1/6/2016. Compliance Issues: When Molehills become Mountains. 1. Reporting or using incorrect compensation

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1 Compliance Issues: When Molehills become Mountains Presented by: Marilyn Ryding, AIF Elizabeth Hopkins, Department of Labor 1. Reporting or using incorrect compensation Compliance testing may be wrong (HCE, ADP & ACP, 401(a)(4)) Failure to follow the terms of the plan Failure to apply employee deferral elections to compensation as defined (exclusion of bonuses, vacation pay, etc.) Know your plan document! How does it define compensation for: Applying employee deferral elections Allocating employer contributions ADP & ACP testing (some documents allow various definitions) Spend time with those involved in payroll to make sure that they understand Use vendor to capture and report deferral elections Extra steps: compare compensation reported on census with payroll reports 1

2 2. Eligibility Failures: Too soon, too late, or not at all! Failure to operate the plan according to its terms Employer may have to make additional contributions on behalf of affected employees (this will be a common theme!) Too soon: if only NHCEs affected, the plan may be retro-actively amended to provide earlier eligibility only for impacted employees Too late or not at all: new IRS Rev. Proc Lowers or eliminates the QNEC requirement Develop and follow a process for enrolling employees Take advantage of vendor s enrollment capabilities 3. Failure to provide Required Minimum Distributions Possible 50% penalty to the person who did not receive the RMD Plan design: make sure that the plan requires RMDs only for 5% owners (RBD for non-5%-owners can be 4/1 of year following year of actual retirement Check for possible TEFRA 242(b)(2) elections (rare, but possible!) Sweep of employee database by DOB mid-year IRS Rev. Proc provides reduced VCP filing fee for multiple failures Watch-out: No reciprocity between plans and IRAs 4. Plan design that might be too clever Multiple eligibility: beware topheavy (e.g. requirement to make contribution to unexpected employees) Multiple vesting schedules: increases possibility of error House of cards type of contribution allocation methods that collapse with change in demographics Annually re-evaluate the company s objectives, and be realistic in cost-benefit analysis Trade-off between manageability and cost savings (penny-wise, but pound-foolish?) 2

3 Terminating employees and defaults: taxes and penalties Failure to report defaults on Form 1099-R: penalties Plans that allow multiple loans or loan refinancing: possible violation of maximum loan Loans made in violation of plan or IRS provisions 5. Participant loans Process: record-keepers that track loans and provide warning reports Plan design: if you must allow loans, limit to 1 at a time and no refinancing Consider eliminating loans (not a protected benefit) Consider allowing terminated employees to continue payments directly to record-keeper IRS Rev. Proc : reduced VCP filing fees 6. Delinquent deposits: employee deferrals & loan payments Employer must make up lost earnings Prohibited transaction Excise taxes Fiduciary breach: personal liability Accidental fiduciaries: wellmeaning payroll personnel making decisions about when to remit contributions ACH debit Payroll integration (180 vs. 360) Back-up system and personnel Other ideas? 7. When a QDRO isn t a QDRO Violation of the anti-alienation rules (IRS Code 401(a)(13)) No distributable event Plan sponsor may be required to make up distribution s Develop proper procedures most document systems include templates Maintain (and use!) a QDRO checklist Make sure the plan has a QDRO procedure Don t just make distribution because a court order has been signed by a judge! 3

4 8. Failure to provide all those participant notices! Safe Harbor: loss of free pass on testing 404(a)-5 fee disclosures: penalties per participant per day QDIA: loss of fiduciary protection against investment losses Summary Annual Report: penalties per participant per day ACA and EACA notices Maintain (and use) a chart showing due dates of all required notices If possible, have a single annual date that all notices are provided Use electronic media wherever possible Use fulfillment services available from record-keeper or third-party vendor 9. Non-amenders Plan disqualification Adverse tax consequences (loss of deductions, inclusion in income) The trust The employer Employees Don t play audit roulette! VCP Filing is available, no matter how far back you have to amend Filing fees range, depending on the size of the plan (as little as $375 for a plan with fewer than 20 employees to $25,000 for a plan with over 10,000 employees See Forms 8950, 8951 & Schedules Must be submitted by, CPA, EA, ERPA, Attorney or the plan sponsor 10. Top-Heavy Plans Special problem for first-year plans with no intended employer contribution: top-heavy is determined the last day of the first plan year Watch-out if using the 1 st year rule that allows HCEs to defer 5% Employer may be required to make a top-heavy contribution If Safe Harbor design can be budgeted, top-heavy automatically satisfied If no employer contribution is intended, make sure to inform Key employees and put them on notice or limit their deferrals Possibly exclude Key employees 4

5 11. Re-hired employees Questions that arise How does the employer know when a re-hired employee is eligible to participate? Must they meet eligibility all over again? What happens to prior nonvested balances? s & Answers Again, know your document! (it will tell you) Recommend using immediate entry for re-hires who previously met eligibility (e.g., no one-year hold-out) Recommend using document provisions that restores nonvested forfeiture only on repayment 5