Structuring Retirement Plan Internal Controls Amid Heightened …media.straffordpub.com › products...

Structuring Retirement Plan Internal Controls Amid Heightened IRS and DOL Scrutiny Avoiding Violations with Plan Amendments, Target Date Funds, Investment Manager Agreements, Discrimination Testing and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, JUNE 4, 2014

Presenting a live 90-minute teleconference with interactive Q&A

Mary Andersen, President, ERISAdiagnostics, Exton, Pa.

Nancy S. Gerrie, Partner, McDermott Will & Emery, Chicago

Jeffrey M. Holdvogt, Partner, McDermott Will & Emery, Chicago

Howard Pianko, Partner, Seyfarth Shaw, New York

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Does the right hand really know what the left hand is doing?

Mary Andersen President, ERISAdiagnostics

[email protected]

4 ERISAdiagnostics, Inc. www.erisadiagnostics.com

ERISA plans are complex “People make mistakes. Even administrators of ERISA

plans. That should come as no surprise, given that the Employee Retirement Income Security Act of 1974 is ‘an enormously complex and detailed statute,’ Mertens v. Hewitt Associates, 508 U.S. 248, 262, 113 S. Ct. 2063, 124 L. Ed. 2d 161 (1993), and the plans that administrators must construe can be lengthy and complicated.” Conkright v. Frommert, 130 S. Ct. 1640, 1644 (2010).


The Importance of Internal Controls Can eliminate or reduce plan operational errors Can demonstrate you know what you are doing Can reduce your ERISA audit fees Can shorten your DOL or IRS “visit” A mechanism for knowledge transfer Can “let you sleep at night”


You know you are in control when: You can identify the procedures in place to indentify

operational failures You can identify the operational failures you have fixed

and how you did it You can prove you corrected the failure You have not had any employee complaints……….yet


You know you are in control when: Locate all plan documents including the latest

determination letter Distributed all the necessary disclosures Filed all the necessary reports (and can substantiate the

data on the reports) Demonstrate that your plan is not discriminatory Describe the process for determining eligibility and

enrolling new participants Describe your benefit distribution process (hardships,

terminations, loans, retirement, disability, death) Describe how much you pay to whom for what

8

ERISAdiagnostics, Inc. www.erisadiagnostics.com

So you think you are in control Is your payroll process outsourced? Have multiple payrolls? Centralized processing? When are contributions forwarded to the trustee? Who reviews deduction reports before being sent to the

trustee? Who verifies that the contributions were actually posted to

participant accounts?


Do you still think you are in control? Describe how contributions are transmitted and who

is responsible How do you know whether an employee’s deferral

election was accurately and timely processed? How do you know the correct definition of

compensation was used? How long are the contributions held by the trustee

before being allocated to participant accounts?


Slide Intentionally Left Blank

Starting to worry? Your subsidiaries have their own HR systems that do

not “talk to each other” AND you have frequent transfers of employees

You are a manufacturing facility and your workforce ebbs and flows with orders AND your system only maintains three dates of hire/termination AND may treat rehires as new hires


Getting a little concerned? You have received your IRC 408(b)(2) disclosures, read

them, understand them and if picked for the DOL focus group can explain it.

You distributed your IRC 404(a)(5) disclosures and can explain them to participants when they call.

You can tell participants why you selected the investment funds that are in the plan.


Getting very nervous New HR system New payroll system New staff; the 20 year veteran just retired and left no notes Changed 401(k) vendors You have just been told your company is changing their strategy

and is acquiring another company and another subsidiary just had a massive layoff

The IRS is coming in The DOL called and said that your employees are concerned

because they have not received a benefit statement in awhile The DOL REACT team just heard about the layoffs and thinks

you might be closing down a plant The qualified independent auditor wants to meet with you to

present their ERISA audit findings


One of EPTAs top ten Lack of insufficient internal controls to ensure that

data provided to third party recordkeepers/plan administrators is accurate.

Wrong date of hire Wrong date of termination Compensation Participant age Large decentralized corporations with separate payrolls Form 5500 data does not match plan records


Remainder of Top Ten Issues Found in EPTA Audits Potential vesting/distribution issues in terminations or

partial terminations Acquisitions Deferral percentage tests Compensation Plan document Vesting Distributions and loans Assets Limits Miscellaneous

16

ERISAdiagnostics, Inc. www.erisadiagnostics.com

EPCU approved projects* 403(b) Plan Document Project Adoption of Interim Amendment; Non-amender project Automatic Contribution Arrangement Correction Deemed Distributions Project Defined Benefit Plans with Questionable Funding Excluded Participant Project Forms 1099-R Funding – Delinquent Forms 5500 Minimum Required Distributions Participant Loan Project for Terminated/Retired Participants QJSA Project Top-Heavy Minimum Benefit Project

*http://www.irs.gov/Retirement-Plans/Employee-Plans-Compliance-Unit---

Approved-Projects


LESE projects - Learn /educate/self-correct/enforce* Plans with Self-Employed Individuals (LESE Project #17) Potentially Frozen Money Purchase Plans (LESE Project #16) Investments in Non-Participant Loans (LESE Project #15) Plan Terminations Without a Form 5310 Filing (LESE Project #13) Potential IRC Section 402(g) Excesses in 401(k) Plans (LESE Project #12) Employer Contribution per Participant Greater than IRC Section 415(c) Limit (LESE Project #11) IRC Section 415(c) Excess in Forms 5500EZ (LESE Project #10) Employer Contributions per Participant Greater than $135,000 (LESE Project #9) Corrective Distributions Reported on Schedules H or I (LESE Project #8) Non-Cash Contributions to Defined Benefit or Money Purchase Plans (LESE Project #7) Reported Defaulted Loans and/or Leases (LESE Project #6) Real Estate Investments and Participant Loans or Schedule D Filing (LESE Project #5) Top-Heavy 401(k) Plans (LESE Project #4) Invalid Business Codes (LESE Project #3) Small Plans and Participant Loans (LESE Project #2) Defined Contribution Plans with Less than $250,000 in Assets (LESE Project #1) *http://www.irs.gov/Retirement-Plans/EP-Examination-Projects---Learn,-Educate,-Self-Correct-and-

Enforce-%28LESE%29-Projects


http://www.irs.gov/Retirement-Plans/Employee-Plans-Learn-Educate-Self-Correct-Enforce-Projects-Plans-with-Self-Employed-Individuals

http://www.irs.gov/Retirement-Plans/Employee-Plans-Learn-Educate-Self-Correct-and-Enforce-Project-Potentially-Frozen-Money-Purchase-Plans

http://www.irs.gov/Retirement-Plans/Employee-Plans-Learn-Educate,-Self-Correct-Enforce-Projects-Forms-5500-with-Non-Participant-Loans

http://www.irs.gov/Retirement-Plans/EP-Exam-Projects-LESE-Projects-Project-

http://www.irs.gov/Retirement-Plans/EP-Exam-Projects---LESE-Projects---Project-






http://www.irs.gov/Retirement-Plans/Learn,-Educate,-Self-Correct-and-Enforce-(LESE)-Projects---Project-

http://www.irs.gov/Retirement-Plans/Learn,-Educate,-Self-Correct-and-Enforce-(LESE)-Projects---Project-

http://www.irs.gov/Retirement-Plans/EP-Exam-Projects---Learn,-Educate,-Self-Correct-and-Enforce-(LESE)-Projects---Project-

http://www.irs.gov/Retirement-Plans/EP-Examination-Projects-Learn,-Educate,-Self-Correct-and-Enforce-(LESE)-Projects-LESE-Project-

http://www.irs.gov/Retirement-Plans/Employee-Plans-Learn,-Educate,-Self-Correct-and-Enforce-Project---Small-Plans-with-Participant-Loans

http://www.irs.gov/Retirement-Plans/Employee-Plans-Learn,-Educate,-Self-Correct,-Enforce-Project---Defined-Contribution-Plans-with-Less-than-$250,000-in-Assets

Industry specific attention IRS web page – results of plan examinations by

industry include Accommodation & Food Service Administrative & Support, Waste Management &

Remediation Construction Finance & Insurance Manufacturing Mining Retail


Coming soon QSAT – qualified self-audit tool


What every plan sponsor should be able to explain Who is the plan trustee? Who is the plan administrator? Who are the plan’s outside service providers?


The DOL will ask Plan documentation 5500s, SARs Fidelity bond Contribution related information Communications Plan loan information And much more!!!


Your IQPA will ask Controls to ensure accuracy of plan financial

statements Process regarding correct application of contributions Existence of SOC report; Type 1 or Type 2. Distribution process (authorizations, comply with

plan) Changes to plan information Your recordkeeper questions to uncover “fraud”


Practical plan sponsor pointers Conduct a self-audit Conduct a mock IRS/DOL audit Conduct a focused audit Enlist the aid of internal auditors Enlist the aid of counsel/consultants Document, document, document


www.mwe.com

Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C.

Strategic alliance with MWE China Law Offices (Shanghai) © 2014 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

51887564.1

IRS Audit Activity – Retirement Plans 2014

Nancy Gerrie [email protected] (312) 984-6936 Jeffrey Holdvogt [email protected] (312) 984-7564

June 4, 2014

mailto:[email protected]


IRS Audit Activity – Retirement Plans 2014

General comments: The IRS is increasing its focus on internal controls employers maintain with respect to their employee benefit plans. The IRS is looking for documented practices and procedures that prevent errors, or that quickly flag errors before they result in large financial consequences. They want to see evidence of actual checks and balances, specific and tangible internal controls, retention of records or proof that internal controls have been implemented. For example, they will look for proof that required notices have actually been sent to participants.

The following are specific issues we are seeing the IRS examine during retirement plan audits, along with issues that have been identified in IRS guidance as top failures.

27

IRS Audit Activity – Retirement Plans 2014 – Cont’d

Compensation. Failure to follow plan’s definition of eligible compensation.

– Compensation is important for several different purposes: (1) determining an employee’s allocation in a defined contribution plan or benefit accruals in a defined benefit plan, (2) calculating the 415 limits, (3) performing nondiscrimination tests (e.g., ADP/ACP), and (4) determining whether a plan is top-heavy.

– IRS suggests annual self-audit of payroll codes, annual check-in with service providers.

– Failure to notice that executive’s pay reaches the 401(a)(17) limit ($260,000 in 2014).

– Many failures can occur for large corporation with numerous payrolls resulting in inconsistent application of compensation definition.

– Confusion for employees regarding different definitions of compensation for different purposes.

– Confusion for employers regarding equity compensation (e.g., exercise of stock options or early sales in 423 stock purchase plan generates W-2 income – does your plan require you to take deferrals from ALL W-2 income?).

– Action Steps: Review payroll codes and compare to plan document definition of eligible compensation.

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Amendments. Failure to amend plan document for tax law changes. − IRS suggests annual review of plan document.

− “Discretionary” amendments must be adopted by end of plan year in which the amendment is effective. “Interim” amendments may be adopted by employer’s due date for filing tax return (including extensions), if later.

− Prototype or other preapproved plan? Keep signed copies and sign and date all amendments.

− Merged-in plan? Be sure to amend to update before merger to avoid tainting surviving plan.

− Be sure that plan document and SPD match. If plan is amended, don’t forget to update the SPD.

– Action Steps: Review plan amendments and SPDs with your legal advisors.

29


Employee Eligibility. Failure to follow plan’s eligibility or enrollment rules.

– Improper exclusion of part-time employees or a merged-in group of employees.

– Misclassification of independent contractors.

– Controlled group employee errors (for example, standardized prototype plans may cover ALL employees of all controlled group members – is that overbroad for your needs?).

– Failure to adhere to Hours of Service counting rules, or Elapsed Time alternative.

– Rehire failures – failure to re-enroll rehired participants without delay.

– For automatic enrollment plans, failure to auto enroll all eligible employees timely or failure to provide automatic enrollment notice.

– Failure to provide complete enrollment package materials – examples should be retained for demonstration of compliance on audit.

– Action Steps: Pull representative sample of employees (new hires, transfers, rehires, part-time) and review eligibility procedures. Maintain file of enrollment packets.

30


Loans. Failures on plan loans – one of top 5 problem areas identified in IRS audits.

– Failure to maintain a loan policy.

– Failure to give complete loan paperwork to participants, including:

• loan agreement

• promissory note

– Failure to obtain required documentation from participants (proof of need for longer residential purchase loan, for example – records must be kept for entire period loan is outstanding – can be as much as 15 years).

– Failure to properly administer loans for employees on regular and military leave.

– Failure to timely default unpaid loans.

– Loan interest rate unreasonably low? (IRS informally states 1-1/2 – 2 points over prime is safer than too low).

– Action Steps: Review loan policy. Review loan paperwork for representative sampling of employees with loans, including defaulted loans. Maintain file of loan applications until expiration of loan term.

31


In-Service Distributions. Failure to follow plan’s in-service distribution rules.

– Distributions made for impermissible reasons under the plan, or made too early.

– Failure to follow hardship withdrawal procedures, e.g.:

• 6-month suspension of future deferrals

• establishing procedures and explaining them in SPD (proof/documentation of hardship, for example)

• failure to look for signs that hardship procedures are being abused, e.g.:

– too many requests from 1 group or division

– requests from multiple employees that look identical

– only highly compensated employees are taking withdrawals

– Failure to permit “special” in-service distributions as a result of protected benefit from a merged in plan.

– Action Steps: Pull representative sample of employees receiving in-service distributions or hardship withdrawals and review reason for withdrawal, proof of hardship, explanation in SPD, and comparison of requests for hardship withdrawals. Maintain file of hardship withdrawal paperwork for 4 plan years.

32


Distribution Paperwork. Failure to provide correct distribution paperwork to employees. – Failure to provide correct options (installments, annuities, lump sums) in paperwork.

– Spousal consents – some plans require spouses to consent to ALL distributions. Does your paperwork match your plan rules?

– Cashing out $1001-$5,000 lump sums without participant consent but failing to roll over to auto-rollover IRA:

• Failure to negotiate and keep appropriate contract paperwork with auto-rollover IRA vendor (specific DOL fiduciary guidelines on contracting with auto rollover vendors)

• Failure to make timely de minimis cashout sweeps

– Action Steps: Review distribution paperwork and compare to plan document rules. Review auto-rollover IRA contracts with vendors. Pull representative sample of employees receiving small lump sum cash-outs and check for proper consent, or auto-rollover to IRA. Review frequency of cash-out sweeps and compare to plan document rules.

33


Suspension of Benefits. Failure to follow suspension of benefits (SOB) rules in defined benefit pension plans upon attainment of normal retirement age.

– Failure to give SOB notice to post-normal retirement age actives.

– Failure to appropriately calculate actuarial increases.

– Action Steps: If employer maintains a defined benefit pension plan that contains suspension of benefits rules, identify all actively employed employees who are close to retirement age and ensure that SOB letters were sent. Check with plan’s actuaries to ensure appropriate actuarial increases were made for all participants regardless of SOB letters.

34


ADP/ACP Test. Failure to pass ADP/ACP test in 401(k)/(m) plan – usually due to incorrect compensation or ineligible employees.

– Alternatively, failure to provide required ADP/ACP safe harbor notice.

– Action Steps: Review with plan administrator to ensure that testing has been timely done and passed, and that correct compensation and employee population was tested.

35


Vesting. Vesting errors:

– Failure to provide for 100% vesting at normal retirement age.

– Failure to properly account for vesting for employees with breaks in service, inter-company transfers, acquisitions.

– Failure to timely sweep forfeitures from terminated participant accounts.

– Failure to calculate and vest employees affected by partial terminations.

– Action Steps: Pull representative sample of employees, especially those with breaks-in-service, inter-

company transfers, or acquired employees, and review that vesting was calculated appropriately. Review plan document rules on when forfeitures are removed from participant accounts or accrued benefits.

36


Minimum Required Distributions. Failure to make age 70-1/2 minimum required distributions timely and properly.

– Correspondence to participants suggesting distributions be requested is NOT sufficient – checks must be distributed with no participant consent required.

– Make sure any 5% owners are tracked.

– After participant’s death, failure to properly and timely distribute to beneficiaries.

– Proof that the employer searched for missing participants.

– Action Steps: Identify all terminated employees age 70-1/2 or older and check that distributions have

commenced. If you have any 5% owners of the employer who are age 70-1/2, check that distributions have commenced for them even if still actively employed. Review any account or accrued benefits of deceased participants to ensure distributions are made to beneficiaries.

37


415 Limits. Failure to follow 415 limits ($52,000 in 2014).

– Failure to monitor contributions.

– Failure to coordinate employee’s participation in multiple plans.

– Failure to monitor contributions in >1 plan due to inter-company transfers, etc.

– Action Steps: Pull representative sampling of highly compensated employees and check that total contributions for plan year did not exceed 415 limits.

38


Top Heavy Testing. Failure to test or provide top-heavy benefit under 416, if applicable (typically more of a problem for smaller plan populations with preponderance of long-service, highly compensated participants).

– Action Steps: Review with plan administrator to ensure that testing has been

timely done and passed.

39


410(b) Testing. Failure to perform 410(b) testing (benefiting 70% of nonhighly compensated employees), especially for partially-frozen plan or multiple plans.

– Action Steps: Review with plan administrator or legal counsel to ensure that

testing has been timely done and passed.

40


QDROs. Failure to maintain or adhere to QDRO procedures.

– Action Steps: Review with plan administrator or legal counsel to ensure that QDRO procedures exist and are being followed.

41

www.mwe.com

Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C.

Strategic alliance with MWE China Law Offices (Shanghai) © 2014 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

DOL Audit Activity – Retirement Plans 2014

Nancy Gerrie [email protected] (312) 984-6936 Jeffrey Holdvogt [email protected] (312) 984-7564

June 4, 2014



DOL Audit Activity – Retirement Plans 2014

General comments: Like the IRS, the DOL is looking for documented practices and procedures that prevent errors, or that quickly flag errors before they result in large financial consequences. They want to see evidence of actual checks and balances, specific and tangible internal controls, retention of records or proof that internal controls have been implemented.

The following are specific issues we are seeing the DOL examine during retirement plan audits.

44

DOL Audit Activity – Retirement Plans 2014 (Contd.)

Target Date Funds – DOL issued guidance (February 2013) for plan sponsors on reviewing their plan’s Target Date Funds. DOL indicated that: – Fiduciaries must engage in a process to obtain information to evaluate

their TDF. – Fiduciaries must understand the differences among TDFs. – Fiduciaries must document their selection and review process and

how they reached their decisions on the TDF selected. – Action Steps: Prepare (or have counsel/advisors prepare) TDF

checklist and periodically review TDF checklists. Document review in Committee minutes.

45


Consultants and Investment Managers. Failure to adhere to DOL recommendations regarding hiring plan consultants or investment managers:

– Does the consultant/advisor have a conflict of interest? • does advisor get bonus based on business placed with particular firm?

• does advisor have preferred vendors because they get additional compensation?

• does advisor have a policy on receiving gifts from vendors doing business with?

– Fiduciary • is the advisor a fiduciary?

• say in writing?

• background check?

• adequate insurance coverage?

• fees reasonable?

• shop every 3-5 years?

– Action Steps: Review agreements with plan consultants and investment advisors. Consult legal counsel for complete review.

46


Float. Failure to review “float” received by trustee or custodian (see DOL guidance 2002-3). – Float must be transparent in TPA agreement:

• must be considered when weighing alternatives

• should be compared to other service providers

• must be reasonable

– Action Steps: Review agreements with trustee or custodian for the above. Consult legal counsel for complete review.

47


Revenue Sharing/12b-1 fees. Are there extra funds in your plan’s “ERISA account”? What are you doing with those extra funds? – Last year, DOL released Advisory Opinion 2013-03A regarding

whether revenue sharing payments constitute “plan assets” under ERISA.

– Action Steps: Consult legal counsel for complete review of you revenue sharing arrangement.

48


Late Payroll Deposits. Late deposit of participant contributions to 401(k) plans. – DOL will look at all your payrolls, when contributions were made, what

was the fastest you were able to get contributions to the trust, then use that as your maximum deadline.

– DOL has informally indicated that they think 3 (or four) days should be the maximum, despite 7-day safe harbor for small plans (fewer than 100 participants).

– Action Steps: Review your payroll records and determine when is a reasonable time to make contributions to the trust. Once you have made that determination, work with payroll and your recordkeeper to make sure that those deposits are made within that timeframe.

49


ERISA fidelity bond. Missing or inadequate ERISA fidelity/fiduciary bond/fiduciary insurance policy:

– Failure to keep copy of certificate – Failure to comply with ERISA bonding requirements – ERISA bond must:

• contain no deductible • name plan as insured • be in an amount equal to a minimum of 10% funds in the plan (with a maximum of $500,000, or

$1 million if plan contains employer securities) • include a discovery period of at least one year after the termination or cancellation of the bond • cover all individuals who handle plan assets

– Action Steps: Obtain a copy of your ERISA fidelity bond and fiduciary insurance policy. Review to ensure compliance with ERISA/DOL requirements.

50


Blackout Notices. Failure to provide blackout notices for individual account plan participants undergoing investment fund change for participant directed individual account plans.

– Action Steps: Monitor all investment fund changes and ensure

that blackout notices, if required, are properly provided and contain the proper information for participants.

51


Investment Policy. Failure to adopt or adhere to Investment Policy/Guidelines.

– Action Steps: Review your plan’s Investment Policy annually

with your investment advisors and plan committee members. Always refer to the Investment Policy when discussing any changes to plan investments.

52


Committee Minutes. Failure to keep minutes of plan committee meetings, or incomplete minutes that raise additional questions that are not answered in those minutes or following meeting’s minutes.

– Action Steps: Keep regular minutes of all plan administration or

investment committee meetings, and retain in permanent files. Review minutes to avoid unanswered questions, conflicts of interest, etc. Review prior year’s minutes before each meeting to make sure any tasks documented in prior minutes are completed or addressed.

53


Signed Plan Documents. Failure to keep signed copies of original plan, document, trust, and all amendments. – Action Steps: Keep permanent files of all signed documents.

Review all documents to be sure signed copies are available. If any gaps, contact legal counsel.

54


Loan Documents. Failure to properly keep loan records. – DOL will ask on audit for:

• Loan policy • Sample loan agreement • Sample promissory note • A listing of all outstanding loans and amounts • Identification of all defaulted loans over last 3 years.

– Action Steps: Review loan policy. Review loan documentation packet sent to employees requesting loans to ensure they contain all proper documents. Review loan paperwork for representative sampling of employees with loans, including defaulted loans. Maintain file of loan applications until expiration of loan term.

55


New Recordkeeper. When changing recordkeepers, make sure the underlying documents and information get transferred from the old recordkeeper to the new recordkeeper.

– Action Steps: During recordkeeper change, ensure that all

documents and information are properly transferred to new recordkeeper without delay.

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