Say it Ain t So: Real Life EPCRS Case Studies You Just Can t Make Up! Alison J. Cohen, Esq., CPC Senior Associate Ferenczy Benefits Law Center LLP

Transcription

1 Say it Ain t So: Real Life EPCRS Case Studies You Just Can t Make Up! Alison J. Cohen, Esq., CPC Senior Associate Ferenczy Benefits Law Center LLP 1

2 What to Expect Disbelief, nausea, and appreciation for your clients you thought were awful Know the tools in your toolbox Case studies for your consideration 2

3 Poll #1 Know Your Letters Which of the following is NOT a corrective program available through the IRS or DOL: A. VCP B. VFCP C. SCP D. FWIW E. DFVCP 3

4 Alphabet City Department of Labor Programs: Delinquent Filer Voluntary Compliance Program (DFVCP) Used for late Forms 5500 Filing fees apply based on plan size Voluntary Fiduciary Correction Program (VFCP) Used for correction of fiduciary breaches NO filing fees 4

5 Alphabet City (Continued) Internal Revenue Service Programs: Employee Plans Voluntary Closing Agreement Program (VCAP) Used for tax-related plan matters Issue can t be resolved through VCP Can t be under examination or investigation Can t be used for abusive or willful tax avoidance transactions User fee -TBD Revenue Procedure Correction of delinquent Forms 5500-EZ User fee applies 5

6 Alphabet City (Continued) Internal Revenue Service Programs: Employee Plans Compliance Resolution Program (EPCRS Rev. Proc ) Self-Correction Program (SCP) Voluntary-Compliance Program (VCP) Audit Closing Agreement Program (Audit CAP) 6

7 EPCRS Deeper Dive Self-correction basics CORRECTION MAY BE MADE AT ANY TIME (even if the plan is under audit by the IRS) Correction of insignificant errors anytime Correction of significant errors time limited 7

8 Insignificant Failures What is insignificant? Balancing of factors: Have other failures occurred? Percentage of plan assets and contributions involved Number of years affected Number of participants affected (as percentage of total in plan and as percentage of those who could have been affected) Was correction made within a reasonable time after discovery? Why did the failure happen? 8

9 Significant Failures Defined: anything that is not insignificant Rule: must be substantially corrected during the correction period Correction period: General rule: last day of second plan year following year of occurrence ADP/ACP: last day of third plan year following year for which testing is failed 9

10 VCP General Steps General procedure File with the IRS Pay user fee Based on type of failure and number of participants on most recent Form 5500 (See Rev. Proc ) Negotiate with IRS as to correction method Sign compliance statement with agreed-upon correction Complete correction within 150 days 10

11 Audit CAP IRS discovers problem on audit IRS and plan sponsor enter into a contract called a Closing Agreement to correct the problem Plan sponsor pays a sanction to the IRS 11

12 Let the Case Studies Begin! 12

13 Case Study #1 The Doctor Is In Medical practice with three plans First, PS only from solo practitioner before practice was formed (PS#1) Second, PS only sponsored by practice (PS#2) Third, DB sponsored by practice (DB) Medical practice is merging with larger medical group Unable to locate or obtain plan documents from Accountant/Adviser (A/A) or broker No TPA works on any plan All valuation work done by A/A and broker Form 5500s appear to all have been filed (at least through 2014) 13

14 Case Study #1 (Continued) PS#1 is invested nearly 90 percent in a limited partnership run by the A/A A/A has neither accounting nor financial adviser licenses A/A is also the Treasurer/Officer of the medical practice A/A has acted as the Plan Administrator (3(16)) in operation Underlying investments of LP are all companies related to A/A No plan documents since 2004 and no SPD No 1099Rs ever produced 14

15 Gut Check Poll #2 Which program(s) are starting to sound like a good fit for PS #1? A. SCP B. VFCP C. VCP D. VCAP E. Witness Protection Program 15

16 Case Study #1 (Continued) PS#2 is invested in two mutual funds one is money market and the other is a low-performing equity fund Eligibility appears to have been calculated incorrectly Broker has been creating valuations on balance forward basis (incorrectly!!) Plan covers one HCE and all but three NHCEs (approximately 12-30), so coverage appears not to be an issue Plan documents are incomplete and no SPD created No 1099Rs ever done for distributions 16

17 Gut Check Poll #3 Which program(s) are starting to sound like a good fit for PS #2? A. SCP B. VFCP C. VCP D. VCAP E. DOS

18 Case Study #1 (Continued) DB is a 412(e) that appears not to be properly funded Plan covers remaining two HCEs and only three of 20 NHCEs No testing has ever been formally done on the plan Eligibility was incorrectly administered Policies appear to be incorrectly set up Only one plan document from 2012 (original effective 2006) and no SPD No fiduciary bond No 1099Rs ever issued for distributions 18

19 Gut Check Poll #4 Which program(s) are starting to sound like a good fit for DB? A. SCP B. VFCP C. VCP D. VCAP E. Charter hospital 19

20 Don t Keep Us in Suspense! PS #1 VCP Possibly VFCP due to self-dealing issue DFVCP How do you complete a Form 5500 when you can t prove the assets? PS #2 VCP DB VCP or VCAP? 20

21 But Wait! There s More! Plan Sponsor went voluntarily to DOL to disclose events Plan Sponsor filed civil lawsuit against A/A and agent Co-fiduciary liability mitigation DOL initiated civil investigation into plans 21

22 Case Study #2 Real Estate Nightmare Defined Benefit Plan Owners/Trustees are husband and wife No IRS or DOL audit in process (yet!) Fired prior TPA two years earlier, just retained a new one No Form 5500 filed in past two years Missed PBGC premium payments, but getting caught up New TPA helped filed late Form 5330 for prohibited transaction related to a loan Only four people in the plan two are the owners 22

23 Case Study #2 (Continued) Employer took a loan of ALL plan assets starting in 2011 By 2014, no assets left in trust Loan was self-written as a line of credit to Employer No interest rate specified No amortization schedule created No repayments ever made Same Owner signed as Trustee and Employer Owner is real-estate developer IRS now making telephone inquiry regarding status of reported prohibited transaction from Form

24 Gut Check Poll #5 Which program(s) are starting to sound like a good fit for the Real Estate Developer? A. SCP B. VFCP C. VCP D. VCAP E. Probation 24

25 Case Study #2 - Recommendations Fix PBGC premiums Put the money back in the trust for non-key participants Freeze and terminate plan stop the bleeding! VCAP makes the most sense PT excise taxes Funding shortfall excise tax What about VFCP? 25

26 Case Study #3 More Doctors Father and son family dental practice in tight-knit ethnic community Predatory financial adviser and TPA partner together to perform services Sets up 401(k) and DB Plans for practice New accountant starts asking questions and looking at financials Plans referred to new TPA for evaluation 26

27 Case Study #3 (Continued) DB Plan issues Sketchy plan documents look like attempt to convert to cash balance at one point, but never signed Administration/valuations don t appear to follow CB documents regardless and numbers all wrong Significant underfunding of plan RMDs that were taken (and some weren t) calculated using DC plan method Spouse told by old TPA she didn t have to take RMD since she was employed and wasn t the owner No fiduciary bond ever taken 27

28 Case Study #3 (Continued) DC Plan issues Plan documents also a mess Three percent safe harbor contribution not given to everyone Not a single non-family member is making 401(k) deferrals 401(a)(4) cross-testing done incorrectly RMDs not done properly No fidelity bond ever taken 28

29 Gut Check Poll #6 Which program(s) are starting to sound like a good fit for these doctors? A. SCP B. VFCP C. VCP D. VCAP E. Weight Watchers 29

30 Case Study #4 PEO Gone Bad Client part of PEO MEP and utilizes PEO payroll services Cash flow issues hit client temporarily PEO advises client to issue net checks and suspend deposits of deferrals, loan repayments, and tax withholding Delinquent 401(k) and loan repayments made several weeks later 30

31 Case Study #4 (Continued) PEO fires client abruptly forcing them to do their own payroll for three months Deferrals and loan repayments withheld, but PEO refuses to accept deposit Client initiates spin-off from MEP 1/1/17 Delinquent deposits, plus earnings, made to new plan 31

32 Case Study #4 (Continued) PEO performs ADP testing for only nine months and initiates corrective distributions Retesting using full 12 months creates different results (both more and less) Bonus: Employee goes to Social Security Administration to get a compensation history report PEO neglected to either deposit or report tax withholding and compensation 32

33 Gut Check Poll #7 Which program(s) are starting to sound like a good fit for this client? A. SCP B. VFCP C. VCP D. VCAP E. Wine Club of the Month 33

34 Case Study #4 - Outcome VFCP need to fix delinquent deposits What about VCP? Loan default triggered What do you do with the missing withholdings and compensation data? 34

35 Case Study #5 Can We Kill It? DB Plan started in 2013 by small lawyer firm Shortly after, Partner diagnosed with stage four lung cancer Firm suffered massive financial losses starting in 2014 and was unable to fund contributions TPA prepared Form 5330 for shortfall excise taxes, but couldn t pay taxes, so didn t file Plan now picked up on compliance check 35

36 Case Study #5 (Continued) Question from TPA: Can we retroactively disqualify the Plan? If not, what are our choices? 36

37 Gut Check Poll #8 Which program(s) are starting to sound like a good fit for this client? A. SCP B. VFCP C. VCP D. VCAP E. Game of Thrones 37

38 Case Study #5 - Outcome VCP can be filed during compliance check Propose retroactive termination 12/31/13 Why? Resolves excise tax issues AFTAP fell below 60 percent, so freeze notice already given to participants Death of Partner in 2016 after protracted illness creates sympathetic case 38

39 Final Thoughts Know your limits Think critically (pretend you re the IRS/DOL) Tell the story to a colleague and get his or her uninfluenced opinion Always present all options (risk/reward) Be prepared for push back 3(16) TPAs may have different restrictions 39

40 Questions?