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FIDUCIARYBESTPRACTICES 1 “Sure your 401k would pass an audit? Last year, most didn’t,” HRMorning.com, Feb. 21, 2014.2 “DOL retirement plan non-compliance fines up 33 percent,” BenefitsPro.com, Feb. 4, 2014.
AUDITS ON THE RISE
1,000 new DOLinvestigators1
Nearly ¾ of plans audited
resulted in fines or penalties1
IRS targeting plan sponsors with 2,500+ participants
$1.69 billion collected by
DOL in 2013—33% increase
over 20122
An increase in Department of Labor (DOL) audits is expected as ACA implementation continues
Audits ensure compliance with the rules and are a revenue source — impetus for increased audits
Even if the risk is low, the potential ramifications are significant — so, preparation is essential
FIDUCIARYBESTPRACTICES
WHAT CAUSES AN AUDIT?
• Random chance• Participant complaint• Form 5500 issue• Referral between IRS and DOL• Media?
What are some audit statistics? DOL audits happen thousands of times annually, but overall — the chances of an
audit are relatively low In 2012, the DOL conducted 3,500 audits Participant complaints generate about 25% of the audits The DOL identifies areas of interest on which each regional office focuses its
resources - MEWAs are a frequent enforcement target
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COMMONLY REQUESTED DOCUMENTS
• Plan document• Trust agreement• Insurance/annuity contracts• Form 5500 and auditor’s report• Summary Annual Report• Summary Income Statement• Benefit statements• Payroll reports• Deposit confirmation for
participant contributions
• Agreements with service providers
• Document evaluating expenses paid by the plan
• Summary Plan Description• Summary of Material
Modification• Determination Letter• Fidelity Bond• Plan’s loan policy
FIDUCIARYBESTPRACTICES
• Fiduciary may have a personal liability
• Plan committees have become targets for ERISA litigation
• Prudent plan governance can help mitigate risk
FIDUCIARYBESTPRACTICES
FIDUCIARIES AT RISK
PAST COURT CASES:
Tussey v. ABB, Inc.: Failure to monitor fees, negotiate
rebates and much more
Braden v. Wal-Mart Stores: $13.5M settlement for failure to negotiate lower
investment management fees
Tibble v. Edison International: Breach of duty of prudence by including retail-class
shares in plan’s investment menu without investigating cheaper institutional-class alternatives
• One person makes all decisions • Insufficient training • No monitoring of fiduciaries • Lack of documented processes/procedures• Complex plan design• No committee charters• No minutes from committee meetings• Presence of ERISA expense account• No documented evidence on reasonableness of fees• Late participant contributions
!
POSSIBLE RED FLAGS DURING A DOL AUDIT
FIDUCIARYBESTPRACTICES
Sources: Page 84, http://www.irs.gov/pub/irs-tege/epche103.pdf & Audit Techniques for 401(k) plans, www.irs.gov/pub/irs-tege/epche603.pdf
FIDUCIARYBESTPRACTICES
POSSIBLE RED FLAGS DURING AN IRS AUDIT
• Incorrect application of eligibility
• Employees not made aware of their right to participate in the plan
• Incorrect vesting calculations• Insufficient non-discrimination
testing/refunds• Incorrect contributions in
comparison to deferral elections and automatic enrollment
• Incorrect definition of compensation used for contributions
• Untimely submission of deferrals and loan payments
• Contributions not within 415 limits
• Trust and plan not operated for the exclusive benefit of participants
• Late submission of Form 5500s, 1099s, etc.
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IRS vs. DOLQualified status of plans,
including examining plans and processing requests for determination letters
IRS
Fiduciary standards, reporting and disclosure requirements
DOL
Potential penalties – average fine in 2013 was $600,0001
Fees from legal council, service provider, etc.
Downtime of human resources staff during audit
Loss of tax deductions for your organization
Excise taxes
FIDUCIARYBESTPRACTICES
POTENTIAL AUDIT OUTCOMES
1 “Sure your 401k would pass an audit? Last year, most didn’t,” HRMorning.com, Feb. 21, 2014.
Costs to your organization: Plan issues:
Lawsuits by plan participants and others
Civil and criminal actions
May lose ability to be a fiduciary going forward
Taxable income to participants
Loss of plan’stax-exempt status
Problems to resolve
Litigation issues:
With proactive practices…hopefully nothing!Otherwise…potential issues could include:
FIDUCIARYBESTPRACTICES
BEING PREPARED FOR AN IRS AUDIT
• Identification of roles/responsibilities internally• Annual Fiduciary training • Review administrative procedures and manuals• Hire experts• Have an up to date fiduciary file • Review governance library• Annual compliance guides• Month-by-month compliance calendar• Plan design modeling • Review of plan documents• Have an outside advisor complete a due diligence• Are you relying on accountant’s audit to find issues?• Have you conducted an internal audit to identify compliance
issues?
HAVE A PROCESS, documentation and monitoring!
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