Workshop 5 Defined Benefit Takeover Issues Lynn M. Young, MSPA, EA Pinnacle Plan Design, LLC Tucson, AZ Richard Kutikoff, MSPA, FSA, EA Pacific Benefit Services, Inc. Sherman Oaks, CA Defined Benefit Takeover Issues A. Initial Consulting Issues Getting Started Why am I getting this new client? Do I really want this new client? 1
Defined Benefit Takeover Issues B. Typical Technical Issues What information do I need? (Everything) What can go wrong? (Everything) How can I solve the existing problems? Defined Benefit Takeover Issues C. Making the Transition Work - Consulting and Professionalism Who is the cause of the problems? Can I solve these problems? What should I do it the problems cannot be solved? (Don t make their problem your problem!) If OK, becomes a normal ongoing client 2
80/20/80 Takeover Rule The 80/20 Rule 80% of your headaches come from 20% of your clients. The 80/20/80 takeover rule 80% of your headaches come from 20% of your clients. Of the 20% of your clients, 80% of these are takeovers. Ask for information Takeover Process Obtain and review information Identify problems Fix problems Move on 3
Consulting Issues Practice Growth Number of current DB plans = (Lynn-use this or next slide) Number of prior plans + New plans of existing clients + New plans of new clients + Existing plans of new clients (takeovers) - Terminating plans of existing clients - Clients with plans that you resigned or they fired you Practice Growth Takeovers can be an important part of practice growth - Many of your current clients were takeovers at some point - Business decision - Accept only easy takeovers - Accept easy and hard takeovers - Focus on hard takeovers 4
Consulting Issues What Have I Gotten Myself Into? The good many are fairly clean The bad many have solvable problems Some with relatively little work Some with significant work The ugly some have virtually unsolvable problems Significant technical issues Difficult clients Problems with other advisors Why are you getting this new client? Prior actuary - Good work but high fee 5
Why are you getting this new client? Prior actuary - Low fee but bad work Type of bad work Technical Timing Communication / coordination Lack of documentation Client perception Different style of prior actuary/tpa might not mean bad work Apparent bad work might be good --- prior actuary/ TPA may have additional/historical information! Why are you getting this new client? Prior actuary - Low fee but bad work Whose fault? Was bad work due to client or other advisor? Was bad work due to TPA/actuary Reputation of prior TPA/actuary 6
Why are you getting this new client? Nothing wrong with fees or work quality Better relationship with other advisor(s) / gatekeepers Personal contact with decision maker So, if you get this new client Who is your client? (plan sponsor, owner, advisor, participants?) If there are problems, do you correct them? Are you required to correct them? If yes, how do you correct them? Do you know how to correct them? What is the impact of the required correction? What if the Plan Sponsor cannot (or will not) implement the required correction. Are there other advisors involved? 7
So, if you get this new client Avoid surprises Disclose services, in writing Disclose responsibility, in writing Disclose fees, in writing (When?) (When?) (When?) Fixed fees? (What if it s worse than expected?) Fixed fees plus hourly? Hourly for first year? Retainer? Loss leader? Technical Issues Data / Documents Needed How much information do I need? You need everything! How far back do I go? As far back as necessary Send detailed list 8
Data / Documents Needed You need everything! To identify problems and price services To accept or decline engagement To fix problems To defend solution in future It s the Plan Sponsor s problem Don t make his problem your problem Data / Documents Needed You need everything! (How far back?) Signed documents Plan documents (incl. base document) Amendments Trust documents Resolutions Determination Letter or Volume/Prototype approval letter 9
Data / Documents Needed Participant communication (How far back?) Summary Plan Descriptions Summaries of Material Modifications Benefit Statements Summary Annual Reports Annual Funding Notices AFTAP notices Data / Documents Needed Government filings and related items 5500s (including Schedule SB) Plan Sponsor elections AFTAP certifications Plan audit (if applicable) PBGC premium filings How far back? 10
Data / Documents Needed Actuarial valuations Prior reports Participant data Includes ownership, officers, relatives Calculation of prior terminated vested or retiree benefits Assets and methodology Valuation of illiquid (non qualifying) assets Use of smoothed asset values Section 10.34 Circular 230 Subpart B Preparation Standards Practitioner may generally rely on information furnished by client without verification Cannot ignore what is actually known Must make inquiry if information appears to be Incorrect Incomplete Inconsistent with another fact 11
Data / Documents Needed Coverage / non discrimination testing Information about other plans Information about other employers Determination of Controlled Group status Determination of Affiliated Service Group status Common ownership Relatives Business relationships Technical Issues Problems (Solutions) What can possibly go wrong may actually have gone wrong. Plan sponsor is ultimately responsible We can help, but only if We have ability to help, and Plan sponsor is willing to accept help Professional conduct 12
Circular 230 Subpart B Proposed Section 10.35 Competence Practitioner must possess the requisite competence to practice before the IRS Competence requires knowledge, skill, thoroughness, and preparation necessary for the matter Technical Issues Problems (Solutions) What can possibly go wrong may actually have gone wrong. EPCRS is your friend A good ERISA attorney is also your friend Peer review (internal or external) Help from IRS or PBGC or DoL 13
Problems (Solutions) Bad document history (EPCRS?) Unsigned documents Documents signed late Missing documents/amendments Were they not done or simply missing? Bad content Problems (Solutions) Incorrect actuarial valuations (unable to replicate results) - Technical IRS - Within IRS 3%/5% corridor? due to: Methodology differences Calculation errors (data, programming, benefit formula) Not understanding actuarial principles Not understanding PPA funding rules Sloppiness, not caring 14
Problems (Solutions) Incorrect actuarial valuations (unable to replicate results) - Consulting Funding MRC and deduction limit overstated? MRC and deduction limit understated? Qualification Impact on AFTAPs (material or immaterial) Incorrect treatment of insurance Problems (Solutions) Incorrect administration Inconsistent with documents (fix, EPCRS?) Incorrect benefit payments (fix) Wrong amounts Bad or no election forms No documentation No 1099R s AFTAPs not done or missing (EPCRS?) Notices not provided Improper lump sums 15
Problems (Solutions) Incorrect administration Bad loans (fix, EPCRS?) Not allowed in plan Allowed but no documentation Allowed but improper documentation Allowed but not (timely) repaid; 1099-R s? AFTAPs not done or missing (EPCRS?) Notices not provided Improper lump sums Problems (Solutions) Incorrect Government Filings 5500s (Amend filing?) Bad asset values Insufficient bonding (particularly with nonqualifying assets); audit? No contribution documentation Incorrect PBGC filings (Amend filing?) Premium payments Mandatory notices 16
Problems (Solutions) Plan Qualification (EPCRS) Document problems Incorrect treatment of Controlled Group or Affiliated Service Groups Incorrect or unavailable 410(b) / 401(a)(4) testing 401(a)(26) Problems (Solutions) Cash Balance Plans all of the above, plus Incorrect pay credits Incorrect interest credits Incorrect vesting schedule Bad plan document Bad benefit payment election forms 17
Circular 230 Subpart B Proposed Section 10.35 Competence Practitioner must possess the requisite competence to practice before the IRS Competence requires knowledge, skill, thoroughness, and preparation necessary for the matter Problems (Solutions) Defined Contribution Plans all of the above, plus Incorrect data pay, hire date, hours worked Incorrect investment allocations Incorrect treatment of forfeitures Incorrect ADP/ACP tests, corrections Safe Harbor notices not provided Incorrect 401k eligibility 18
Problems (Solutions) Special Situations Mergers and Acquisitions (Consulting) Union employees (Consulting) Prior IRS/DoL audits (Completed?) Ongoing IRS/DoL audits (Your responsibility or Prior Actuary s responsibility? Is an attorney involved?) Making the Transition Work Cooperation of the prior actuary/tpa One of the most critical aspects of a takeover Valuable historical knowledge Explanation of apparent errors Missing documents / files 19
Making the Transition Work Other People Involved Second prior actuary Second prior TPA Change in ownership of Plan Sponsor Change in senior personnel at Plan Sponsor (HR head, CFO) Change in advisors (CPA, investment advisor, attorney) Making the Transition Work Prior actuary Usually has the most historical knowledge Prior fee disputes Subject to ASOPs Codes of Professional Conduct Other published guidance When to report prior actuary 20
ASPPA Code of Professional Conduct 8. Courtesy and Cooperation (Part B) When a Principal has given consent, the Member shall cooperate in assembling and transmitting pertinent data and documents, subject to receiving reasonable compensation for the work required to do so. ASPPA Code of Professional Conduct 8. Courtesy and Cooperation (Part B, continued) The existence of a fee dispute generally does not relieve the Member of this responsibility, except to the extent permitted by applicable state Law. 21
ASPPA Code of Professional Conduct 8. Courtesy and Cooperation (Part B, continued) The Member shall promptly, at the request of the Principal return any and all records of the Principal that are necessary for the Principal to comply with federal tax law. The Member need not provide any items of a proprietary nature or work product for which the Member has not been compensated. Section 10.28 Circular 230 Subpart B Return of a Client s Records Must be promptly returned upon request Copies may be retained Generally, if a fee dispute still return items 22
Section 10.28 Circular 230 Subpart B Records include items Pre-existed practitioner s retention Prepared by client or third party Does not include practitioner-prepared documents Withheld pending fee payments Making the Transition Work Business / Consulting Considerations Let s assume that it s a mess Let s assume the client is unhappy How to clean up the mess 23
Making the Transition Work How to clean up the mess Unhappy client Getting hired (Remember earlier) Disclose services, in writing Disclose responsibility, in writing Disclose fees, in writing Making the Transition Work How to clean up the mess Unhappy client Fees (Remember earlier) Advance retainer? Fixed fees? (What if stuck?) Fixed fees plus hourly? Hourly for first year? Loss leader? 24
Making the Transition Work How to clean up the mess Fix with EPCRS Unhappy client Consulting fees IRS fees Cost of additional benefits IRS visibility Making the Transition Work How to clean up the mess Fix with EPCRS If client agrees What if client doesn t agree Involve other advisors in decision Can you keep client? Should you keep client? Accident waiting to happen When should an attorney be used? 25
Making the Transition Work How to clean up the mess The role of the referral source Can help solve problems What if referral source is the cause of the problems? What if referral source is a major referral source for your firm? Who is the client? Conflict of interest? Making the Transition Work How to clean up the mess Funding level seriously overfunded Impact of reversion and excise tax How much advance time; can liability reach asset levels without future contributions? Does Plan covers owner or owner + employees? 26
Making the Transition Work How to clean up the mess Funding level seriously underfunded Magnitude of underfunding Financial health of employer Attitude of business owner. Who is covered? Owner only Owner + employees, not PBGC-covered Owner + employees, covered by PBGC Not Every Transition Can Work What if mess cannot be cleaned up by you? Don t get in over your head Get help (other actuary, attorney) 27
Circular 230 Subpart B Proposed Section 10.35 Competence Practitioner must possess the requisite competence to practice before the IRS Competence requires knowledge, skill, thoroughness, and preparation necessary for the matter Not Every Transition Can Work What if the mess simply cannot be cleaned up? When to fire client? Client is unable / unwilling to fix problem Client is unable / unwilling to pay fees Ethical concerns with client Disclose / document In Writing 28
Section 10.34 Circular 230 Subpart B Preparation Standards Practitioner may not willfully or incompletely sign a return or advise client Lacks a reasonable basis Willfully attempts to understate the tax Intentionally disregards rules and regulations Section 10.34 Circular 230 Subpart B Preparation Standards Practitioner may not advise or allow a client to submit a document or paper to IRS that is Frivolous Intentionally disregards rules and regulations 29
Not Every Transition Can Work What if mess cannot be cleaned up? When to fire client? Don t make their problem your problem Remember the 80/20/80 Takeover Rule The 80/20/80 takeover rule 80% of your headaches come from 20% of your clients. Of the 20% of your clients, 80% of these are takeovers. 30
Remember the 80/20/80 Takeover Rule With skill, planning and attention to detail 80% of your headaches come from 20% of your clients. Of the 20% of your clients, 80% of these are takeovers. Most of the remaining 16% can be fixed, and can become normal, ongoing clients. 31