Audit and Tax Compliance in the Employee Benefits World

Transcription

1 Audit and Tax Compliance in the Employee Benefits World Timothy J. Desmond - Partner Presenters Louis F. LiBrandi - Principal Administration of Employee Benefit plans CANNOT be performed by looking in the rear view mirror, but a view through the windshield on where the plan is going and navigating the landscape of risk, competition and everchanging regulations PKF O Connor Davies, LLP 2 Employee Benefits Auditing What is the current landscape of ERISA audits in Colleges\Universities The significance of being a Fiduciary How does internal audit fit in Areas of increased scrutiny Specific areas for internal auditors A few examples of what could go wrong Current Landscape THE DOL Limited Scope Audit Investments and investment income are not audited (Scope Limitation) DOL very interested in compliance with Plan Document, operations, internal controls at the Plan Sponsor and at the Third Party Service Providers Documentation of user controls and processes DOL program of auditing the auditors 3 4 The Significance of Being a Fiduciary Who is a Fiduciary: o Fiduciary status is based on the functions performed for the plan, not just a person s title; o A plan must have at least one fiduciary (a person or entity) named in the written plan as having control over the plan s operation; o The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. Fiduciary Responsibilities: o Acting in the best interest of plan participants; o The prudent handling of duties performed for the plan; o Operation of the plan in accordance with the plan document; o Review of plan expenses for reasonableness and to ensure they are plan related; o Diversification of plan investments. The Significance of Being a Fiduciary (Cont d.) Documentation of Fiduciary Responsibilities: o It is recommended that the plan sponsor establish a retirement committee to review key fiduciary responsibilities and that minutes be kept of those meetings to be used as formal documentation

2 The Significance of Being a Fiduciary (Cont d.) Recent Litigation against Colleges/Universities o The lawsuits claim the universities violated their fiduciary responsibilities by allowing excessive fees to be charged to the plan; o Furthermore; the lawsuits allege that the universities, as the plan sponsor, failed to monitor excessive fees paid to administer the plans and did not replace more expensive, poor performing investments with cheaper ones; o Had the plans eliminated their long lists of investment options and used their bargaining power to cut costs, the complaints argue, the participants could have saved tens of millions of dollars. Internal Audit CPA firms should read Internal Auditor reports and findings Use the knowledge they gain to better plan their audit, follow up on any corrections ERISA audits usually start at the earliest, 3 months after the year ends The timeliness of internal audit function can save the plan sponsor headaches by fixing any non compliance issues before the outside auditor arrive 7 8 Areas of Increased Scrutiny Timeliness of deposits of participant contributions Administration of Participant Loan Receivable Investment fees and return performance Benchmarking against peers Offering appropriate choices to participants to invest in, in light of performance and fees Parties in interest Fraud Safeguarding personal information Cyber Security Specific Areas for Internal Auditors Walk throughs of key controls Trace origin of a change to contribution % and investment allocation Instruction given electronically by participant to 3 rd Party vendor then passed to HR/Payroll Agreeing totals for completeness Testing individual transactions for compliance with the plans provision 9 10 A few examples of what can go wrong Totals of participant deferrals can be agreed from the W 3 to the amount deposited for the year to the Trustee, but many individual participants can not be recalculated? Answer: Excel Spreadsheet Snafu What Can Go Wrong? Plan Sponsor makes a employer contribution with a simple formulae. Each pay period the employer contributes 10% to every employee that has made a participant contribution. Several highly paid employees did not receive their correct amount? Since several of the HCEs reached their deferral limit early in the year, they were not included in the employer contribution for most of the year. Answer: a true up should be performed at the end of the year to catch any circumstance in which an employee did not get what the Plan promised

3 What Can Go Wrong? Per the Plan Document, the definition of compensation is Gross Pay but the Plan Sponsor has been using Base Pay when calculating its Employer contribution. The Plan is not operating in compliance with its own plan document. Answer: The Plan Sponsor should consider entering into an IRS Voluntary Compliance Program and correcting its contributions and making a lost earnings adjustment to each affected participant. What Can Go Wrong? Participants are making before tax contributions and after tax contributions. The plan document does not allow after tax contributions (silent on the matter). College is not operating in compliance with plan document. Answer College must operate in accordance with its plan document or risk loss of its tax exempt status, and possible penalties What Could Go Wrong? The President of the University is retiring at the end of the year. While getting her retirement package reviewed it was discovered by the institution that she has been receiving excess contributions to her account for several years. The contributions exceeded the IRS compensation limit of IRC 401(a)(17), totaling >$80,000. Answer: A very uncomfortable situation has just occurred that will require the Board of Trustees, the auditors and the institution holding the account to work out a remedy to get the account in compliance. Tax Agenda 403(b) Plan Plan document Operations 457 Plan Fringe Benefits A short review 403(b) Plan Document 403(b) Plan Document (cont d.) 2007 final IRS regulations require a plan document: 1) Effective 1/1/2009 and signed by 12/31/2009, and 2) Reasonable operational compliance 2017 Revenue Procedure designated March 31, 2020 as the last day for plans to meet the RAP Revenue Procedure provides: 1) IRS approval process for prototype and volume plans, and 2) Remedial Amendment Period ( RAP ) for making retroactive corrections to plan Types of errors that can be corrected: 1) missing language 2) error in required language 3) error in discretionary language Insert Logo Here 17 Insert Logo Here 18 3

4 Plan Adoption Process 403(b) Plan Document (cont d.) Plan document preparers/vendors will populate pre approved documents with plan provisions from the current document. Plan sponsor must review new document for accuracy. Errors/failures may result in monetary (sanction $$) and plan corrections on an IRS examination. 403(b) Plan Document (cont d.) 403(b) Prototype Plan Planning opportunity. During the transformation process, a plan sponsor may want to evaluate/consider making allowable changes to the plan: Auto enrollment and escalation feature, Adding a Roth feature, Adding/changing the employer contribution provision, Reducing the number of loans available, Hardship withdrawals, Reviewing the cash out feature Delinquent Employee Contributions & Loan Repayments - Operational Compliance Matters - Small plan (under 100 participants 7 business days) Segregate as soon as possible from general assets of the employer Is the timing reasonable? Is the process completed consistently? Voluntary Correction 1. VFC Program (DOL) 2. Self Correction Hardship Distributions New Guidelines IRS has issued guidelines to its examiners to substantiate the hardship withdrawal process: Two step process: Step 1: Determine if plan sponsor/tpa obtained source documents supporting distribution request, and, if so, determine if plan sponsor/tpa provided participant with the required notifications prior to approving the distribution. Specifically: Hardship Distributions New Guidelines (cont d.) Withdrawals should be processed only on account of a deemed immediate & heavy financial need. Distribution amount cannot exceed such need. Only EE salary deferrals, and maybe certain other contributions, are available for distribution. No earnings on amounts are available. Taxable to the participant. Participant must preserve all supporting documents showing need & provide to plan sponsor on request

5 Hardship Distributions New Guidelines (cont d) Step 2: The plan sponsor/tpa obtains the source documents from Step 1, the agent will determine if they substantiate the distribution request. Incomplete/inconsistent source material may result in further IRS examination to substantiate the need. Participants who receive two or more hardship distributions in a given plan year are subject to further scrutiny to substantiate multiple claims. Loan Distributions Recent IRS guidance emphasizes that plan sponsor, not TPA, bears responsibility for maintaining documents showing that loan transactions comply with regulations. Sponsor s files should include the following: Participant s loan application, Executed promissory note, For home loans, proof that proceeds will be used for purchase of primary residence, Proof of all loan repayments, In the event of default, evidence of effort to collect missed payments, Form 1099 R for any deemed distributions Loan Distributions (cont d.) A repayment period of more than five years is permitted only for loans used to purchase a primary residence. Self certification is not allowed under the IRS guidance. Amount of the loan(s) need to be correct dollar limit $50k reduced for any outstanding loan, or ½ account balance. Written loan policies are/should be available and utilized to administer the operation of the plan and to support the fiduciaries responsibility. Defined: Causes: Why Important: Missing Lost Participants Is a former participant in a qualified retirement plan who cannot be located for purposes of executing transactions; distributions, RMDs Age 70½, mailings are being returned. Increase of job changes 7.4x, change of residence, early death. Compliance matters; disclosure requirements, fiduciary responsibility, IRS/DOL examinations, reduce plan fees Missing Lost Participants (cont d.) What can be done: Have employee update address annually at open enrollment coordinate HRIS Systems Review uncashed checks Social media searches, commercial search firms National Change of Address (NCOA) registry A written process should be developed and followed as part of plan administration to demonstrate the process to the IRS/DOL Plans

6 457 Plans Eligible IRC Section 457(b) Ineligible IRC Section 457(f) Eligibility Select group of management or highly compensated employees Reporting and disclosure Notification to DOL of Top Hat Plan Deferrals reported on Form W 2 Form 990 Fringe Benefits Features not permitted in non governmental 457(b) Plan Loans Age 50 Catch up Contributions placed in trust Fringe Benefits A form of pay including property, services, cash or cash equivalent in addition to stated pay for the performance of services. U.S. Tax Law All income is subject to tax unless an exclusion applies. Examples: bonuses, employer provided health care, transportation benefits, meals, de minimus benefits, employer contributions to retirement plans, educational assistance, car allowance, cafeteria plans. Fringe Benefits (cont d.) Tax Treatment of Fringe Benefits Taxable included in gross income Nontaxable excluded from wages from/by a specific exemption (ER paid health) Partially Taxable excludable up to a dollar limit (e.g., transportation) Tax Deferred benefit not taxable when received but taxed later (e.g., ER contribution to retirement plan) Fringe Benefits (cont d.) Nontaxable Fringe Benefits under an Accountable Plan (AP) Under an AP, allowances or reimbursements paid to EEs for job related expenses are excludable from wages and withholding. Requirements for AP (or policy): 1. A business connection to the expenditure. 2. Adequate accounting within a reasonable period of time. 3. Excess reimbursements/advances are retuned within a reasonable period. Questions The opinions expressed in this presentation and on the previous slides are solely those of the presenter and not necessarily those of PKF O Connor Davies, LLP. PKF O Connor Davies, LLP does not guarantee the accuracy or reliability of the information provided herein