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, CPAPosted 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, CPAPosted 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, CPAPosted 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, CVAPosted 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:
- Policies and procedures that provide for adequate 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
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, CPAPosted 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.
- 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.
- 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.
- 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.
- 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, CPAPosted on March 31 2015 by admin
I was browsing the United States Department of Labor (“DOL”) website the other day and I came across an interesting article that talked about employer abuse of employees’ 401(k) contributions. I haven’t really thought much about this before as I have fortunately always worked for employers that I feel are trustworthy and ethical. However, the article made me realize that we as employees are putting a lot of trust in our employers to manage our 401(k) plans and with this trust comes a risk of abuse or even fraud.
The article that I read talked about the DOL recently undergoing an anti-fraud campaign and discovering that a small fraction of employers actually abuse employee contributions. They found that some employers are holding on to employees’ contributions for too long and are even using employees’ contributions for corporate purposes.
Below are 10 warnings signs that the DOL came up with that might uncover that your 401k contributions are being misused:
- Your 401(k) or individual account statement is consistently late or comes at irregular intervals.
- Your account balance does not appear to be accurate.
- Your employer failed to transmit your contribution to the plan on a timely basis.
- A significant drop in account balance that cannot be explained by normal market ups and downs.
- 401(k) or individual account statement shows your contribution from your paycheck was not made.
- Investments listed on your statement are not what you authorized.
- Former employees are having trouble getting their benefits paid on time or in the correct amounts.
- Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees.
- Frequent and unexplained changes in investment managers or consultants.
- Your employer has recently experienced severe financial difficulty.
From my experience as a 401(k) auditor, I feel that it is not completely uncommon for one of these warning signs to occur from time to time. However, if you feel that you are consistently experiencing multiple of the signs above or even one of the signs on a consistent basis, it might not be a bad idea to contact the DOL and report your concerns.
By Ryan G. Wojdacz, CPAPosted on March 10 2015 by admin
The search is on for an accounting firm to perform the required audit of your employee benefit plan. In determining which proposal to accept, one must question the difference between the low end and the high end of the pricing spectrum. The intent of this blog is not to infer that everyone should hire the most expensive accounting firm in order to receive a quality audit, but instead to ensure that the firm that is hired does quality work that meets the requirements set by the Department of Labor.
According to the American Institute of Certified Public Accountants, the Employee Retirement Income Security Act holds plan administrators responsible for ensuring that plan financial statements are audited in accordance with generally accepted auditing standards. The potential penalties for a missed or rejected filing can be significant. The DOL has the right to reject plan filings and assess penalties of up to $1,100 per day, without limit, on plan administrators for deficient filings.
The DOL has determined that the following factors could contribute to a deficient filing:
- Lack of experience and/or technical training on the part of auditors conducting employee benefit plan audits.
- Lack of established quality review and internal process controls.
- The lack of necessary audit work performed.
- The failure of auditors to understand the limited scope audit exception.
It is vital that each organization in need of an employee benefit plan audit be aware of their specific needs. While accepting proposals, do research on each firm and the requirements set forth by the DOL. It is important to understand that changes within the plan, (change in third party administrator for example), may have an impact on the cost of the audit. Again, hiring the most expensive accounting firm is not ideal, but hiring an audit team that is capable and experienced will be highly beneficial.
By Sarah McFarlandPosted on February 24 2015 by admin
Every American knows the instant anxiety associated with receiving a letter from the Internal Revenue Service (“IRS”). That anxiety might be overwhelming if the letter is a notification that your company’s employee benefit plan has been chosen for examination. The IRS understands this and has provided an online resource guide specifically geared to educating employers on the process of examinations of benefit plans.
The process is simple. After your initial contact with the IRS and their document and record request, the agent will set an appointment for an on-site audit of the plan. Once on-site work is completed, any additional information needed will be mailed to the agent. If the agent determines there are issues to address, they will go over options with you. You are free to involve your attorney at any point in the process if you feel that it is necessary.
Click on this link to access the IRS EP Examination Process Guide. The guide will answer almost any question that you have regarding the audit process.
By Rex Platt, CPAPosted on January 13 2015 by admin
The Economic Growth and Tax Relief Reconciliation Act of 2001 authorized the establishment of Roth 401(k) accounts beginning January 1, 2006, which are post-tax retirement account. The next big thing to happen to Roth accounts was the American Taxpayer Relief Act of 2012, which opened the doors to in-plan Roth conversions. Effective immediately as of December 31, 2012, this act expanded Internal Revenue Code section 402A to allow vested amounts that are not otherwise distributable, meaning 401(k) deferrals, vested employer matching deferrals, etc., to be transferred to a designated Roth account maintained within a plan.
As an optional provision, Plan sponsors have the choice to add this provision to their plan document and allow participants to convert traditional 401(k) amounts in their accounts to Roth accounts. However, the Plan must already allow for Roth elective deferrals, and if it does not, that must be added to the plan document as well.
Brief Rules and FAQ
What plans are covered?
- Any 401(k), 403(b), or governmental 457(b) plan that has been amended to permit Roth elective deferrals.
Which participants are eligible
- Any participant, including an active or former participant, with an account balance in the plan.
Amounts eligible for conversion?
- Typically the following amounts are eligible for conversion:
- Pre-tax 401(k), 403(b) deferrals, & 457(b) deferrals, and earnings thereon
- Vested matching contributions and earnings thereon
- Vested profit sharing contributions and earnings thereon
When is the deadline for conversion?
- December 31 of each year. The conversion amount will be considered taxable income for that year.
Consider exploring if:
- You are in a low tax bracket this tax year.
- You have plenty of time until retirement age.
- Generally, the younger you are, the more you benefit.
- You have available resources to pay the tax created by the conversion.
- You are expecting to receive a tax refund.
- Use the refund to pay the tax on conversion.
- Example: Assume you are in the 25% tax bracket, and want to use $500 of your tax refund to pay for conversion tax; you could convert up to $2,000 ($500/25%).
- You are interested in an estate planning tool by the use of Roth savings.
- Roth accounts pass income tax free to your heirs.
Note: The purpose of providing this information is to inform participants in 401(k) plans that this option exists for them. I would advise anyone considering an in-plan Roth conversion to consult with a financial adviser to weigh the pros and cons of this decision and align this decision with future financial goals.
By Josh Mitchell, 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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- Full Scope vs. Limited Scope Audits
- Supreme Court Rules that Plan Sponsors Have Duty to Monitor Investment Options
- Language Barriers of 401(k) Disclosure
- Reduced Corrective Contributions
- Internal Control for Plan Management
- 401K Plan Fee Assessment
- Warning Signs Your Employer May be Misusing Your 401(k) Savings
- Why a Quality Audit of Your Plan is so Important
- IRS Examinations of 401(k) Plans
- Exploring Roth In-Plan Conversions