The opinions expressed in this presentation are those of the speaker. The International Foundationdisclaims responsibility for views expressed and statements made by the program speakers.

Prepping for DOL/IRS Investigations

Phil CooneyRetirement Benefits ManagerNortheast Carpenters FundsEdison, New Jersey

William A. Cumming, Esq.ShareholderHessian & McKasy, P.A.Minneapolis, Minnesota

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Our Agenda

• Differences between IRS and DOL proceedings.

• Investigative Process.• Preparing for and handling the audit.• What is hot in DOL investigations.• Specific Fund experiences• Lessons learned.

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DOL Investigations vs. IRS Audits

What are the differences:1. A little history: Pre-ERISA, and ERISA framework.

A. IRS was the primary source of regulation of benefit plans before ERISA.

B. ERISA created joint jurisdiction with tax considerations handled by the IRS, and fiduciary matters by the DOL, but there is overlap.

C. Many sections in ERISA are also in the IRC.

2. IRS still performs audits for compliance checks and tax qualification.

3. DOL now styles encounters as “investigations”.A. DOL shows badges, and advises you that the investigation could lead

to civil or criminal action.B. DOL always seeks cooperation from Plan officials.C. A lack of cooperation leads to subpoenas and other bad things.

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The Investigative Process

• Why was my fund selected?– Generally speaking and borrowing from a Jason

Bourne movie, the DOL does not do random. Further, the DOL usually does not kiss and tell. Hence, you will not know why they are there.

– Four primary causes for a DOL investigation:1. Particular DOL initiative (like Apprentice plans and

targeting auditors with errors or dabbling).2. Participant complaints.3. Issues identified in filings (transactions or auditor)4. Links to prohibited transactions from other case

• How long will the process take?

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The Investigative Process

• Basic Steps:– The opening letter.– Responses to the initial documents requested.– Initial interviews.– Follow up requests—Questions.– Requested additional interviews.– Closing determinations.

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The Investigative Process

• How it starts– DOL sends an opening letter.– Letter advises that an investigation is open,

and what plan years will initially be included.– A list of initial documents for production

(usually electronic submission, including up-loads to the DOL portal).

– Timeline for receipt of the initial documents.

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The Investigative Process

• Opening letter– Understand that the years identified for the

scope of the investigation are subject to change.

– The opening letter is accompanied by an initial document request. The request specifies when responses are due. Be prepared for a short window for response.

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The Investigative Process

• Opening letter– The document request will ask for stunning detail:

• Plan document, trust, SPD and any amendments.• Policies for collection, investment, trustee expense, conflicts,

committees, records retention, whistle blower, credit card and vehicle use.

• All minutes from board meetings and subcommittees.• All investment documents for all investments, valuations, due diligence.• ERISA bond, fiduciary insurance, other insurances.• Bank records, trust accounting records from custodian, charts of

accounts.• Credit card statements and receipts.• Annual audits, actuarial reports, financial statements.• Correspondence, communications, benefit appeals, delinquent records,

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The Investigative Process

• Initial Responses– Establish a team, and respective duties. Ask who is

best to be the front person (it can very by fund), and acknowledge the audit and establish clear lines for communication with the auditor/investigator on behalf of the fund.

– Have all documents responsive to the request reviewed, usually by the administrator and counsel. Identify fixes needed, material not needed.

– Be mindful of timelines, lack of extensions.

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The Investigative Process

• The initial interview– Typically with the primary administrative contact.– Cover an overview of the operation of the fund,

procedures and basic compliance considerations.– May asking probing questions into funds

handling, expense review procedures and trustee decisions.

– Generally the DOL is open to presence and participation by counsel, reflected also in DOL enforcement manual.

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The Investigative Process

• Follow Up Questions– The initial interview, combined with the

review of documents submitted in response to the initial document requests commonly generate additional requests.

– This may be an opportunity to glean some sense of what the investigator is focused on.

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The Investigative Process

• Follow up interviews, and new interviews– Expect one or more rounds of follow up

interviews with the lead Plan official, typically these are more likely the more complex the fund.

– The investigator may also want to interview individual trustees, and service providers, not infrequently the investment consultant or an investment manager. This also can shed light on the agenda.

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The Investigative Process

• Repeat the last two steps:– It is not unusual to go through successive

supplemental document requests. Evaluate for agenda clues.

– Additionally, and perhaps more troubling, are repeated requests for interviews of trustees or providers (typically investment providers).

– The repeated request might happen once, or three or four times.

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The investigative Process

• Closing and Determinations:– Not only can the process drag on for a long time,

be prepared that you might not hear a dramatic and definitive “we’re done”.

– But you usually do. Most commonly you receive a closing letter, and commonly if any glitch is identified, it will declare that you committed a fiduciary breach.

– May also direct the fund to a VC program for resolution. This usually involves participant related failures.

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Preparation and Handling of Audit

• The odds are that the fund did not have meaningful notice that the investigation was coming.

• Select the front person who you judge is going to do the best for the fund in interacting with the investigator.– You may get lucky, but generally not taking

this process seriously only leads to more costly issues and proceedings.

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Preparation and Handling of Audit

• Once you have assigned roles for your team, be certain:– All documents requested and produced are

reviewed by legal counsel to ensure that they are “clean” and that if there is a brewing issue, it can be identified for consideration of how to handle.

– You do not want to produce any document that has not been specifically requested.

– Always be honest in responses to the investigator.

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Preparation and Handling of Audit

• Preparing for interviews:– Anyone in the lead position for interviews

should have careful preparation to respond in an optimal way to the investigator(s). Be alert that there may be multiple interviewers.

– Trustees and all others need careful preparation. These interviews are dangerous, in part because trustees believe they should know answers that they really do not. This is as risky as preparing for testimony.

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Preparation and Handling of Audit

• Responding to subsequent requests and discussions with the investigator:– Every round needs to have the same care as the

first round. Be alert to the fatigue factor. While you may have a lot of other things to attend to, the investigator(s) have nothing else they focus on. They take lots of notes.

– Expect misunderstandings, no matter how well you communicate a piece of information, it can be misconstrued and require detailed follow up.

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Hot Topics for DOL Audits

• The DOL has a variety of focal issues it is always interested in, but recently it has focused on some new areas.– Valuation of hard to value investments.

• Alternatives, ranging from private equity/venture capital, real estate operating funds and hedge funds, to name a few.

• What process and procedures do the trustees utilize to ensure that the manager’s stated values are valid?

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Hot Topics for DOL Audits

• DOL focal issues include some new areas:– Provider fee arrangements.

• Hard dollar and soft dollar arrangements, complete disclosures and reasonableness.

• Whether payments are channeled to third parties or related parties.

• To what level do the trustees understand the fee arrangements and other terms.

• Is the manager of the investment a fiduciary to the plan?

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Hot Topics for DOL Audits

• DOL focal issues include some new areas:– Credit card usage.

• Does the plan have a policy regulating use. • Do the trustees regularly review credit card

charges and approve those expenses.

– Agreements (or lack of agreements) with employers, a union, or fiduciary.

• The DOL shows a particular concern about providing uncompensated services to unions or participating employers.

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Hot Topics for DOL Audits

• Other DOL issues:– Timeliness of employer contributions.

• Are contributions received on schedule, and credited in appropriate amount of time.

• 401(k) contributions timely remitted.

– The substance of agreements between benefit funds for expenses and services shared or provided by one fund.

• The heart of the concern is subsidized services entirely or disproportionately paid by one fund.

• Methodology of cost sharing arrangements.

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Fund Experiences

• DOL investigations frequently running two years and longer.

• Investigative contingents of 1-4 investigators.

• Deep focus on specific investments (typically an alternative)

• IRS experiences.

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Lessons Learned

• Preparation is invaluable– Self-audits and management audits allow early

action without government oversight.– Identifying systems and recordkeeping that can

be optimized.

• When the letter comes– Organize a team to manage the process.– Expect that it will go on for an extended period.– Remain respectful and recognize the power

balance.

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Lessons Learned

• Be mindful of the difficulty and risk associated with Trustee and provider interviews.– Preparation helps, even though time consuming.– Scope of interviews does often suggest what is of

interest to DOL.

• Patience.– Investigators have varying experience and

backgrounds.– You may need to educate the investigator on the

subject matter they are reviewing.

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NJ Carpenters Funds

• Multi-Employer Benefit Fund• 13,000 Active and Retired Participants• 7,500 Pensioners• Pension, Annuity and Health Benefits• Annual Pension Pay-out = $100M• Annual Contributions = $260M• $1.1B Pension Assets• $1.2B Annuity Assets

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What Generates an Audit?

Participant Complaints

Voluntary Filings

You’ll never know?

Stepped-upEnforcement

Geographic

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Notice of Audit

• Letter of Examination (August 2014)• Schedule Initial Conference• Location• Pre-Examination Procedures

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Pre-Meeting

• The “Ground Rules”• Facility Requests• Communications Requests

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Opening Conference

• What is an IDR?• What is an FU?• Plan Documents• Internal Procedure and Practices

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Plan Document—Under Attack

AMENDMENTS

IRS CODES & LAWS

MERGERS

FUND PROFESSIONALS

Practice

SPD

Plan Document

ManagementLabor

EconomyParticipant Appeals

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Lesson #1

• Annual Review, “Keep it air-tight”– Review your Plan Document– Practice vs. Procedures– Applications, SPD’s and SMM’s– Did an appeal change anything?– Legal Action– Update Amendments– Circle the Wagons of Professionals– IRS Agent looks for inconsistencies

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Move-In Day

• Office Space• Phone Lines—Caller ID Block• Key Fob• Fax and Copier• Rent Free• Up to 2 years

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IDR’s

• Information Document Request• 75 IDR requests (With FU’s)• Focused on Pension and Annuity• Calendar Year 2012 (Right to Expand)

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Lesson #2

• Handing over you files—Have a Plan.– Original File vs. Making Copies– 1,000+ Participant Files requested– Requesting Files back– Consider a Scanning Program– Keep an Active File list for Staff

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Key IDR Requests

• Pension Fund Affidavit• Pensioners Living Abroad—1042-S• Annuity Loans—Recasting/New Home • Rejected Applications• 70½ RMD’s/Over 70 Not on Pension• Monthly Annuity: Constructive Receipt• Suspension of Benefits Letters

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Suspension of Benefits

• ERISA 203(a)(3)(B)/IRS Code 411(c)(3)• Suspension rules/Actuarial Adjustment• What is your Normal Retirement Age?• 65 - 60 - 62• Pay pensions on date of application• No Actuarial Increase/Retro payments• Started Suspension Letters 7/1/2013

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Corrective Actions

• Pension adjustments with retro 62-65 & 65+• 62-65 (.06), 65+ (.08) per year adjustment• Retro-active adjustment—2008-2013• 239 participants = 3% of Pensioners• Retro payment ranged—$6.00 - $34K• Monthly Pension Adjustments = $15K• Continue Suspension Letters (7/1/13)

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Example

Total Benefit at 62 $1,178.15Benefit earned after 62 $0.00Retirement Age 63-0Months Between 62 & Retire 12Actuarial factor (6% annual) x.005 Actuarial Increase $70.68 New Benefit $1,248.83Option factor (90%) $1,124

$1061 $63 = $1,124 Retro =$3,843Pension Adj. New Pen. ($63 X 61 months)

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“Carve Outs”

• We stated our case and challenged IDR’s• Age 65—Jt. 100% to Survivor

(No reduction)• Waiting period was annual 8.33% gain• Reduced window from 2004-15 to 2008-13• Working between 62-65• Merged Local—October 1, 2009• Mitigated damages by 50%

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Lesson #3

• State your case– Ask for Clarifications– Request Meetings– Explanation of IDR’s?– Don’t be paralyzed.– Stay Calm and breath.– Self-corrections may suffice.

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Fines

• 239 Retro-Payments• Monthly Adjusted pensions = $15K• Administrative Penalty $25K - $150K

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Session #G04

Prepping for DOL/IRS Investigations

• Preplan and self-audit if possible.• Review documents before releasing them.• Provide timely responses and be honest.• Expect follow up to initial requests.• Prepare any witness or representative

thoroughly before an interview.• Evaluate and understand complex

alternative investments, particularly on valuation.

• Annual review of documents and practices• Internal Meeting with all staff and

professionals• Have a plan when handing over

documents• State your Case• Don’t be afraid to challenge• Remain Calm

Website Resourceshttps://www.ifebp.org/inforequest/ifebp/0167272.pdf

62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, Florida

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2017 Educational ProgramsGeneral Topics

63rd Annual Employee Benefits Conference October 22-25, 2017 Las Vegas, Nevadawww.ifebp.org/usannual

Trustees and Administrators InstitutesFebruary 20-22, 2017 Lake Buena Vista (Orlando), FloridaJune 26-28, 2017 San Diego, Californiawww.ifebp.org/trusteesadministrators

Fraud Prevention Institute for Employee Benefit PlansJuly 17-18, 2017Chicago, Illinoiswww.ifebp.org/fraudprevention

Construction Industry Benefits ConferenceNovember 13-14, 2017 Santa Monica, Californiawww.ifebp.org/construction

Collection Procedures InstituteNovember 15-16, 2017 Santa Monica, Californiawww.ifebp.org/collections

Related ReadingVisit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

Employee Benefits Glossary, 13th EditionItem #7570www.ifebp.org/glossary

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NEW!

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