Common Compliance Issues and Remedies

Transcription

1 Common Compliance Issues and Remedies Ilene H. Ferenczy, Esq. Ferenczy + Paul LLP Tricia A. Van Vliet, CPA Elliott Group CPAs, PLLC

2 Today s Lineup Overview of plan compliance errors knowing how to recognize and respond Avoiding an identity crisis when errors occur understanding your role and responsibilities Illustrative examples taking a closer look at the challenges and solutions Plan financial statement audits assessing the impact of regulatory issues

3 Overview of Plan Compliance Errors Sources to consider when assessing compliance ERISA IRC Plan document Considering potential impact of violations Corrective distributions Transaction reversal Jeopardized tax qualified status Fiduciary risk and liability Disclosure requirements Nature of issues Plan design Day-to-day plan operation Other prohibited transactions

4 Overview of Plan Compliance Errors Common Areas Where Plan Errors Are Encountered Eligible compensation Eligibility Late remittance of participant deferrals & loan repayments Plan document updates Employer contributions deposit and allocation Application of plan vesting provisions Timing and use of plan forfeitures Participant loans Form 5500 filing requirements Discrimination testing

5 Overview of Plan Compliance Errors Correction Programs Available IRS Employee Plans Compliance Resolution System (EPCRS) (Rev. Proc ) Self-correction (< 2 yrs. old or de minimis error) Voluntary Correction Program (VCP IRS submission) Audit CAP (errors found on audit or in determination letter submission) DOL Voluntary Fiduciary Correction Program (VFCP) Delinquent Filer Voluntary Compliance Program (DFVCP)

6 Avoiding an Identity Crisis Plan Sponsor ERISA Counsel Management Auditor Third Party Service Providers Beware of unintended consequences when you fail to understand your role and responsibilities

7 Avoiding an Identity Crisis (continued) What can (and does) go wrong when auditors fail to understand their roles and responsibilities? Independence issues Most common source of engagement inefficiency Risk business, litigation, etc. Setting inappropriate expectations Jeopardize client relationship

8

9 IRS vs. DOL Involvement DOL Fiduciary breach Benefit claims Failure to deposit deferrals/loans into the plan (or improper withdrawals from the plan) Reporting and disclosure IRS Almost everything else! Tax qualification (everything in IRC Sections 401(a) and 501(a)) Tend to be highly technical stuff, not as relevant to participants

10 Documentation Problems The Code and ERISA require that a plan be in writing This means that the plan must be administered according to its terms All of this is highly discoverable in IRS audit The Code and the Courts require that plan documents include certain required provisions Plans must be updated when laws or rules change

11 General Correction Principles Put everything back where it should be Don t break any other rules fixing this problem Be consistent The Employer must pay to fix its mistakes Estimates OK only if precision is expensive and unreasonable If people are due money, give them interest De minimis excuses are rare Fixes by amendment need IRS OK (VCP)

12 When Does Your Client Need a Lawyer? When money isn t where it should be Improper loans to owners or the sponsor Embezzlement Extreme cases of non-deposit of employee deferrals When the plan document is a mess Things not signed timely No connection between the plan and its operations

13 When Does Your Client Need a Lawyer? When participants are getting pitchforks and torches A lawsuit cannot be far behind When the IRS or DOL is at the door When there is a significant claims problem A lawsuit cannot be far behind When no one knows how to proceed

14 Let s take a closer look at the challenges encountered and solutions for correcting common errors

15 Failure to properly apply the plan s definition of compensation Contributing Factors Various definitions of compensation for different purposes Transition periods (e.g., payroll system conversions, changes in service providers) Reliance on summaries rather than actual plan document Lack of care in applying complicated plan provisions

16 Failure to properly apply the plan s definition of compensation Potential Implications Determination of participant deferrals Nondiscrimination tests (ADP, ACP, crosstesting, etc.) Allocation of employer contributions (match, profit sharing, etc.) Application of legal limits and obligations (deferral limit ($17,500), allocation limit ($52,000), top heavy minimums. gateway contributions)

17 Failure to properly apply the plan s definition of compensation In-Scope Audit Work Determine definition of compensation in properly executed plan document Gain understanding of root causes for any differences identified Test payroll coding of wages in accordance with plan provisions

18 Failure to properly apply the plan s definition of compensation Out-of-Scope Audit Work Consultation with ERISA attorney Consideration of adjustment, disclosure, written communications For verified errors determine risk of material misstatement in plan financial statements Audit client schedule of known errors & calculated correction

19 Failure to properly apply the plan s definition of compensation ERISA Counsel Services & Solutions Revise nondiscrimination testing; if failed, assess corrections needed Assess whether legal limits have been exceeded; assess corrections needed Determine whether selfcorrection is still available If self-correction is unavailable, assess viability of IRS or DOL program filings

20 Improper exclusion of employees from plan participation Contributing Factors Written document vs. plan sponsor interpretation Employee rehired or transferred to a nonexcluded class; works more than expected Written document vs. TPA instructions TPA employee census insufficient to track excluded classes of employees

21 Improper exclusion of employees from plan participation In-Scope Audit Work Compare plan document provisions to plan operations Understand root causes of improper exclusion Evaluate risk of potentially excluded employees (divisions with low participation)

22 Improper exclusion of employees from plan participation Out-of-Scope Audit Work Consultation with ERISA attorney Consideration of adjustment, disclosure, written communications For verified errors determine risk of material misstatement in plan financial statements Audit client schedule of known errors & calculated correction

23 Improper exclusion of employees from participation - ERISA Counsel Services & Solutions Determine number of years and whether a material number of participants are affected Determine correction: long-term or short-term exclusions; deferrals at issue? Assess ability to self-correct and cost of correction If self-correction is unavailable, assess viability of IRS VCP Program

24

25 Financial Statement Auditor s Risk Assessment Plan management characteristics Ability to detect & correct plan compliance issues Attitude toward compliance Overreliance on third parties Due diligence & documentation Fraud risk factors Differences vs. errors Prohibited transactions & consideration of financial statement materiality

26 IRS Is Concentrating on Internal Controls And So Should Your Clients! Current IRS audit initiatives center on the compliance mechanisms available in the plan vis-à-vis the plan sponsor and administrator IRS to release a Compliance Assessment Tool for use by plan sponsors and advisors (not IRS auditors) Called QSAT: Questionnaire Self Assessment Tool (designed from findings in 401(k) Questionnaire)

27

28 Tricia Van Vliet, CPA Elliott Group CPAs, PLLC 250 Monroe NW, Suite 400 Grand Rapids, MI Ilene H. Ferenczy, Esq. Ferenczy + Paul LLP 2200 Century Parkway, Suite 560 Atlanta, GA ilene@ferenczypaul.com