The Importance of Knowing Your Plan’s Definition of Compensation

Posted 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, CPA

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Dear Plan Sponsors: Reviewing a SSAE 16 Report

Posted 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

By Audrey D. Richards

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How to Handle a Blackout Period

Posted 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

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The Importance of Obtaining a Quality Audit

Posted on November 24 2015 by admin

On November 16, 2015, the Department of Labor’s (“DOL”) Office of Chief Accountant sent an e-mail to all plan administrators of plans which are required to have an annual financial statement audit alerting them of the importance of obtaining a quality audit from a qualified and experienced CPA firm.

This is primarily in response to the DOL’s report issued in May 2015 in regards to audit quality where it was identified that audit firms with smaller employee benefit plan practices not only have a significantly higher overall deficiency rate but also had a high number of deficient audit areas. The study focused on 2011 Form 5500 filings, of which there were 81,162 filings with audits performed by 7,330 CPA firms. Of these 7,330 CPA firms, 95% of the CPA firms audit less than 25 plans on an annual basis and 50% audit 1 or 2 plans.

This email from the DOL focuses on audit quality and that selecting a qualified CPA who has the expertise to perform an audit in accordance with professional auditing standards is a critical responsibility in safeguarding the plan’s assets and ensuring compliance with ERISA’s reporting and fiduciary requirements. It also notes that employee benefit plan audits have unique audit and reporting requirements and are different from other financial statement audits, and that substandard audit work can be costly to plan administrators and sponsors.

The email lists the following qualifications to ask of a CPA firm:

  • The number of employee benefit plans the CPA audits each year, including the types of plans;
  • Henry & Horne audits approximately 50 benefit plans on an annual basis with individual assets ranging from $100K to over $350M and participant counts surpassing 6,000 participant.
  • The extent of specific annual training the CPA received in auditing plans;
  • Henry & Horne is a member of the American Institute of Certified Public Accountants (“AICPA”) Employee Benefit Plan Audit Quality Center which provides training, support materials and alerts on trending topics. In addition, Henry & Horne attends the annual employee benefit plan conference sponsored by the AICPA.
  • The status of the CPA’s license with the applicable state board of accountancy;
  • Henry & Horne is an active member in the Arizona State Board of Accountancy.
  • Henry & Horne is an active member in all other states where registration is required for work performed within the state.
  • Whether the CPA has been the subject of any prior DOL findings or referrals, or has been referred to a state board of accountancy or the American Institute of CPA’s for investigation; and
  • Henry & Horne has not been the subject of any prior DOL findings or referrals.
  • Henry & Horne ’s employee benefit plan audit work is not part of a state board of accountancy or an AICPA investigation.
  • Whether or not your CPA’s employee benefit plan audit work has recently been reviewed by another CPA (this is called a “Peer Review”) and, if so whether such review resulted in negative findings;
  • Henry & Horne ’s employee benefit plan audit work is subject to Peer Review by another CPA firm every three years. The firm’s last Peer Review was for the year ended May 31, 2013 has received a peer review rating of Pass.
  • Henry & Horne ’s employee benefit plan audit work is also subject to internal inspections by the firm’s Audit and Accounting Committee on a quarterly basis.

If you have any questions in regards to the DOL’s email, audit quality report or Henry & Horne ’s qualifications, please contact us.

By Kevin Bach, CPA, CVA

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Participant Loans – IRS Requirements

Posted on November 17 2015 by admin

If you participate in your Company’s 401k Plan, you are probably already aware that your Plan may offer an option for you to take out a loan from your 401k balance. These loans are tax free and typically require you to pay your loan back plus interest over a certain period of time. There are a few key requirements that your 401k loan needs to meet to be in compliance with the Internal Revenue Service (“IRS”). These key requirements are as follows:

  • The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less.
  • Generally, the employee must also repay the loan within five years and must make payments at least quarterly. The law also provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence which can extend the loan repayment period to 30 years.
  • If an employee has an outstanding loan and terminates employment, plan sponsors may require an employee to completely repay the outstanding loan balance. If the employee is unable to repay the loan, then the employer will treat the loan as a deemed distribution and will report it to the IRS on Form 1099-R, which means the employee will then need to pay taxes on the distributed loan amount.

In addition to the IRS requirements noted above, each plan can have its own specific loan policy that participants are required to follow. These loan policies may require their own minimum loan balance amount and also limit the number of loans allowed at any given time. Participants should receive information from the plan administrator describing the availability of and terms for obtaining a loan.

By Ryan G. Wojdacz, CPA

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Investment Policy – Why and What to Include?

Posted on November 3 2015 by admin

An investment policy is created by an investment committee (those charged with making investment decisions for a retirement plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members/trustees or to clarify expectations for prospective money managers who may be hired by the committee.

According to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for every qualified company retirement plan (i.e. 401[k], profit sharing, pension, 403[b]) there are certain fiduciary responsibilities for managing plan assets with care, skill, prudence and diligence of a prudent expert and by diversifying the investments of the plan so as to minimize the risk of large losses. This investment policy statement documents these fiduciary responsibilities and ensures fiduciaries are adhering to these responsibilities.

ERISA and the Department of Labor (“DOL”) have established the following procedures for plan trustees:

  • An investment policy must be established
  • Plan assets must be diversified
  • Investment decisions must be made with the skill and care of a prudent expert
  • Prohibited transactions must be avoided

An investment policy statement should set forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan’s assets, and provides the basis for evaluating the plan’s investment results.

When a plan is audited under ERISA, the auditor will request a copy of the most current investment policy being followed by the trustees and review it for the items listed above. Having this policy statement compels the trustees to be more disciplined and systematic, which will improve the investment goals of the plan.

By Leslie A. Lee, CPA

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2016 Retirement Plan Limits

Posted on October 27 2015 by admin

On October 21, 2015, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments (“COLA”) for the 2016 tax year. These COLA rates are used to adjust over 40 tax provisions from the standard deduction and personal exemption to retirement plan limits. Based on changes in consumer price index, used by the IRS to determine the COLA rates, which was less than the statutory threshold to trigger increases, there are no increases in the 2016 limits.

See the tables below, for a comparison of the 2015 and 2016 retirement plan limits:


For further information, click here.

By Kevin C. Bach, CPA, CVA

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Compliance for Small Company Employee Benefit Plans

Posted on October 21 2015 by admin

As another employee benefit plan season draws to a close, I was reflecting on the many compliance errors that we find each year while auditing plans. The plans that require audits are typically larger employers with over 120 employees. These plans are typically administrated by professionals with significant experience in their fields. And yet, due to the complexity of employee benefit plans, we still find compliance errors in many of these plans during the course of our audits.

This led me to think, what about those plans that aren’t required to get audited each year? These would be smaller employers. Many of these plans are likely administered by a payroll clerk or bookkeeper with limited experience in employee benefit plans. If I had to guess, I’d say that the likelihood for errors would be much higher. So, what can smaller plans do to make sure they are not perpetually making compliance errors in their plans?

Many small companies are now engaging audit firms to perform agreed upon procedures, or procedures that are substantially less in scope than an audit but that are specifically tailored to detect the most common compliance errors. An auditor would focus these procedures on the areas that most frequently cause compliance errors for both large and small companies alike. A few examples are:

  1. The auditor can design specific procedures to determine if the correct definition of compensation is being adhered to by the plan. This will involve reading the plan document’s definition of eligible compensation and then determining if employee compensation is being correctly deferred. For example, if the employer is not deferring on bonus compensation but the plan document includes bonuses in the definition of compensation, these procedures would identify this error. In my experience auditing benefit plans, the errors that end up being the most costly to clients are typically involving the definition of compensation. It is best to catch these as early as possible as the employer is required to correct the error as far back as the error was occurring.
  2. The auditor can recalculate the number of days from each pay date to the date that deferrals are contributed to the plan. If the contributions are not consistently contributed within a few days, the auditor can identify which contributions may need to be considered as late contributions. More importantly, the auditor can identify why the contributions were contributed late to the plan and recommend improved controls to prevent future late deferrals.
  3. The auditor can recalculate employer contributions to determine if the plan is calculating them in accordance with the plan document. For example, the plan document might call for the employer match to be calculated on an annual basis, but the employer might be calculating on a pay period basis. If this is the case, a true-up contribution could be required at the end of each year. If this is not happening, the employer will need to make the contributions plus lost earnings for prior years missed.

I would highly recommend for any small employer plan to engage a benefit plan auditor to come and “kick the tires” on your benefit plan. Finding any compliance errors now will save additional expense in the future and give you peace of mind that your plan is in compliance with regulations.

By Rex Platt, CPA

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401K Pre-Approved Plans 2016 Deadline

Posted on October 14 2015 by admin

Some employee benefit plans are set-up as pre-approved plans. Typically this includes prototype and volume submitter plans. This basically means that the plan is operating under a Plan Document from a financial institution, adviser or similar provider that has requested IRS opinion or advisory letters on the tax status of the Plan. These types of plans use IRS approved wording and generally have limited customization.

Revision of the plan

Pre-approved plans are generally updated entirely by your provider every 6 years and they send a request for a new opinion or advisory letter from the IRS. This is to ensure that as the law changes the retirement plan documents comply with these revised laws. According to the website, most of these letters for the latest round of approvals were issued on March 31, 2014. Employers have two years from the date of issuance to adopt these updated plans; therefore, the upcoming deadline is April 30, 2016. If adoption is not completed within this time frame, the plan will not be in compliance with the current tax laws.

How to adopt a revised plan document

The first step is to contact your provider. They should have sent you a revised plan document which would be approved by the IRS. This will comply with law changes as set forth on the 2010 cumulative list of changes on the website. Be aware that even if you amended your plan you should still be sure to adopt a Pension Protection Act of 2006 (“PPA”) plan document.

It is important to ensure that your plan is up to date and in compliance with current tax laws to ensure the plan is eligible for tax benefits. If you are unsure if you are in compliance, we recommend contacting your provider to ensure all of your plan documents are up to date.

By Brie C. Keckler, CPA

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FASB’s Employee Benefit Plan Reporting Simplification

Posted on September 29 2015 by admin

On July 31, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. The ASU was in response to consistent feedback received from employee benefit plan financial statement users. The ASU covers three areas for entities that follow the requirements in FASB Accounting Standards Codification (“ASC”) Topics 960, 962 and 965:

I. Fully Benefit-Responsive Investment Contracts

Part I of the ASU applies to applicable entities that hold investments in fully benefit responsive investment contracts (“FBRICs”), as defined by the FASB ASC Master Glossary. This update redefines a FBRIC and requires that FBRICs be measured, presented and disclosed at contract value, as contract value is the relevant measure of the portion of the net assets available for benefits of a defined contribution plan for a FBRIC. This update eliminates the need for a plan to calculate the fair value and present a reconciliation from contract value to fair value as the employee benefit plan financial statement users consider this to not be decision-useful information, as contract value is the amount participants would normally receive if they were to initiate permitted transactions.

II. Plan Investment Disclosures

Part II of the ASU is to reduce the complexity in the employee benefit plan financial statement in line with the FASB’s overall Simplification Initiative as minimal changes have been made to pension plan accounting since 1980 (release of FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans) while other portions of FASB were updated and were applicable to employee benefit plan financial statements which resulted in increased disclosures and accounting requirements.

  • Elimination of investments that represent more than 5% of net assets available for benefits
  • Elimination of the disclosure of net appreciation/depreciation by investment type
  • Elimination of the need to disaggregate investments by nature, characteristics, and risks within the fair value hierarchy
  • Elimination of the need to disclose an investment’s strategy if the investment is a fund that files a Form 5000 as a direct filing entity

III. Measurement Date Practical Expedient

FASB ASU 2015-04 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, was issued in April 2015, which provided a practical expedient that allows employers to measure defined benefit plan assets on a month-end date that is nearest to the employer’s fiscal year-end, when the fiscal period does not coincide with a month-end. Thus, part III of this update provides a similar measurement date practical expedient for employee benefit plans. If a plan applies the practical expedient and a contribution, distribution, and/or a significant event occurs between the alternative measurement date and the plan’s fiscal year-end, the plan should disclose the amount of the contribution, distribution, and/or significant event. The plan should also disclose the accounting policy election and the date used to measure investments and investment-related accounts.

The ASU is effective for fiscal years beginning after December 15, 2015 and early application is permitted. Entities can separately adopt each part of the ASU, but must implement all components within each part. For more information read the ASU at

By Kevin C. Bach, CPA, CVA

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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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