will end up with total employer contributions of 6% of total compensation at the end of the year. These provisions help plan participants to achieve the highest employee match possibly due to them.
It is necessary to read plan documents to determine if they contain these provisions. It is also noted that plans can elect quarterly true-up provisions instead of an annual provision. Less sophisticated plans may be at a higher risk of failing to gross up employer matches at the end of the year, which could result in:
- Significant variances between employer contributions made and required per the plan;
- A shortfall in employer contributions; as well as,
- A potential for lost earnings for participants.
If true-up contributions are missed, this issue should be discussed with ERISA counsel and your auditors to determine the proper correction as soon as possible.
By Kristi RayPosted on February 2 2016 by admin
As I reflect on my last 401k audit season, I remember running into some operational issues that were a result of plan administrators not using the correct form of compensation, as defined by their plan document, while calculating employee and employer contributions. Using the correct form of compensation while making contributions is important because if the wrong compensation is used it will typically result in the employer having to make retrospective corrections to the plan and the plan’s participants. Sometimes these corrections can be very time consuming to calculate and can result in significant amounts of money.
To ensure that you’re remitting contributions on the plan’s correct form of compensation, you should first refer to your plan document and determine what the plan’s actual definition of compensation is. The most common forms of compensation that I have seen are Section 415, Section 3401 and W-2. However, your plan’s form of compensation may be different from one of these. You should also be aware that there may also be certain exclusions from compensation that are elected by the employer. This will also be stated in the plan document.
After you have found what your plan’s definition of compensation is and whether there are any exclusions from that compensation, your next step should be to determine what is eligible and what is ineligible for your contributions. The Internal Revenue Service has plenty of material out there that will help guide you in determining this. After you have determined what is eligible and what is ineligible, it would be wise to take a look at the payroll codes in your payroll system and ensure that everything is set up to calculate contributions properly. I would also recommend that you test a few of your employees’ contributions for a specific pay period and ensure that everything is calculating properly.
If you have taken the steps above and are still unsure as to what your plan’s compensation is or what you should be deferring, I would recommend reaching out to your Third Party Administrator or even an ERISA attorney to ensure that your plan is calculating this properly. Doing this can definitely save you money and headaches in the long run.
By Ryan G. Wojdacz, CPAPosted on January 6 2016 by admin
What is a SSAE 16 report anyway? SSAE 16 stands for Statement on Standards for Attestation Engagements No. 16, Reporting on Controls at a Service Organization, and was finalized in January 2010 by the Auditing Standards Board of the AICPA. SSAE 16 replaced SAS 70 as the authoritative guidance for reporting on service organizations. The relevant report you will receive falling under this guidance is called a Service Organization Controls (SOC) 1 Report, which can be one of two types:
- In a SOC 1 Type I report, the auditor reports on the fairness of the presentation of management’s description of the service organization’s system and the suitability of the design of controls to achieve the related control objectives included in the description for a specific point in time.
- In a SOC 1 Type II report, the auditor reports on the fairness of the presentation of management’s description of the service organization’s system and the suitability and operating effectiveness of the design of controls to achieve the related control objectives included in the description over a period of time. Generally, this is the most common type of report you will receive from your service providers.
Where do I get it? Your service providers (for example your plan’s recordkeeper, trustees, or other advisers) typically issue this report on an annual basis, and if it is not already made available to you, should be provided upon request. Remember, if your plan requires an audit, this will be requested by the auditor anyway, so this is a great time to review the report yourself.
What am I looking for in it? At first glance this report can be overwhelming, so just focus on the key items relevant to you:
- Auditor’s Opinion – Read the opinion paragraph seen in the Independent Auditor’s Report at the beginning of the document. Is it modified? Are there exceptions noted in the opinion? If you answer yes to either of these, you should determine if these will impact your plan participants or any other reports provided by your service provider.
- Subservice Organizations – Often, your service provider will use other organizations in their operations. If a referenced subservice organization isn’t included in your SOC 1 report (also referred to as “carved-out”), consider whether it is significant to your Plan (if it directly impacts the Plan and its data). If it is, you should obtain the subservice organization’s report, too.
- Testing of Operating Effectiveness of Key Controls – Review all testing performed by the independent auditor for any exceptions. If there are any exceptions, review the management’s response and determine if these will impact your plan participants or any other reports provided by your service provider.
- Complementary User Entity Controls – Your service provider will point out these controls that must be in place at the plan sponsor in order for reliance to be placed on the controls listed in the SSAE 16 report. It is extremely important that you review these and verify you have all applicable procedures in place.
For more information, read the standard at www.aicpa.org.
By Audrey D. RichardsPosted on December 8 2015 by admin
What is a blackout?
A blackout is a period of three or more consecutive business days during which participants’ are temporarily limited in or restricted from the ability to perform the following activities:
- Directing or diversifying investments
- Obtaining distributions
- Obtaining loans
What actions must Plan Administrators take in order to remain in compliance during a blackout?
In order to comply with IRS regulations, Plan Administrators must send notification to all participants regarding the blackout period unless the blackout falls under one of the exceptions. The notice must adhere to the following guidelines:
- Notice must be written in layman’s terms so the average participant may understand
- Notice must be provided between 30-60 calendar days before the last date on which the restricted activities may occur
- Notice must include the reason for the blackout
- Notice must include the length of the blackout period with the beginning and ending dates included
- If exact beginning and ending dates are not provided contact information must be included in order for participants to obtain this information
- Notice must detail what activities will be suspended during the blackout period and the duration of the suspension
- This may differ for each type of activity
- Notice must include contact information for the Plan Administrator
If any changes are made to the above items, a second notice must be provided to participants. The notice may be sent electronically, by hand delivery or by regular, certified or express mail. If the notice is sent by mail, the 30 day compliance period begins on the date the notice was mailed.
What happens if the Plan Administrator does not comply?
The penalties for not providing proper notice to participants are as follows:
- A daily penalty of $100 will be imposed for each participant/beneficiary who does not receive the notice
- This must be paid by the plan administrator and cannot be passed through to the plan
What situations constitute an exception?
As stated previously, there are circumstances in which the notice period can be reduced from 30 days to “As soon as administratively possible”, or where notice is not required at all are as follows:
- Posting the blackout notice would violate ERISA’s exclusive purpose rule or prudence rule
- Events leading to the blackout were unforeseeable and out of the plan administrator’s control
- The blackout occurs as a result of a merger, acquisition, divestiture or other similar event
- The plan is a single participant plan and is exempt from any and all rules
By Crystal L. Becerril, CPA-- Older Entries »
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
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- How to Prepare for Your 401(k) Audit
- Determination Changes Impacting Qualified Retirement Plans
- DOL Fiduciary Rule
- Forming a 401(k) Plan Committee
- Plan Sponsor Record Retention Guidelines
- Required Minimum Distributions
- Does Your EBP Have a True-Up Provision?
- The Importance of Knowing Your Plan’s Definition of Compensation
- Dear Plan Sponsors: Reviewing a SSAE 16 Report
- How to Handle a Blackout Period