401k Annual Audits: Anticipating Serious and Costly Errors, Evaluating Alternative Solutions

Transcription

1 401k Annual Audits: Anticipating Serious and Costly Errors, Evaluating Alternative Solutions WEDNESDAY, MARCH 12, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the Official Record of Attendance, please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 ( star zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 4

5 401(k) Annual Audits March 12, 2014 Brian A. Benko Joanna C. Kerpen McDermott Will & Emery LLP McDermott Will & Emery LLP Washington D.C. Washington D.C. (202) (202) Boston Bruxelles Chicago Düsseldorf Houston Londres Los Angeles Miami Milan Munich New York Orange County Paris Rome Silicon Valley Washington, D.C. Alliance stratégique avec MWE China Law Offices (Shanghai) 2012 McDermott Will & Emery. Les entités suivantes sont collectivement désignées "McDermott Will & Emery", "McDermott" ou "la Firme": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato et McDermott Will & Emery UK LLP. Ces entités coordonnent leurs activités via des contrats de prestations de services. McDermott bénéficie d'une alliance stratégique avec MWE China Law Offices, cabinet d'avocats distinct.

6 Governing Law Employee Retirement Income Security Act of 1974 (ERISA) Title I: Protection of Employee Benefit Rights Enforced by the Department of Labor (DOL) Title II: Amendments to the Internal Revenue Code (IRC) Enforced by the Internal Revenue Service (IRS) Form 5500 Annual Report Published by the DOL Used by the DOL and the IRS Filed by all employee benefit plans 6

7 Audit Overview Enforcement DOL Enforcement Reporting and disclosure Fiduciary standards Voluntary Fiduciary Correction Program Delinquent Filer Voluntary Compliance Program IRS Enforcement Plan qualification formal and operational compliance Employee Plans Compliance Resolution System (EPCRS) Self Correction, Voluntary Compliance Program, and Audit CAP 7

8 Audit Overview Procedure General procedure for IRS and DOL audits Selection for audit Initial contact by the IRS or the DOL Document request Site visit Additional requests Discussion of issues Correction of failures Completion of audit 8

9 Form 5500 Overview Electronic filing required annually using DOL EFAST2 system Exceptions for certain government and church plans, and one participant plans that have assets of $250,000 or less as of the close of the plan year Designed to satisfy annual reporting requirements under ERISA and the Internal Revenue Code Requirement to file is for the plan administrator, not the plan sponsor Single Form 5500 is filed for a single employer plan even if there are multiple related employers participating Participating employers in a multiple employer plan must file separate schedules if contributions for each employer fund only that employer s employees Employers must keep records of information used to prepare the Form 5500 for at least six years after the Form 5500 is filed 9

10 Form 5500 Small Plans Form 5500-SF: 401(k) plans with fewer than 100 participants may be able to file the Form 5500-SF Rule: If a plan files as a small plan in one year, and has at least 80, but not more than 120, participants at the beginning of the following plan year, the plan can file as a small plan for that following plan year The plan must also (i) be eligible for the small plan audit waiver, (ii) hold no employer securities, and (iii) have 100% of its assets in investments that have a readily ascertainable fair market value Form 5500-EZ: One participant plans with assets in excess of $250,000 as of the close of the plan year must file the Form 5500-EZ 10

11 Form 5500 Requirements Due date is generally seven months after the end of the plan year or short plan year (July 31 for calendar year plans) Two and one-half month extension available by filing the Form 5558 with the IRS (extension until October 15 th for calendar year plans) Automatic extension to due date for plan sponsor s tax return in certain circumstances (but not later than nine and one-half months following the end of the plan year) 11

12 Form 5500 Requirements, continued Part I: Annual Report Identification Information Plan year, type of plan, type of filing, extensions Part II: Basic Plan Information Plan name, number, effective date, plan sponsor information, preparer information, plan administrator information, number of participants Electronic signature using EFAST2 12

13 Form 5500 Schedules Schedule A (insurance information) Schedule C (service provider information) Required for plans with 100 or more participants, generally for service providers paid $5000 or more Not required for plans with fewer than 100 participants Schedule D (DFE/Participating Plan Information) information on participation in pooled investment or insurance arrangements Schedule G (financial transaction information) Not required for plans with fewer than 100 participants 13

14 Form 5500 Schedules, continued Schedule H (financial statement and related information, including auditor s report) Not required for plans with fewer than 100 participants Schedule I (financial statement and related information for small plans) Schedule R (retirement plan information, including distributions) 14

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16 Potential Issues or Reasons for Audit EFAST2 system challenges DOL will take into account good faith attempts to file correctly Failure to file Form 5500 or late filing Delinquent Filer Voluntary Correction (DFVC) program available Incomplete filing Plan administrator can file a revised Form 5500 within 45 days of the DOL s notice of rejection Failure to maintain proper records Informal comments indicate plans should keep an actual signed copy of the Form 5500, even though submitted using an electronic signature 16

17 Penalties Civil Penalties Separate penalties can be assessed by the DOL and IRS DOL penalty of up to $1,100 per day (reduced penalties under the Late- Filer and Non-Filer Enforcement Programs) IRS penalty of $25 per day (capped at $15,000) Penalty for failure to file a Form 5500 Rejected Form 5500s are treated as not filed Criminal Penalties Under ERISA, up to $100,000 and ten years in prison (maximum fine of $500,000 if the entity is not an individual) for willful violation Federal criminal penalties (e.g. for knowingly making a false statement or concealing information) 17

18 Additional Filings Form 8955-SSA (Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits) Same deadline and extension rules as Form 5500 Filed with the IRS Formerly the Form SSA Form 8822-B (Change of Address or Responsible Party Business) Due within 60 days of the change in address or identity of a plan s responsible party 18

19 DOL Audit Triggers Participant complaints Form 5500 review At-risk employers vulnerable to selection for audit Specific DOL reasons for certain audits (e.g. looking into plan administration at certain industries) Random selection 19

20 DOL Audits Document Requests Typical Document Request includes: Plan Document and SPD Fidelity Bond and Fidelity Insurance Policy Form 5500s for the past three years, and Summary Annual Report for the previous year Trust agreement and trustee statements for the past three years Service provider agreements Meeting minutes Asset records and payroll/contribution records 20

21 IRS Audits Document Requests IRS generally requests various documents and information related to 401(k) plans Plan and trust governing documents Amendments (including proof of adoption) IRS determination letter Summary plan descriptions Payroll records and tax forms Documents relating to contributions Corporate minutes relating to plan 21

22 Plan Document Compliance Plan, trust and amendments must comply with the law in form Plan and trust documents Interim amendments IRS determination letter Sample IRS audit request Copies of the plan and trust documents, including the original plan and trust documents, all amendments, adoption agreements and restatements thereto, from the inception of the plan to the present Copies of all determination and/or opinion letters that the plan has received from its inception to present 22

23 Operational Compliance Plan must be operated in accordance with its terms and applicable law Most issues in an IRS audit focus on operational compliance Common issues reviewed during an IRS audit Eligibility and Vesting Timing of Salary Deferrals Compensation Definitions ADP/ACP Testing Distributions and Hardship Withdrawals 23

24 Eligibility and Vesting Properly apply eligibility requirements and vesting standards Allow employees to participate and make elective deferrals Vest benefits in accordance with plan terms and IRC requirements Sample IRS audit request Copy of employee census reports and/or valuation reports, which should include date of birth, date of hire, date of termination, and total hours worked during the year, as to each employee Copy of payroll records used to decide employees eligibility and vesting (e.g., time cards, personnel records, employment contracts) Copies of Forms 940, 941, W

25 Salary Deferrals Timely deposit salary deferrals Sample IRS audit request Copies of payroll records Copies of all cancelled checks (front and back), wire transfers or other documentation substantiating all contributions made to the plan for the year(s) under examination Provide a reconciliation showing when the pay period ended, when employees were paid, when the deposits were made and, if possible, when the deposits were received by the custodian 25

26 Compensation Definitions Different compensation definitions used for various purposes Deferrals and other contributions Testing 415, nondiscrimination, top heavy Sample IRS audit request Identify plan provisions that define compensation and provide an explanation of how compensation is determined for plan purposes Sample calculations for applying compensation definitions for various purposes under the plan 26

27 Nondiscrimination Testing Compliance with actual deferral percentage (ADP) and actual contribution percentage (ACP) tests Properly include/exclude eligible employees Correctly classify highly compensated employees Compensation definition Corrective measures taken, if any Safe harbor requirements, if applicable Safe harbor notice to participants 27

28 Nondiscrimination Testing (continued) Sample IRS audit request Copy of ADP and ACP tests, including a list of all highly compensated employees and all eligible employees and an explanation of how the figures on the tests correspond to the compensation and deferrals listed on Form W-2 Sample calculations demonstrating how correction was made, if any corrective measures taken to satisfy ADP and ACP testing Samples of safe harbor notices sent to participants 28

29 Distributions and Hardship Withdrawals Administer distributions and hardship withdrawals in accordance with plan terms Sample IRS audit request List of all participants who received a distribution and their dates of hire and termination, as well as proof of payment/rollover, all notices provided to terminated participants Sample calculations showing the benefits paid to participants, including the compensation that was used, years of service, etc. Copies of hardship withdrawal files Copies of Forms 1099R (statement of recipients of total distributions) 29

30 Penalties Threatened sanction Loss of tax-qualified status Audit CAP Enter into a settlement agreement with IRS resolving compliance failure Negotiate settlement to tailor penalty to the compliance failure Correct compliance failure as stipulated in closing agreement Improve internal controls prospectively Pay fine to IRS and excise taxes, if any End of IRS audit 30

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32 The Unique Alternative to the Big Four 401k Annual Audits Best Practices for Audit Preparation Jen Aras, CPA Senior Manager, Crowe Horwath LLP Sacramento, California

33 The Unique Alternative to the Big Four Before anything else, preparation is the key to success. - Alexander Graham Bell Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 33

34 The Unique Alternative to the Big Four Know What to Expect CPA performing a financial statement audit, not a compliance audit, BUT. Plan financial statements do include information prescribed by ERISA Audit will provide valuable insight to assist in any regulatory reviews Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 34

35 The Unique Alternative to the Big Four Know What to Expect What procedures will the auditor perform? Obtain an understanding of the Plan Obtain an understanding of transaction and entity level internal controls Perform plan level testing Perform participant/employee level testing Test the financial statement disclosures Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 35

36 The Unique Alternative to the Big Four Who is Running the Show? Identify the owner of the audit process at the Plan Sponsor Understand roles and responsibilities What audit information will be received from TPA versus Plan Sponsor? Can the auditor contact the TPA directly? Who is preparing the financial statements? What will be the involvement of HR / Payroll / Financial Reporting? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 36

37 The Unique Alternative to the Big Four Communication is Key Schedule an audit planning meeting with all parties involved Schedule status checks during audit fieldwork Schedule check-ins and establish timelines for work performed after fieldwork, leading up to engagement delivery Schedule an autopsy meeting at the end of the audit Never to early to prepare for the next year! Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 37

38 The Unique Alternative to the Big Four Start With the End Goal In Mind Expected deliverables Audited financial statements Form 5500 Audit Communications letter Audit findings letter Establish a timeline for the audit Audit package available from the TPA Regulatory filing dates Oversight Committee meeting dates Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 38

39 The Unique Alternative to the Big Four How do we get there? Know your plan Understand how information is processed and who is involved Document what you do Initial or sign off as prepared, with the date Have an independent review documented If the auditor cannot see it, then it did not happen Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 39

40 The Unique Alternative to the Big Four How do we get there? Keep notes from prior audit What information was needed late in the game? What were the hold ups to the audit process? Ask for samples of internal control documentation or checklists the auditor is using Will help you be prepared for questions in the field May help you to identify additional controls to add to your plan operations Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 40

41 The Unique Alternative to the Big Four How do we get there? Perform your own reconciliations and testing procedures Contributions sent to the plan Distributions from the plan Plan transfers Changes in investment options New participants to the plan Changes in participant data Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 41

42 The Unique Alternative to the Big Four How do we get there? Ask your auditor for a checklist of information they will request Don t be overwhelmed by the request list Traditional reporting package will meet the majority of the auditor s needs Footnote disclosure requirements are standard, but audit procedures are not Audit standards require a degree of unpredictability in procedures as well Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 42

43 The Unique Alternative to the Big Four How do we get there? Obtain SOC 1 / SSAE 16 reports from your service providers for the period under audit TPA / custodian / recordkeeper Payroll Valuation Review the SOC 1 report Audit report List of controls tested Exceptions and potential impact on your plan User controls Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 43

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45 The Unique Alternative to the Big Four Sample Request List Plan Level Documents: 1 2 Requested Item A copy of the plan document and copies of any amendments to the plan, if applicable. A copy of the most recent IRS determination letter. 3 Copies of the minutes of any Board of Director or Committee meetings that related to the Plan Inform auditors of any litigation related to the Plan or any attorneys that were used for Plan matters (i.e. Plan amendments). Copies of the final tax discrimination tests for the plan. Plan s CENSUS : A list of all employees employed at any time during the plan year. This list should include name, social security number (or employee number), date of birth, date of hire, date of termination, compensation, employee deferrals, and employer contributions, if applicable. In addition, please provide a reconciliation of total compensation from this listing to total wages per the W-3 for the year or per the year end payroll report. Comments DOCUMENTATION: Plan document and all amendments should be SIGNED and DATED DOCUMENTATION: Keep recent and prior letters. Read for any exceptions. DOCUMENTATION: Memorialize key decisions such as approval of PS contributions, changes to investment mix, plan amendments. This documentation will serve as evidence of fiduciary oversight Maintain copies of invoices and correspondence for Plan-related litigation or other Plan matters DOCUMENTATION: Evidence that someone reviewed and documentation of corrective measures taken. Show evidence of review and approval. DOCUMENTATION: Reconciliation of total compensation from this listing to total wages per the W-3 for the year or per the year end payroll report. Ensure deferrals match the trust records If ER contributions, ensure they match deposits to the trust Evidence of review! Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 45

46 The Unique Alternative to the Big Four Sample Request List Plan s Financial Information Requested Item 7 Trust statements from your Custodian or Recordkeeper 8 9 Form If your Plan is audited, support for investment fair value disclosure, including management s analysis of classification for level 1, 2 or 3 investments. This is important if your Plan invests in Level 3 investments, i.e. Partnerships or private stock. Comments A member of management should review these annual and quarterly statements to ensure they meet expectations. DOCUMENTATION: Initial and Date evidencing review. A member of management should review for accuracy. If your plan is audited, compare the balances to the audit report. DOCUMENTATION: Initial and Date evidencing review. Sponsors may not just rely on their Custodian or Trustee. What has management done to validate the accuracy and timeliness of values? 10 Original documentation supporting loan activity for the Plan Documentation: Signed request form AND approval. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 46

47 The Unique Alternative to the Big Four Sample Request List Contribution Testing Requested Item Provide a schedule for all contributions remitted to the trust during the year, including those amounts that were paid subsequent to year end. Provide support for the contributions made to the Plan, such as wire transfer support. 16 Provide the formula for calculating EE and ER contributions for the plan year. Eligibility Testing Comments Documentation: Keep a list evidencing date payroll withheld, verification that what left the payroll made it to the plan and record of timeliness. Establish strong controls over timeliness. Documentation: Keep support AND approval for such transfers. Common errors: Wrong definition of compensation, incorrect ER Profit Sharing contributions. Perform spotchecks. Keep documentation Requested Item Personnel records verifying date of birth and date of hire. Please note that we prefer a document that was prepared and signed by the employee, such as an application or enrollment form. If an employee is eligible to participate in the Plan, please provide his or her election form indicating that he or she accepted or declined participation. What controls does the sponsor have in place to check for correct eligibility? Comments Personnel files shall be kept current. Auditors look for support for demographic information AND support for participant s pay. Common errors: No pay rate changes in files. Auditors are looking for validation of appropriate inclusion or exclusion from the Plan. Sometimes this documentation is electronic and maintained by the Custodian. Consider testing/spot-checking. Also, keep a narrative of the controls over this process. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 47

48 The Unique Alternative to the Big Four Sample Request List Distribution Testing 17 Requested Item A list of all participants who received distributions from the Plan. This list should include the participant s name, the amount of the distribution, and the date of the distribution. 18 A list of all expenses paid by the Plan for the year including service provider and amount paid. Other Items Requested Item Correspondence with the Department of Labor and/or Internal Revenue Service related to the Plan and a copy of your response. A copy of communications from your auditor regarding any Plan deficiencies or weaknesses and your planned response A copy of the most recent Report on controls Placed in Operation or Report on Controls Placed in Operation and Tests of Operating Effectiveness (SSAE 16 Report) for any service providers. Comments Documentation: Auditors will test that distributions were appropriately requested by the participants, spousal consent was obtained if applicable AND the distribution was approved. Sometimes this occurs at the Custodian however, Sponsors should spot-check listings to see if anything appears unusual. An initialed listing/notation would be evidence of review. Many plans don t pay expenses however, evidence of approval is important if paid out of Plan. Comments Documentation of response. Committee approval may be appropriate. Documentation of how Sponsor plans to fix, evidence of fix or written response. Evidence of management s review and comments on any exceptions noted. Will exceptions impact your plan? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 48

49 The Unique Alternative to the Big Four Most Common Audit Findings Some errors and audit findings persistently surface Errors or inconsistency in the definition and application of compensation Inconsistency in the timing of remitting participant deferrals Lack of documentation of controls in place at Plan Sponsor Reconciliations and independent reviews Meetings of those charged with governance Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 49

50 The Unique Alternative to the Big Four For more information, please contact: Jen Aras, CPA Senior Manager, Audit Services Crowe Horwath LLP 400 Capitol Mall, Suite 1400 Sacramento, California Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 50