Do I Need an Audit?

Posted on August 18 2015 by admin

As a sponsor of an employee benefit plan, along with annual reporting requirements, you may be required to undergo an audit of your plan’s financial statements. What are the reporting requirements and what triggers an audit? This varies depending on the type and size of the plan you sponsor.

One participant plans (a business owner with no employees) have the option of filing either Form 5500-EZ or Form 5500-SF. However, if plan assets are less than $250,000, no filing is required. One participant plans have no audit requirement.
Plans with fewer than 100 participants, but are not one participant plans, must file Form 5500-SF electronically. Plans of this size are considered small plans and also have no audit requirement.

Plans with 100 or more participants must file their Form 5500 electronically. Plans of this size are considered large plans and, generally speaking, will require audited financial statements to be submitted with the Form 5500. Of course, there is an exception to this rule called the 80-120 rule. The four basic variations of this rule are as follows:

  • Plan filed as a small plan in the prior plan year with no more than 120 participants at the beginning of the current plan year – the plan may continue to file as a small plan and no audit is required
  • New plan with 100 or more participants at the beginning of the plan year – must file as a large plan and an audit is required
  • Plan filed as a large plan in the prior plan year – the plan must continue to file as a large plan and an audit is required until that time the number of participants falls below 100 at the beginning of the plan year
  • Plan filed as a large plan in the prior plan year with less than 100, but greater than 80 participants at the beginning of the current plan year – the plan has the choice of continuing to file as a large plan where an audit is required or the plan may file as a small plan and avoid the audit requirement

As a reminder, when determining the number of participants, there are three types of individuals that must be included in the count: all employees who are eligible to participate (whether they have chosen to or not); those who have retired or separated from employment, but who still have account balances; and deceased individuals whose beneficiaries are either receiving benefits or are entitled to receive benefits.

By Crystal Becerril, CPA

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Where Are You Saving Your Money?

Posted on August 4 2015 by admin

As an auditor of employee benefit plans, I often talk with clients about their plan’s participation rates and suggest ideas on how to increase participation. As part of my daily routine, I read numerous articles from different financial sources. I came across a CNBC article published on July 29th, 2015 that I found to be rather surprising. The article is titled “More American savers skimp on retirement plans” by Tom Anderson, Personal Finance Writer for CNBC.

Hearts and Wallets is a retirement market researcher and they published a recent news analysis showing that Americans are saving more, but not by the method of their employer sponsored retirement plans. The average annual household savings has increased in percentage over the last two years, based on a survey of 5,500 U.S. households by Hearts and Wallets. The Federal Reserve Bank in St. Louis stated that the personal savings rate in May 2015 was 5.1%. However, the percentage of household savings that went into employer sponsored retirement plans has been decreasing over the last two years according to Hearts and Wallets.

I ask myself… Why would more Americans be saving, but not taking advantage of employer sponsored plans? Would you leave free money on the table? These plans can save you money spent on investment management fees and often employers will match your savings contribution up to a certain amount. If you are going to save and you have the option available to participate in an employer sponsored retirement plan, it doesn’t make sense why you wouldn’t want to do that. Most plans accept rollovers (accounts of new participants from other plans) so once you leave your employer you can join the next employer’s plan.

When I speak with employers about their retirement plans and ask them what their goals for the plan are, I generally hear the same two goals. These are to increase the number of employees that participate in the plan and to increase the amount of deferrals of current participants. It is in the best interest of the employer to have a majority of their workforce saving money for retirement. In order to achieve those two goals, there are numerous avenues that an employer may use. The most obvious would be to offer an employer match. If one is already offered, then increase the amount of the match. A less obvious way would be to add automatic enrollment to the retirement plan.

According to a November 2014 study by Tower Watson, employers with participation rates above 80% in their defined contribution plans increased from 50% in 2010 to 64% in 2014. During this same time period, the share of companies offering automatic enrollment rose from 57% to 68%. There is a proven link between increased participation and retirement plans using automatic enrollment. Employers already using automatic enrollment in their sponsored retirement plans should consider adding automatic escalation to help increase deferral amounts of participants. Automatic escalation typically will increase each participant’s deferral rate a certain percentage annually, unless the participant chooses not to accept the increase. Another avenue to increase participation would be changing the fee structure of the plan so the participant pays less and the employer pays more of the fees.

Regardless of the avenue taken, it is important that employers spend time to send the message and educate their employees of the benefits available by participating in sponsored retirement plans.

By Josh Mitchell, CPA

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Compliance Testing Failures – Now What?

Posted on July 28 2015 by admin

Hearing the news of a compliance testing failure sounds rather daunting. The severity of a compliance testing failure varies by case, and correcting it may not be as difficult or costly as it sounds. Throughout compliance testing, traditional 401(k) plans must be tested to ensure that contributions made by and for nonhighly compensated employees (“NHCE”) are proportional to those made for and by highly compensated employees (“HCE”). These tests are referred to as Actual Deferral Percentage (“ADP”) and Actual Contribution Percentage (“ACP”) tests. There are parameters set for each test. A failure results from the ADP or ACP tests exceeding those parameters.

Correcting the error is the most vital step in the process. Corrective action described in your plan document must be taken within the statutory correction period following the close of the plan year; also an excise tax will be added to the liability if the correction is not made within the first 2 ½ months of the correction period. If the correction is not made within the 12 month statutory correction period, the plan may lose its tax-qualified status and the failure must be corrected by using the IRS Employee Plans Compliance Resolution System (“EPCRS”).

Using the EPCRS leaves you with three options for correction:

  1. Self-Correction Program – will permit a plan sponsor to correct the failure(s) without contacting the IRS or paying a fee
  2. Voluntary Correction Program – permits a plan sponsor to, any time before audit, pay a fee and obtain IRS approval for the correction of the plan failure(s)
  3. Audit Closing Agreement Program – allows a plan sponsor to pay a sanction and correct the plan failure(s) while the plan is under audit

The corrections will typically consist of a Qualified Non-Elective Contribution (QNEC) to raise the deferral percentage of the NHCE’s, or excess contribution amounts are determined and distributed to HCE’s with the same amount being contributed to the eligible NHCE’s.

In addition to the above options, a plan may refund excess contributions to the NHCE’s, beginning with those that have the highest amount of contributions for the plan year, and adjusting all NHCEs until the plan is compliant with the testing parameters. One negative attribute from a participant perspective is that the refunds are considered taxable income upon receipt, and will not be a portion of their retirement funds.

While implementing a Safe Harbor match will prevent such failures from happening, it is vital that plan sponsors monitor the results of such testing, or perform tests independently for additional assurance. Timeliness is key in correcting plan failures.

By Sarah McFarland

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Key Qualities to Evaluate When Selecting an Auditor for Your Employee Benefit Plan

Posted on July 14 2015 by admin

When your Company hits over 120 participants within your plan, it’s time to start looking for an auditor that is right for you! As the plan administrator, one of the things you must do is evaluate your options and ensure that you hire a qualified firm to assist in your audit. There are some key qualities to evaluate when making this selection. Hiring a qualified auditor will provide a quality audit which will assist in fulfilling your responsibility to file accurate annual statements, assist with avoiding any penalties associated with filing untimely, as well assist with keeping you informed on upcoming topics related to employment benefit plans to keep your plan in compliance.

First, the auditor is required to be licensed or certified by the state regulatory authority as a certified public accountant. When an auditor steps in to complete the audit, he or she must also be independent. What does this mean? The auditor should not have any financial interests in the plan that might impact his or her ability to remain unbiased when issuing an opinion on the financial condition of the plan. Additionally, it is important that the audit firm has experience in auditing employee benefit plans. This is a common issue in employee benefit plan audits that has caused many audits to have deficiencies.

During the preparation of your first audit, there are some additional things to keep in mind. Be aware that Department of Labor’s rules and regulations permits limited scope audit on employee benefit plans when the plan’s assets are held by banks or insurance companies and they have written certifications for investment activity. Be sure to consult with an attorney, plan adviser, or auditor to ensure this is the best route for your plan. Lastly, in the final stages of selecting an auditor, the auditor will provide an engagement letter describing the terms of the audit. This normally will include responsibilities that the auditor will have as well as your responsibilities throughout the audit. This normally entails the timing, scope, and fees associated with the audit. Read this carefully and be sure to ask any questions that arise to make sure you understand and agree to the terms of the audit.

Following these simple steps should assist in finding the right auditor for you! If you have additional questions regarding the search for a new auditor please don’t hesitate to contact us for more information.

By Brie C. Keckler, CPA

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Full Scope vs. Limited Scope Audits

Posted on June 23 2015 by admin

When a 401(k) or other retirement plan requires an annual audit, a plan administrator may have a choice to engage an audit firm to perform a full-scope audit or a limited scope audit of the financial statements. To be qualified for a limited scope audit, a bank or insurance carrier must act as a trustee or custodian for the plan, be state or federally chartered and be regulated, supervised and subject to periodic examination by a state or federal agency. Additionally, the trustee or custodian must certify as to the accuracy and completeness of the investment information.

There are definitely some benefits to only receiving a limited scope audit. The main benefits can include lower audit fees and fewer areas subject to audit testing. For example, when an auditor is engaged to perform a full-scope audit, everything in the plan is subject to audit testing. However, when performing a limited scope audit of the financial statements, the auditor need not perform any auditing procedures with respect to investment information prepared and certified by the qualified trustee or custodian. Note that the limited scope exemption applies only to investment information including investments, investment income, and related expenses, and potentially participant loans. With a limited scope audit, the auditor will continue to test participant data, including the allocation of investment income/losses to individual participant accounts, contributions, benefit payments and other information that was not certified.

When it is time to issue the audited financial statements, the CPA who is hired to perform a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. The CPA’s opinion is called a Disclaimer of Opinion because the CPA has not been able to do sufficient work to form an overall opinion on the financial statements. However, the Department of Labor will accept a Disclaimer of Opinion for a limited scope audit with no penalties.

By Ryan G. Wojdacz, CPA

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Supreme Court Rules that Plan Sponsors Have Duty to Monitor Investment Options

Posted on June 9 2015 by admin

On May 18, 2015, the U.S. Supreme Court issued its opinion in the Tibble v. Edison Int’l case. In 1999 and 2002, Edison International added 6 retail mutual fund options to the available investment options for the company’s 401(k) plan. All 6 mutual funds had virtually identical institutional-class mutual funds that charge lower investment fees. Petitioners had sued Edison International seeking to recover damages incurred from the higher fees charged by the retail investment options.

The Supreme Court’s decision stated that, under trust law, a fiduciary has a continuing duty to review the investment options and to remove imprudent options. Therefore, the statute of limitations did not apply to the investments added in 1999 and 2002.

This decision should prompt all plan sponsors to evaluate whether they have a sufficient and documented process in place to prove that they have fulfilled their responsibility to review investment options on a continual basis. If you are a plan fiduciary and are wondering if you are fulfilling your responsibilities for reviewing investments, please take the time to read the Department of Labor’s Report of the Working Group on Prudent Investment Process.

By Rex Platt, CPA

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Language Barriers of 401(k) Disclosure

Posted on May 26 2015 by admin

I would like to address disclosure versus communication. They are two very different things, but they shouldn’t be. Have you ever tried to read ERISA or DOL regulations? The average person doesn’t read this stuff. Lawyers read it because it is in their language. Lawyers are the ones who write this stuff.

Imagine a Company with 100 employees that has a 401(k) plan. If I walked into that Company and asked every employee if they have read the Company’s 401(k) plan document, how many employees would say yes? I am willing to bet 10 or less and part of that 10 would be the employees responsible for managing the plan. Is that bad? Not necessarily, because there are things called Summary Plan Descriptions (SPD’s). A SPD is supposed to be written as a high level summary of the plan that is not flooded with legal language that confuses participants. If I asked how many employees have read the Summary Plan Description (SPD) I am willing to bet that the answer would be closer to 50 out of 100 employees (assuming all 100 employees are participants). But out of those 50 employees, how many actually understood everything and read the full document? 30? 15? 10? That’s the problem. SPD’s are typically written by lawyers with the primary goal to protect plan sponsors instead of inform plan participants in easy to understand language. This is an example of the disconnect between disclosure and communication.

Over the past five years, the DOL has done impressive things to help advance the protection of plan participants. One of those impressive things was paying more attention to and increasing the regulation on disclosures involving participant fees. However, in my opinion, the DOL could have done a better job in executing this initiative to enhance the transparency and disclosure of participant fees. Did you know the current regulatory regime regarding participant fee disclosure allows for documents in excess of 15 or 20 pages and formulas that require a calculator to figure out? These disclosures are designed with the hope that the average participant will not pay any attention because it will take too much time to figure out. That’s not communication. Even worse, disclosure of participant fees are typically in basis points or rates, which makes it more difficult for the average participant to figure out.

My question – Why does the DOL not require a one page year-end itemized fee summary highlighting the actual cost of the plan in dollars? Why is there not a required uniform disclosure amongst all service providers related to fee disclosure? There are Fiduciary Service companies that gather fee information for clients and create a report that provides a uniform comparison of all provider fees that allow plan sponsors to perform fee benchmarking analyses. So it would make sense if the DOL created a template that all providers must use when quoting and disclosing fees, right? Leading plan administrators have already taken it upon themselves to provide this one page summary to participants.

I believe that the DOL has done and will continue to do great things to protect and inform plan participants. However, I think the DOL needs to realize their downfalls in communicating to the average 401(k) participants. In my opinion, I think the DOL is missing the connection between disclosure and communication on certain issues such as disclosure of plan participant fees. Confusing disclosure language is not likely to be read by the average 401(k) participant, but direct communication in plain English is likely to be read.

By Josh Mitchell, CPA

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Reduced Corrective Contributions

Posted on May 19 2015 by admin

During April 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-28 that made amendments to the safe harbor corrective contributions for employee benefit plans. The Employee Plans Compliance Resolution System (EPCRS) allows plan sponsors to correct certain failures and thereby, continue to provide employees with retirement benefits. The IRS received numerous comments requesting special correction methods for plans with automatic contribution failures. These comments have surrounded the fact that employers were discouraged from adopting automatic contribution features due to potential implementation issues and the fees and corrective contributions associated.

This new Revenue Procedure makes modifications for the following:

  • Auto Contribution and Escalation Errors – New safe harbor EPCRS correction methods including automatic enrollment and automatic escalation of elective deferrals in plans described in § 401(k) and § 403(b)

o   No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of

  • 9.5 months after the end of the plan year in which the failure first occurred
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

o   This safe harbor correction method is currently set to expire in 2020, but the IRS will reconsider an extension

  • Elective Deferral Errors – Special safe harbor correction methods for plans (including those with automatic contribution features) that have failures that are of limited duration and involve elective deferrals

o   No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:

  • 3 months after the failure first began
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

o   25% corrective contributions are required if the period of failure exceeds three months and if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:

  • The last day of the second plan year after the plan year in which the failure first began.
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

Overall, if a Plan Sponsor wants to implement the new guidance he or she must:

  • Give written notice to employees affected by the error no later than 45 days after the correct deferrals begin
  • Make corrective contributions to make up for missed matching contributions plus earnings on all missed contributions and deferrals, within the two-year timeframe used to correct significant operational failures under Revenue Procedure 2013-12

For further information see the Internal Revenue Bulletin here.

By Kevin Bach, CPA, CVA

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Internal Control for Plan Management

Posted on April 22 2015 by admin

Plan administrators are faced with numerous rules and restrictions put in place not only by those in charge of retirement plan regulation, but also as stipulated in the plan document itself. Strong internal controls are essential for the administration of any plan to ensure accurate financial reporting, protection of plan assets and compliance with all regulatory requirements. A well designed system of internal controls will work to reduce the risk of fraud and to minimize errors as well as potential instances of noncompliance. When implemented properly, efficiencies in day to day operations will be increased and interactions with outside service providers, auditors, and regulatory bodies will be more effective and less painful for everyone involved.

There are various types of controls that can be implemented depending on what the objective of the control is determined to be. Generally speaking though, an internal control can be described as a systematic process, such as a review or procedure, put in place to assist individuals in conducting business in an orderly and efficient manner while safeguarding company or plan assets, increasing the likelihood of detecting and deterring errors, and overall producing reliable and accurate information that can be used by management and others in need.

According to the AICPA Employee Benefit Plan Audit Quality Center, the general characteristics of a good system of internal controls over financial reporting include:

  1. Policies and procedures that provide for adequate segregation of duties to reduce the likelihood that deliberate fraud can occur
  2. Personnel qualified to perform their assigned responsibilities
  3. Sound practices to be followed by personnel in performing their duties and functions
  4. A system that ensures proper authorization and recordation procedures for financial transactions

The internal controls implemented will vary based on the size, complexity, and type of plan as well as the size of the organization and the involvement of outside parties. However, despite the complexity of the plan or the organization, controls should not only be established, but should be well documented and communicated to all. One thing to remember is the controls put in place are only effective if they have been properly designed and are actually operating as intended. Monitoring and adjusting of controls is essential to ensure the systems in place are providing the protection they were designed to.

By Crystal L. Becerril, CPA

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401K Plan Fee Assessment

Posted on April 7 2015 by admin

When companies are selecting the services for their 401K plan, are they assessing the fees that they are paying for these services? As it has been required for these fees to be more transparent, this is something every company with a plan should be evaluating. The question becomes what is the best way to assess these fees? What is reasonable?

Who receives these fees?

The first question you should ask yourself is who are you paying for these fees? Common providers include record-keepers, investment advisors, plan fiduciaries, consultants and brokers.

While looking at the providers for your specific plan, you should review the fees and what services these fees are covering. This is something that the Company should be reviewing on a periodic basis. The Company’s review should be documented, including whether these fees have fluctuated and whether these fees in comparison of other service providers are reasonable. The Company should evaluate this at the plan’s cost as well as the individuals.

What are the fees that should be assessed?

The variety of types of expenses may make it difficult to evaluate what is reasonable. The best way to look at these expenses is to try to break them up into different categories. There are administrative services which typically include legal, accounting, customer service, recordkeeping, etc. This is normally charged at the participant level.

Then there are investment services which are paid to manage the employees’ investments. These can vary and are typically charged to the employee through a reduction of net return on investments. These tend to be the larger portion of the fees and vary more plan by plan depending on the mix of investments in any given plan.

Last, there are individual services. These include loans, loan maintenance charges, distributions, etc. At times these are charged to the individual participant or may be bundled.

Different methods to evaluate these expenses

There are many different methods that can be used to evaluate these expenses once you have an understanding of the fees within your plan.

  1. Use a professional service: There are a number of consultants that analyze the fees of different service providers. It is important to ensure that you understand the information that the consultants used during their analysis before making any decisions.
  2. Review third party information: Review other service provider’s fees. Be sure that when you are evaluating you take into consideration that the plans may vary in different ways. Therefore, when looking at these fees, take into consideration that the cheapest plan may not include services provided in another plan.
  3. Request proposals from opposing service providers: This may assist with a better understanding of the breakdown of these fees and can assist with comparison among other third parties.
  4. Benchmarking: There are different studies done that assist with understanding reasonable fees; however, when reviewing these make sure that you understand the metrics involved as each plan is not in-line with the others.

Understanding these fees is important to ensure that the neither the Plan nor the participant is paying unnecessary fees. However, it is important to balance reasonable fees with the services that are necessary for the Plan. Following these steps should help you gain an understanding of what to look for and some different ways to evaluate these fees.

By Brie C. Keckler, CPA

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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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