Employee Benefit Plan Audits: Asking the Right...

Employee Benefit Plan Audits:

Asking the Right Questions and Avoiding Critical Errors

WEDNESDAY, DECEMBER 17, 2014, 1:00-2:50 pm Eastern

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FOR LIVE EVENT ONLY

Employee Benefit Plan Audits

Dec. 17, 2014

Danielle J. Kimmell

Bober Markey Fedorovich

[email protected]

Cindy H. Mitchell


[email protected]



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

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You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Employee Benefit Plan Audits: Asking the Right Questions and

Avoiding Critical Errors

By: Danielle Kimmell, CPA

Cindy Mitchell, CPA

What we will cover

• Form 5500 from an audit perspective

• Form 5500 errors and corrections

• Plan errors

• Types of plan failures

• Correction programs available

• Seven most common plan failures

• How to avoid plan failures

• Best practices for audit preparation

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Form 5500

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Form 5500 – Plan Audit Requirements

• General requirements

– > 100 audit is required

– Except… The 80/120 Rule; Plan Audit Waiver

– Measurement period – first day of the plan year

– Measurement criteria

• Active participants

• Eligible to participate

• Participant accounts

– Other criteria: Qualifying plan assets / bonding and Summary Annual Report (SAR) and document & other administrative communications to participants/beneficiaries

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• Other audit requirement considerations

– 403(b) plans – “governmental” and “church” are exempt; otherwise, apply audit requirements

– Welfare plans – Voluntary Employee Beneficiary Association (VEBA) Trust, apply audit requirements

– Short period – 7 months or less, election to defer the audit requirements to the following year does exist

– Controlled group provisions

• Members of a controlled group don’t have to participate in a plan

• However, the controlled group impacts plan testing rules (nondiscrimination, ADP/ACP, top heavy, etc…)

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• Full scope audit

• Limited scope audit - Disclaimer of opinion; no testing of investments IF…

– Financial institution properly qualified – bank or similar institution or by an insurance carrier that is regulated, supervised and subject to periodic exam

– Certification must cover the “accuracy and completeness” of information submitted

• Cautionary note: loans and hard to value assets are sometimes not covered or are erroneously not excluded from the certification

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Form 5500

• Audit requirement to review Form 5500

• Auditors are required to review anything on the Form 5500 that have a direct impact to the financials.

• Most of the time this is Sch H and Sch SB if it is a defined benefit plan

• Should also scan all other schedules for reasonableness

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Form 5500 – Schedule H

• Most common discrepancies between Sch H and F/S

• Asset allocation

• For 5500 purposes, all assets have to be identified and separated out by type (non-interest bearing cash, interest bearing cash, US Government securities, corporate stock, partnership interest real estate, mutual funds, CCTs, PSAs, etc.)

• Receivables

• Accrued contributions (both ER and EE)

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• Most common discrepancies between Sch H and F/S

• Adjustment for fully benefit responsive contracts

• For F/S purposes, reported at contract value

• For 5500 purposes, reported at FMV

• Typically requires a footnote to explain the discrepancy between the 5500 and the F/S

• Income allocation

• Dividends for Mutual funds on line 2b(2)(C)

• All other income from mutual funds (realized and unrealized capital gains) reported on line 2b(10)

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• Deemed loans

• For 5500 purposes, no longer an asset

• For books and F/S purposes, still an asset (allowance?)

• May require a reconciling footnote on the F/S

• Late deposits

• DOL large plans typically have a very short time frame

• Problem especially in first year audit

• Additional financial schedules needed for 5500

• Schedule of assets held at year end (Sch H, line 4i)

• Schedule of reportable transactions in excess of 5% (Sch H, line 4j) – exemption for participant directed

• Schedule of late deposits

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Form 5500 – Status indicators

• 5500 status indicators:

• Processing – The DOL has not completed its review.

• Filing stopped – The DOL recognizes the 5500 but some problem in the filing has caused the DOL’s review to stop. Employer should file an amended return.

• Filing error – The DOL recognizes the filing as a 5500 but the DOL has determine that there is an error or omission. Employer should file an amended return.

• Filing received – The DOL recognizes the filing as a 5500 and the DOL has determined that there are no errors or omissions.

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Slide Intentionally Left Blank

Plan errors

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Types of plan failures

• Operational failure ‒ failure to follow plan terms

• Plan document failure ‒ plan provision violates IRS code

• Demographic failure ‒ fail coverage, non-discrimination

• Employer eligibility failure ‒ employer not eligible to adopt plan

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Correction Programs Available

• IRS Programs – SCP: Self Correction Program

– VCP: Voluntary Correction Program

– Audit Cap: Audit Closing Agreement program

• DOL Programs – VFCP: Voluntary Fiduciary

Corrections Program

– DFVCP: Delinquent Filer Voluntary Corrections Program

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Features: • Easy

• Free

• No IRS involvement

• Few guarantees

• Limited to operational failures only

• Must have practices and procedures in place to avoid future failures

IRS - Self Corrections Program

Types of failures: • Operational failures only - not

following the plan document provisions

Timing of correction: • If insignificant error: correct any time

• If significant error: correct within two years after the end of the plan year of failure

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Features: • Not as easy

• Fees apply

‒ $750-$25,000

• IRS/attorney involvement

• IRS guarantee

IRS - Voluntary Corrections Program

Types of failures: • Any failure – but cannot be under

audit by the IRS or DOL

Timing of correction: • Any time – as long as not under audit

Note: Make sure to follow through on correction because IRS is following up (29% of plans failed to follow through on correction)

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Features: • Fees apply

‒ $2,500 - $88,000

• IRS/attorney involvement

• IRS guarantee

IRS - Audit Closing Agreement Program

Types of failures: • Any failure

Timing of correction: • When under audit

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Features: • Fees apply

‒ Small plan $750

‒ Large plan $2,000

‒ Max penalty – Two times the amount shown above if multiple years involved

‒ If 5500 not that late, penalty reduced to $10 per day

DOL – Delinquent Filer Voluntary Compliance Program

Types of failures: • Late filing of Form 5500

Timing of correction: • As soon as possible – cannot be used

if under audit

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Features: • May avoid paying IRS excise

tax

• Time consuming

• DOL “no action letter”

• Must notify interested parties of the filing and correction

DOL – Voluntary Fiduciary Corrections Program

Types of failures: • Delinquent participant contributions

• Loan failures

• Party-in-interest transactions

• Plan expenses

Timing of correction: • As soon as possible – cannot be used

if under audit

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Most common plan failures

• Failure to deposit employee deferrals timely

• Failure to file Form 5500 timely

• Plan loan failure

• Failure to use correct definition of compensation

• Eligibility failure

• Vesting failure

• Failure to provide RMD (required minimum distribution)

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Late deposit of participant contributions

• Employee contributions become plan assets on “the earliest date on which such contributions can reasonably be segregated from the employer’s general assets” but no later than the 15th business day of the following month. Employee contributions include deferrals and loan payments ‒ Must deposit money into the trust with lost earnings

‒ Must report late deposits on Form 5500

• Correction programs available: ‒ SCP

‒ VCP (if significant and past the two year period)

‒ VFCP

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Failure to file Form 5500 timely

• Form 5500 due seven months after the plan year end ‒ Can file for a 2 ½ month extension using Form 5558

‒ Can rely on automatic extension using corporate extension

‒ Watch welfare plans (possibly more than one plan)

o Funded welfare plans (large or small) – filing required

o Small unfunded/fully insured welfare plans – no filing

o Large unfunded/fully insured welfare plans – filing required



‒ VFCP

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Plan loan failure

• Plan document does not allow for loans but loans are permitted

‒ Retroactively amend the plan to permit loans and file under VCP

• Loan terms exceed five years with no evidence that it was used to purchase primary residence

‒ Re-amortize the loan over the maximum remaining period from the date of the original loan

• Loan amount exceeds dollar limit

‒ Participant repays the excess amount and remaining principal balance is re-amortized over original loan’s remaining period

• Loan payments are not made timely

‒ Participant to make a lump sum payment for missed installments or deemed distribution of loan balance – employer must issue 1099-R to participant

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Failure to use correct definition of compensation

• Several different definitions of compensation – know which definition is used by your plan ‒ Section 3401(a) – (FIT withholding)

‒ W-2 Box 5 wages

‒ Include or exclude bonuses

‒ Include or exclude fringe benefits

‒ Include or exclude overtime, commissions, etc.

• When compensation used to practice is larger than the definition of compensation in the plan ‒ Improper employee contribution and earnings returned to

participant

‒ Improper matching contribution and earnings to be forfeited

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Failure to use correct definition of compensation

• When compensation used in practice is less than the definition in the plan: ‒ Contribute 50% of the employees missed elective deferral

‒ Contribute 100% of the missed match

‒ Contribute earnings on all of the above



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Eligibility failures

• Types of eligibility failures: ‒ Missed entry date – employer required to provide participant

o 50% of missed deferral

o 100% of missed match

o 100% of lost earnings

‒ Entry allowed too early

o Excess deferral and earnings should be returned to participant

o Excess match and earnings should be forfeited and used in

accordance with plan terms



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Vesting failures

• Improper application of years of service ‒ Too few years of vesting service credited

o Forfeitures and earnings must be restored to participant

‒ Too many years of vesting service credited

o Employer match and excess earnings should be forfeited and used in accordance with plan terms



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Failure to distribute required minimum distribution

• Two problems for failing to distribute RMD ‒ Operational failure for the plan

‒ 50% penalty for the participant

• Correction procedures ‒ Distribute RMD


‒ VCP

o If filed under VCP, IRS can forgive 50% penalty

o Reduced filing fee of $500 if less than 50 participants

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How to avoid failures in the future

• Make sure to read the plan documents and know the definitions provided

• Have practices and procedures in place to be compliant with plan documents (good internal controls)

• Monitor new legislation and impact on plan

• Follow through on corrections as the DOL is following through

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Audit Best Practices / Common Issues

• Overarching comments

– Audit personnel should be well versed in:

• Plan industry, operations, rules, regulations

• The plan’s document and related provisions

– If they don’t know the above:

• They can’t tailor the audit for proper risks and plan provision

• They won’t be able to identify issues, risks or errors when they find them

– 32% audit deficiencies rates – DOL findings; they call this unacceptable

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• Internal Controls

– Yes, plan’s have internal controls; IRS and DOL have various tools and guidance on their websites related to what they expect to see

– Appropriate identification and audit procedures are required

– Internal controls play into your assessment of risk and, if tested, could help you reduce your testing

– Can’t assessment control risk below maximum if they are not tested

– Consider dual purpose testing to leverage work

– Consider ability to leverage SOC reporting

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• Service Organizations

– Documentation • The appropriate report for the appropriate service provider

• Watch for carve-outs; you may need to get additional reports

• User controls – documenting them; identify key controls; perform relevant procedures on those controls

• Utilize and leverage AICPA EBPAQC checklist to meet minimum documentation requirements related to SOC reports

– Overreliance • Auditors often rely to heavily on the receipt of a SOC report from a TPA

• Read the report - Don’t presume no errors and don’t presume no qualifications in the report

• Cannot eliminate required testing because a SOC report exists

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• Actuaries

– Overreliance is a common issue; failure to test of validate census data

– Documentation requirements related to use of an expert

– Must gain comfort with key assumptions underlying calculations; clients should take ownership in this process

– Make sure you have the right report for the plan financials

• TPA reporting

– Watch for overreliance of TPA reports

– They frequently have inaccurate data

– Make sure you are obtaining the best source documents; original sources

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• Participant Data

– Common issue… failure to test

– Lost participants

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• Contribution testing - Audit procedures tend to not be properly modified for special provisions and / or errors are often found when these areas are audited:

– Catch-up contributions

– 402(g) limits

– Auto-enrollment & opt-out provisions

• Timeliness of remittance testing

• Payroll / compensation testing - Common failure related lack of auditor testing on the basis for which contributions are made

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• Plan loans

– Timely repayment

– Cessation of payments after loan is fully repaid

– Proper administration within rules and limits of the plan document and IRS limits

– Loans in default not properly accounted or allowed for

– Loans not tested by auditor

• Values not tested when certification doesn’t cover loans

• Administration of loans not tested even though required regarding of whether or not loan value are tested

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• Distributions testing

– Minimum distribution requirements

– Corrective distributions – timeliness; booking the liability

– Un-cashed benefit payment checks

– Vesting errors

• Transfers between plans

• Hire / re-hire / layoff

• Partial plan termination

– Pension plans

• Calculation errors due to complex nature

• Amounts not appropriately adjusted at different points in time (surviving spouse or term certain elections)

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• Hardship distributions

– Plan documents – Are they actually allowed?

– Generally, contributions to the plan should cease for a period of time after the hardship distribution. Common for this to not be treated timely or properly.

– Potential for risk of fraudulent applications for hardship

• Internal controls and proper administration is important

• Overreliance on TPAs often occurs

• Possible safe harbor depending on administrative and plan set up

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• Plan expenses

– Auditors often skip testing considerations related to plan expenses

– 408(b) fee disclosures now required – Has the plan sponsor complied? Has the auditor asked or obtained copies?

– Sch C on Form 5500

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Noteworthy Websites

• http://www.irs.gov/retirement-plans/

• http://www.dol.gov/ebsa/

• http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Pages/EBPAQhomepage.aspx

• http://www.401khelpcenter.com/

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http://www.irs.gov/retirement-plans/



http://www.dol.gov/ebsa/

http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Pages/EBPAQhomepage.aspx

http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Pages/EBPAQhomepage.aspx

http://www.401khelpcenter.com/


• Danielle J. Kimmell

– [email protected]

– 330-255-2459

• Cindy Mitchell

– [email protected]

– 330-255-2454

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Questions

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Employee Benefit Plan Audits: Asking the Right...

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