Operating in Compliance Understanding IRS and DOL Audit Hot-button Issues and How Plan Sponsors Can Address Them GREGORY D JONES QUALIFIED PLAN SPECIALIST JANUARY 19, 2017 Greg Jones and his associated firm are not affiliated with OppenheimerFunds or any of its affiliates. Products offered through OppenheimerFunds. t FDIC Insured May Lose Value t Bank Guaranteed Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 2014 OppenheimerFunds Distributor, Inc. All rights reserved.
AGENDA IRS and DOL enforcement update IRS and DOL audit hot buttons and hypothetical and actual case studies 401(k) plan check-up Support network ERISA is a highly complex area of law. The information contained in this material is strictly educational in nature and is not intended as legal advice. Clients are strongly encouraged to obtain legal advice from a qualified expert. 2
3 IRS AND DOL ENFORCEMENT UPDATE
Enforcement Framework Focus Fiduciary rules and participant protections Impact Fiduciaries and service providers Timely contributions Focus Compliance with tax rules Impact Operational compliance 401(k) questionnaire 4
Employee Plans (EP) Compliance Trends and Tips IRS Employee Plans Enforcement Guidance: EP Examinations Trends and Tips IRS website, 2014 http://www.irs.gov/retirement-plans/ep-compliance-trends-and-tips 5
IRS LESE Exam Projects Learn, Educate, Self-Correct, Enforce (LESE) Focused IRS examinations Based on a sampling generally about 50 plans Similar characteristics that the IRS believes may reveal problems Assess compliance levels for selected groups of retirement plans 6
401(k) Compliance Questionnaire Measure Compliance levels Risk factors Determine new compliance projects Hardship distributions Roth contributions Top-heavy plans Excess corrections Provide Questionnaire Self-Audit Tool IRS website, 2014 http://www.irs.gov/pub/irs-tege/401k_final_report.pdf 7
8 IRS AND DOL AUDIT HOT BUTTONS AND CASE STUDIES
IRS Audit Hot Buttons Common Plan Failures Failure to timely update plan documents Failure to operate the plan in accordance with plan terms Compensation definition Matching contributions ADP/ACP nondiscrimination tests Eligible employees 402(g) deferral limit Deferral deposits Hardship distributions Loans Sources: 2013 IRS 401(k) Plan Checklist; Internal Revenue Manual, EP Exam Guidelines, Section 2 9
Missed/Unsigned Plan Documents and Amendments IRS Actual Case Study Christy & Swan Profit Sharing Plan v. Commissioner of IRS (March 2011) Failed to restate for Economic Growth and Tax Relief Reconciliation Act (EGTRRA) Missed other interim amendments Chose not to correct through IRS Employee Plans Compliance Resolution System (EPCRS) Consequence: retroactive disqualification (employer/ employees) Tax deductions disallowed Participants plan balances are taxable Source: Christy & Swan Profit Sharing Plan v. Commissioner of IRS, T.C. Memo 2001-62 (Mar. 15, 2011) 10
Employee PLANS COMPLIANCE RESOLUTION SYSTEM (EPCRS) IRS Revenue Procedure 2013-12 Process Fee Types of Errors Voluntary Correction Program (VCP) Employer initiated, IRS submission Reduced fee based on number of participants Operational, document, demographic, & employer eligibility errors Audit Closing Agreement Program (Audit CAP) IRS initiated Penalty based on various factors Errors discovered under IRS audit Self-Correction Program (SCP) Employer initiated, no IRS involvement fee Operational errors 11
Eligible Participants Excluded Hypothetical Case Study: Facts Employer D 401(k) plan 8 participants Plan operates on a calendar year basis January 1 and July 1 entry dates Employer matching contribution 50% matching contribution on deferrals up to 10% Employee Jack erroneously excluded Should have been given the opportunity to make elective deferrals on January 1, 2013 Was not provided the deferral opportunity until January 1, 2014 Jack is a non-highly compensated employee (NHCE) Jack s compensation for 2013 was $80,000 The actual deferral percentage (ADP) NHCEs for 2013 was 8% te: The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed and a financial advisor should be consulted. 12
Eligible Participants Excluded Hypothetical Case Study: Correction Employer D must make a corrective contribution for the 2013 missed deferral opportunity and the missed matching contribution Calculation 1 : $80,000 (Jack s salary earned during period he was excluded) x.08 (ADP of NHCEs = 8%) $ 6,400 (Missed Deferral) x.50 (50% x Missed Deferral) $ 3,200 (Corrective deferral contribution by employer Qualified n-elective Contribution (QNEC)) + 3,200 (50% match on Missed Deferral - $6,400 x.50) $ 6,400* (Full corrective contribution by Employer D) * The corrective contribution must be adjusted for earnings through the date of the correction Additional IRS fees and penalties may apply Correction amounts add up significantly if eligible errors occur with multiple employees or over multiple years te: The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed and a financial advisor should be consulted. 1. See IRS Revenue Procedure 2013-12 13
Eligible Participants Excluded- continued Hypothetical Case Study: Correction Q: Is the penalty always 50% of missed deferrals? A:. 50% is actually a corrective contribution requirement rather than a penalty. The 50% QNEC amount is dictated by the IRS in Rev. Proc. 2013-12, where the IRS explains the corrections options and suggests correction methodologies for certain common errors, such as the missed deferral opportunity. 14
DOL Audit Hot Buttons Fiduciary Breaches Failing to Operate the plan prudently and for the exclusive benefit of participants Properly value plan assets or to hold plan assets in trust Follow the terms of the plan Properly select and monitor service providers Using plan assets to benefit The plan administrator The plan sponsor 15
DOL Corrections Program Delinquent Filer Voluntary Compliance Program (DFVCP) Late or inaccurate Form 5500 filings Voluntary Fiduciary Corrections Program (VFCP) Delinquent participant contributions Delinquent participant loan repayments Improper payment of expenses from plan assets Payment of excessive or unnecessary compensation Improper handling of defaulted participant loans Purchase of assets by plans from a Party in Interest Inadequate fidelity bond Failure to timely deliver participant Summary Plan Description (SPD) and notices 16
Delinquent Deposits Hypothetical Case Study: Facts Company A s pay periods Employees paid every other Friday Participant deferrals each pay period: $25,000 Participant deferral contributions reasonably can be segregated from Company A s general assets by 10 business days following each pay day Pay period ending March 6, 2012 Company A should have remitted participant deferral contributions by March 20, 2012 (the Loss Date) Date remitted: May 18, 2012 (the Recovery Date) In 2014, the plan sponsor discovers it made a late payment in 2012 The plan sponsor decides to use the DOL Voluntary Fiduciary Corrections Program to correct the late payments te: The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed and a financial advisor should be consulted. 17
Delinquent Deposits Hypothetical Case Study: Correction Determine the corrective contribution amount (use DOL VFCP Online Calculator) Lost earnings on the principal amount Interest on lost earnings Data for Online Calculator Principal Amount: $25,000 Loss Date: March 20, 2012 Recovery Date: May 18, 2012 Final Payment Date: March 14, 2014 Online Calculator repayment amount: $127.99 Administration costs (service fees for calculation and allocation) DOL website, April 2014 18 te: The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed and a financial advisor should be consulted.
DOL Audit Hot Buttons Fiduciary Breaches Fees Fiduciary duty pay only necessary and reasonable fees ERISA 408(b)(2) service provider fee disclosure rules Proposed fee guide Model fee guide www.dol.gov/ebsa/pdf/408b2sampleguide.pdf 19
Tussey v. ABB, Inc. Plan Fees Participants alleged plan fiduciary failure to Monitor recordkeeping fees Benchmark fees Follow Investment Policy Statement District Court Judgment & Award Plan sponsor fiduciary breach failure to monitor & benchmark fees $13.4 million Appeals Court Decision Upheld Plan sponsor fiduciary breach selecting high expense share classes when lower-expense option available $21.8 million Vacated & remanded to district court Tussey v. ABB, Inc.,. 12-2056 2014 WL 1044831 (8th Cir. Mar. 19, 2014) 20
Supreme Court Hearings on Fiduciary Claims Tibble v. Edison Selection of investment share classes Supreme Court deciding whether to hear case Dudenhoeffer v. Fifth Third Bank Employer stock drop case Presumption of prudence Oral arguments heard April 2, 2014 Tibble v. Edison International, 711 F.3d 1061 (9 th Cir. 2013) Dudenhoefer v. Fifth Third Bancorp,. 11-3012 (6th Cir. Sept. 5, 2012) 21
22 401(k) PLAN CHECK-UP
Plan Document Checklist: Is your plan document up-to-date? 1. Do you have a signed copy of the original plan document and each adoption agreement? Yes 2. Have you signed each IRS-mandated amendment and retained a copy?* Yes 3. Have you amended your plan document for each plan design change you implemented (e.g., automatic enrollment, designated Roth contributions)? 4. Do you have a copy of the IRS approval letter for your plan (e.g., opinion letter, determination letter)? 5. Have you kept written minutes or records of each board resolution approving the original plan and each amendment? 6. Do you have a copy of the Summary Plan Description (SPD) and amendments to the SPD? Yes Yes Yes Yes * Your plan document provider is the best resource for a list of required amendments. 23
Operations Checklist: Are the plan s operations based on the terms of the plan document? 1. Is the plan s definition of compensation for all deferrals and allocations used correctly? 2. Were employer matching contributions made to all appropriate employees under the terms of the plan? 3. Has the plan satisfied the 401(k) nondiscrimination tests (ADP and ACP)? Yes 4. Were all eligible employees identified and given the opportunity to make an elective deferral election? 5. Are elective deferrals limited to the amounts under IRC 402(g) for the calendar year? 6. Have you deposited employee elective deferrals in a timely manner? Yes 7. Do participant loans conform to the requirements of the plan document and IRC 72(p) 8. Were hardship distributions made properly? Yes Yes Yes Yes Yes Yes 24
Importance of Internal Controls Internal controls Prevent plan operation errors Help identify errors more quickly Reduce the scope/duration of an examination Sample Internal Control Procedures Compare deferral election forms with amounts deducted from employees wages Verify types of compensation used for allocations, deferrals and testing Check that service providers received accurate compensation records Verify years of service are accurately determined for eligibility and vesting Verify marital status and spousal consent for plan distributions Ensure participants received required minimum distributions 25
Service Provider Checklist: Are you prudently selecting and monitoring plan service providers? 1. Are the services necessary for the administration of the plan? Yes 2. Are the fees reasonable for the services provided? Yes 3. Have you documented the process you used to select (or review) your service providers and the reasons you selected each particular provider? 4. Have you compared the service provider s performance and fee schedule to other providers (e.g., RFP)? 5. Is the service provider required to be licensed? If so, is the license current? Yes 6. Has your service provider delivered the services outlined in your service agreement?* 7. Do you have any plan participant comments or complaints regarding the services?* Yes Yes Yes Yes *Applies when reviewing existing service providers 26
27 SUPPORT NETWORK
Support Network Financial Advisor Third Party Administrators or Bundled Service Providers Helps you understand your fiduciary responsibilities Regulatory updates Self-audit tools Gateway to compliance resources Investment information Resource for industry benchmarks Service provider selection and monitoring support Ongoing compliance and operational support Proactive monitoring of changes in the law and regulations Corrections support 28
Support Network Other Support Services Legal services Accounting and audit services OppenheimerFunds Plan Sponsor Fiduciary Resources Plan sponsor fiduciary support and educational programs Papers and Articles 29
Plan Sponsor Next Steps Design a compliance strategy Access your financial advisor s expertise to develop a plan Identify your other sources of compliance support TPA or bundled service provider OppenheimerFunds Assign internal responsibility Set a time table Initial review Periodic check-ups Document your compliance 30
Summary IRS and DOL engage in both compliance guidance and enforcement activities Proactive self-audits are essential to ensure compliance Building a support network is key to ongoing compliance 31
NEXT STEPS For more information, obtain a copy of the OppenheimerFunds Retirement Fiduciary Focus Series Contact us at [presenter includes contact information] 32
33 Q&A
Disclosures ERISA is a highly complex area of law. The information contained in this material is strictly educational in nature and is not intended as legal advice. Clients are strongly encouraged to obtain legal advice from a qualified expert. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks. including the possible loss of the principal amount invested. This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling 1.800.255.2755. Read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 2014 OppenheimerFunds Distributor, Inc. All rights reserved. MRF-2-10-31/11 May 28, 2014 RPL0000.039.0414 34