IRS Audits and DOL Investigations of Plans and TPAs · 23.04.2019 · IRS LESE Audits 27 Project...

IRS Audits and DOL Investigations

of Plans and TPAs

Fred Reish, APM, PartnerEmployee Benefits and Executive Compensation Practice Group

Drinker Biddle & Reath

[email protected] 23, 2019

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Audits and Investigations

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• Risks to Third Party Administrators:

➢Reputational risk.

➢Liability to plan and/or employer.

• Protections through process:

➢Policies and practices.

➢Checklists.

➢Training and supervision.

• IRS audit issues and DOL investigation issues.


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• Protection through service agreements:

➢Consulting services.

➢Reliance on information.

▪ Employer mistakes versus TPA mistakes.

➢Scope of services.

▪ Services to employer.

▪ Services to plan.


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• Self-correction and voluntary compliance programs.

• Filing Forms 5310.

• 408(b)(2) disclosures.

➢Changes to compensation.

• Service provider investigations.

• Accommodation subpoenas.

• TPA plans and provider payments.

• Producing TPAs.

IRS Audits

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Top Ten Issues for EP Examiners

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• When comparing multiple years, there is a large drop

in plan participants.

• There is a large decrease in plan participants from

beginning of the year to end of the year.

➢ Terminations on same day.

➢ Reason for severances.

• Not all of the participants from an acquired plan

continue to participate after that plan has been merged

with an ongoing plan.

1. Termination or Partial Termination


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Probably not. Routine turnover during the year is generally

not considered a partial termination.

Factors relevant to determining whether the turnover rate

is routine include:

We typically experience employee turnover in

excess of 20 percent per year. Is this a partial

termination?

• Information on the turnover rate in other periods and the

extent to which terminated employees were actually

replaced,

continued . . .IRS Retirement Plan FAQs regarding Partial Plan Termination.


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• whether the new employees performed the same

functions.

• whether the new employees had the same job

classification or title, and

• whether the new employees received comparable

compensation.

Continued . . .

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• The acquiring employer may exclude the matching

contribution for employees of the newly acquired

company.

• The acquiring employer might use incorrect

compensation amounts when computing the matching

contribution for business units of the newly acquired

company.

• Incorrect matching contributions due to inaccurate

participation dates for employees of newly acquired

companies.


2. Acquisitions


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• ADP/ACP percentage calculations may be performed

incorrectly.

• Newly acquired employees may have not been offered

an option to make elective deferrals or may not have

been considered for testing purposes.

3. Deferral Percentage Tests


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4. Compensation

• Multiple payrolls with different compensation coding.

• Definition of correspondence in plan document differs

from compensation reported.


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• Qualification issues exist where plans have not timely

adopted amendments leading to automatic

disqualification. These issues are resolved through

closing agreements.

– Terminated and distributed plans.

• The merger of plans into other plans - The plan

documents may not have been timely amended to

comply with all applicable laws prior to the time the

plans were merged.

5. Plan Document


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• Issues may exist where the accounts of participants age

65 and over have forfeitures. If the participant is age 65

or over, the participant should be 100% vested and

there should be no forfeitures.

• Plans may be using incorrect vesting schedules.

• Plans may fail to properly determine participants'

service correctly.

6. Vesting


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• Large distributions on the income statement relative to

plan assets or to a prior or subsequent plan year.

• Plans may fail to suspend "salary deferrals" of

participants receiving hardship distributions from their

accounts as required by I.T. Regulation 1.401(k)-

1(d)(2)(iv)(b).

• Plan participants, receiving premature distributions or

defaulting on plan loans, fail to report the distributions

and/or pay the 10% excise tax on their individual tax

returns.

7. Distributions and Loans

continued . . .


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• Return indicates that the plan terminated a long time

ago, but distributions did not take place.

• If the employer uses automated systems for participants

to secure plan loans, in-service distributions, or hardship

distributions, significant compliance issues may occur if

required documentation or spousal consents are not

secured and maintained.

• Distributions may be understated due to a plan's failure

to properly value employer real property or employer

securities in a closely held corporation.

7. Distributions and Loans

Continued . . .


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• Large percentage of assets classified as other assets on

the balance sheet.

• Large percentage of assets in one single investment.

• Large amounts of administrative expenses.

• Large percentage of assets invested in employer real

property or employer securities (other than in an ESOP).

8. Assets


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• Plan(s) may exceed IRC section 415 limits when plan

participants are participating in more than one.

• Employees may also exceed the IRC section 402(g) limit

when participants are participating in more than one plan

that offers elective deferrals.

9. Limits


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• Large corporations with decentralized payroll systems

may have problems administering the plan if there are

no internal controls to ensure plan provisions are

properly applied. For example, if each subsidiary

determines eligibility for plan participation, who is an

HCE, or what constitutes “plan compensation,”

significant compliance issues may occur in coverage

and allocations.

• Plan data used to prepare the 5500 returns does not

always match the actual records (such as payroll data).

10. Miscellaneous

IRS Fiscal Year 2019

Compliance Program

Compliance Strategies: “ . . . TE/GE employees submit

suggestions for consideration . . . . Once approved, these

issues are considered to be priority work. . . . In this

manner, TE/GE continuously ensures it is focused on the

highest known priority and emerging risks.”

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IRS TE/GE 2019 Compliance Program.

IRS Fiscal Year 2019

Compliance Program

A partial list of the 2019 compliance programs for

Employee Plans:

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• Small plans with large assets: determine whether smaller

plans with trusts holding large assets have taken deductions

on Form 1120, U.S. Corporation Income Tax Return,

exceeding IRC section 404 limitations.

• Terminated cash balance plans: assess terminated plans

with cash balance features that may have exceeded IRC

section 415 limitations, or generated a reversion which is

subject to an excise tax.

Prior Year (2018)

Compliance Program

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Compliance Strategies:

• Distributions: examine plans that failed to make required

distributions under IRC section 401(a)(9), failed to

distribute per plan terms (either in timing or form), and/or

failed to distribute the correct benefit amount.

• Trust investments in small plans: examine plans that failed to

properly value all assets at fair market value and/or failed

to properly reflect all plan assets in the name of the trust

(e.g., real estate investments).

continued . . .

IRS TE/GE 2018 Work Plan, September 28, 2017.

Prior Year (2018)

Compliance Program

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• Contributions/earnings allocations: examine plans that made

erroneous allocations of contributions and/or forfeitures due

to the use of an incorrect definition of compensation

and/or failed to make all matching contributions per plan

terms.

• Elective deferrals: examine plans that failed to withhold the

proper amount of elective deferrals per plan terms.

• Referrals: continue to pursue referrals received from sources

within and outside the IRS that allege possible non-

compliance by a retirement plan.

Continued . . .

IRS LESE Audits

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LESE examinations are the random selection of

approximately 50 returns with similar characteristics that

we believe may reveal problems. We use focused

examinations to measure compliance levels of the selected

groups retirement plans.

Employee Plans Learn, Educate, Self-Correct and

Enforce (LESE) Projects

IRS LESE Audits

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Small Plans with Participant Loans

We examined approximately 50 Form 5500 returns with:

• 10 or fewer participants, and

• Participant loans exceeding $100,000.

Project Results:

The most common issues were:

• Prohibited transactions.

• Not amending the plan for current law.

• Not having adequate fidelity bonding.

IRS LESE Audits

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Real Estate Investment & Participant Loans

We examined approximately 50 Form 5500 returns with:

• net assets under $5,000,000, and

• investments in real estate, and either

▪ participant loans, or

▪ Schedule D (DFE/Participating Plan Information)

Project Results:



• Plan assets not valued at fair market value.

• Late or Non-Amenders.

• Inadequate fidelity bonding.

IRS LESE Audits

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Forms 5500 with Non-Participant Loans

Overview:

We reviewed 50 Form 5500 returns of non-ESOP qualified

plans with reported investments in non-participant loans.

We used focused examinations and reviewed:

1. Plan qualification – compliance with current tax law in

form;

2. Trust investments (including the analysis of plan

loans); and

3. Distributions.continued . . .

IRS LESE Audits

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Project results

The results of this project reflected a substantial amount of

non-compliance.

The most common issues encountered were:

• Prohibited transactions (in six plans) involving loans to

disqualified persons.

• Seven plans examined contained operational failures

dealing with employees not participating timely. All

errors occurred because of the failure to follow plan

terms.

• Inadequate or insufficient bonding in six plans.

Continued . . .

IRS LESE Audits

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Form 5500 Plan Terminations Without a Form 5310

Filing

We examined 47 Form 5500 returns to obtain a snapshot view of

qualified plans where the Form 5500 reflected that the plan had

terminated, yet the IRS had no record that Form 5310 was

submitted.

Examination agents considered:

1. Plan qualification – compliance with tax law in form;

2. Distributions; and either;

• Plan assets if the plan was a defined contribution

plan, or

• Minimum funding requirements if the plan was a

defined benefit plan.continued . . .

IRS LESE Audits

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Project results

Overall, the terminating plans reviewed were generally in

compliance. However, there were some plans that failed to

comply with reporting, form or operational requirements.


• Not filing the final Form 5500, which you must continue to

file until all plan assets are distributed. The return should

indicate “final return” only in the year that the final asses

are paid.

• Failure to timely amend plans to comply with current law

and regulatory changes.

Continued . . .

Key Issues for Self-Correction

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➢ Compensation

➢ Participant loans

➢ Compliance with plan document provisions

Department of Labor

Investigations

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DOL Investigations

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• Participant complaints.

• Curious/suspicious figures within the Form 5500.

• Referral from other agencies.


Compliance Strategies:

DOL National Enforcement Project

[T]he PIC project . . . investigat[es] the receipt of improper orundisclosed compensation and supports the Department’s . . .initiatives . . . that plan fiduciaries and participants receivecomprehensive disclosure about service provider compensationand conflicts of interest.

PIC exams also focus on indirect compensation arrangements,

conflicted and undisclosed arrangements and arrangements

that are outside of market standards.

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Note: 408(b)(2) disclosures.

408(b)(2) Disclosures for Plans

“A description of compensation or cost may be expressedas a monetary amount, formula, percentage of the coveredplan assets, or a per capita charge for each participant orbeneficiary or; if the compensation or cost cannotreasonably be expressed in such terms, by any otherreasonable method.”

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DOL’s 408(b)(2) Regulation.

408(b)(2) Disclosures for Plans

“The description may include a reasonable and goodfaith estimate if the covered service provider cannototherwise readily describe compensation or cost andthe covered service provider explains the methodologyand assumptions used to prepare such estimate.

Any description . . . Must contain sufficientinformation to permit evaluation of the reasonablenessof the compensation or cost.”

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DOL’s 408(b)(2) Regulation.

DOL Investigations

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• General rule: “Segregated from the assets of the employer

(e.g., deposited into the plan) as soon as reasonably feasible,

but no later than the 15th business day of the following month.

• Practical DOL strategy: Examine pattern of deposits.

• Small plan (less than 100 participants) rule: No later than the

7th business day following withholding.

• Also applies to loan repayments.

Late deposit of deferrals:

DOL Investigations

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• Meeting at employer offices.

• Building directory.

• Preparation for interviews.

➢ Coverage of employees

DOL Investigations

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• DOL investigations of ongoing plans.

➢ See DOL guidance on terminated plans; FAB 2014-01.

• Fiduciary duty to search.

• Required minimum distributions.

• IRS non-enforcement policy (October 2017 Memorandum)

for required minimum distributions.

Missing participants:

DOL Investigations

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• Settlor fees paid by ERISA plans.

• ERISA budget accounts.

➢ Application of money.

➢ Allocation of money.

• Real estate holdings.

➢ Diversification

➢ Valuation.

Additional areas of concern:

DOL Investigation

Request for Information

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1. Documents that show names of all of [TPA’s] ERISA

client plans, addresses, contact names and telephone

numbers, and [TPA] client numbers.

2. All documents containing [TPA’s] guidelines, policies

and procedures, for servicing its ERISA-covered

plans.

3. All contracts or service agreements between [TPA’s]

and its ERISA client plans.

continued . . .

Service provider investigation:

DOL Investigation


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5. All contracts or service agreements between [TPA]

and any persons or entities outside [TPA] who perform

services for or in relation to [TPA’s] ERISA client

plans.

6. All contracts or agreements between [TPA] and plan

fund custodians, including any revenue sharing

agreements.

Continued . . .

continued . . .

DOL Investigation


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5. All documents reflecting any additional revenues paid

to [TPA] for ERISA plan accounts in excess of those

directly billed to such clients.

6. All documents relating to [TPA] Client Numbers

_____, ____, _____, _____, _____, _____, _____,

_____, _____, ______ including but not limited to

service agreements, fee schedules, fees charged for

prior three years, plan documents, amendments,

summary plan descriptions, summary annual reports

and IRS Opinion and/or Determination letters.

Continued . . .

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IRS Audits and DOL Investigations of Plans and TPAs · 23.04.2019 · IRS LESE Audits 27 Project...

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