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, CPAPosted on December 16 2014 by admin
In a previously issued blog titled “Have lost Participants in your 401(k) Plan?”, the topic of missing participants was addressed prior to the Department of Labor (DOL) issuing any guidance on fiduciary responsibility of plan sponsors in that respect. The guidance issued by the DOL in Field Assistance Bulletin (FAB) No. 2014-01, outlines fiduciary duties and missing participants in terminated defined contribution plans.
When a defined contribution plan is terminated, a plan administrator is required to distribute all of a plan’s assets as soon as administratively feasible after plan termination. Prior to making a distribution, the plan administrator is responsible for contacting plan participants for directions on how to remit their account balances. In instances where the participants do not respond to the correspondence, the plan administrator is required to complete the following tasks outlined in the FAB:
- Use certified mail; it’s an easy and low cost method to find out if the participant can be located.
- Check related plan and employer records. The terminated plan records may not be up to date, but records from a group health plan or similar records may be more current.
- Check with the designated plan beneficiary. If the participant has designated a spouse or relative as a beneficiary, they may be able to assist in providing the updated contact information for the participant. If there are privacy concerns, it is recommended that the beneficiary forward a letter to the participant.
- Use free electronic search tools. Plan fiduciaries must make use of the search tools that do not charge a fee, for example; internet search engines, public record databases, obituaries, and social media.
If all attempts to locate the missing participant or beneficiary have failed, a plan administrator must evaluate and select an appropriate distribution option to complete the plan’s termination. The preferred distribution option per Section 404(a) of ERISA is to rollover the funds into an IRA, which is more likely to preserve funds for retirement and will avoid taxation. As alternative options, administrators may deposit the funds into federally insured bank accounts or escheat the funds to the state unclaimed property funds. One hundred percent income tax withholding for a missing participant’s benefits is an unacceptable distribution option and is in violation of ERISA’s fiduciary requirements.
By Sarah McFarlandPosted on December 2 2014 by admin
If your company has a 401(k) plan, one of the areas to understand is if your plan allows for different types of distributions, what they entail, and some key items to note regarding each type. The main types of distributions are hardships, termination/rollovers, and in-service.
Not all plans allow for hardship distributions; however if they do, there is criteria that must be met. These will vary based on how they are outlined by each plan document, but in general, there are some basic rules that are typical for a hardship distribution:
- There needs to be a financial need for the distribution and proof of this should be kept on file.
- Most plans will not allow for the distribution to exceed the amount of employee deferrals made to the plan.
- The plan may also indicate that prior to taking this type of distribution that all other forms of distributions have been exhausted, such as an in-service distribution or a loan.
Termination distributions are probably the most common distribution you will see. When an employee is terminated from the employer they can request a distribution in cash or they can have their balance rolled over into another individual retirement account. Some of the key things to look for in a termination distribution are:
- Paperwork should be kept on file indicating the termination date of the employee.
- A calculation should be complete to ensure that the employee can only receive the amount that they are currently vested in. Therefore, having accurate participant information in the system (regarding hire date) is important.
- If this is a lump-sum cash distribution, a calculation should be complete to determine that taxes were properly withheld. No taxes are necessary on rollover distributions as they are being transferred to another plan typically.
- After the distribution occurs, you will want to ensure that their balance is at $0 and there isn’t a small amount remaining (typically will occur due to earnings, if it does occur).
- If the distribution were for a rollover, proper request forms should be obtained indicating where the funds should be rolled over.
In-service distributions allow you to take a distribution up to 100% of the employee’s elective deferral, matching contribution, and any qualified non-elective contributions at the attainment of a specified age, (determined by the plan), but typically at the age of 59 ½. Employees will be taxed if taking out this distribution. To avoid this some individuals choose to rollover their balance as opposed to taking a distribution. Some key items to be aware of include:
- Proper employee information to determine that they have reached the age of 59 ½.
- A request form (online or paper).
There are, of course, other types of distributions but those listed above are the most typical distributions you will see. In all distributions it is important to ensure that there is a proper process in place to verify that the distribution was 1) requested, 2) in compliance with the plan, and 3) to ensure documentation is retained to show proof of these items.
By Brie C. Keckler, CPAPosted on November 11 2014 by admin
To attract and retain talented employees, employers should be aware of how their retirement plan provisions compare to other employers. If you are an employer and have not benchmarked your retirement plan provisions, now is a good time to do so. Each year Deloitte publishes the results of its Annual 401(k) Benchmarking Survey. You can obtain a copy of the survey results by clicking this link (Deloitte Benchmarking Survey). The following are some highlights regarding competitive provisions in 401(k) plans:
- 58% of respondents have no waiting period for eligibility and less than 15% have waiting periods longer than 3 months.
- 53% of respondents have a Roth 401(k) feature and 15% more are considering it.
- 67% of respondents made some sort of matching contribution, 4% made some sort of profit sharing contribution, and 23% made both. Only 6% of respondents made neither matching contributions nor profit sharing contributions.
- 56% of respondents have no waiting period for eligibility for matching contributions.
- The most popular matching formula (21% of respondents) is 50% of the first 6% of employee contributions. The second most popular (10% of respondents) is 100% of the first 6% of employee contributions.
- 59% of respondents increased their matching contribution formula.
- 81% of respondents that have a profit sharing provision made a profit sharing contribution.
- 93% of respondents let employees direct the investment of profit sharing contributions.
By Rex Platt, CPAPosted on October 28 2014 by admin
On October 23, 2014, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments (“COLA”) for the 2015 tax year. These COLA rates are used to adjust over 40 tax provisions from the standard deduction and personal exemption to retirement plan limits. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment.
See the tables below, for a comparison of the 2014 and 2015 retirement plan limits:
For more information on the 2015 contribution limits for various types of plans, visit the following IRS website:
Ryan G. Wojdacz, 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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- 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
- Different Types of Distributions on a 401(k) Plan
- Benchmarking Your 401(k) Plan Provisions
- 2015 Retirement Plan Limits
- Do You Have a Hardship?