IRS Audits and DOL Investigations of Plans and TPAs Fred Reish, APM, Partner Employee Benefits and Executive Compensation Practice Group Drinker Biddle & Reath [email protected] April 23, 2019 1
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.
Audits and Investigations
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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.
Audits and Investigations
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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
Top Ten Issues for EP Examiners
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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.
Top Ten Issues for EP Examiners
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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.
Top Ten Issues for EP Examiners
2. Acquisitions
Top Ten Issues for EP Examiners
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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
Top Ten Issues for EP Examiners
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4. Compensation
• Multiple payrolls with different compensation coding.
• Definition of correspondence in plan document differs
from compensation reported.
Top Ten Issues for EP Examiners
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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
Top Ten Issues for EP Examiners
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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
Top Ten Issues for EP Examiners
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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 . . .
Top Ten Issues for EP Examiners
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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 . . .
Top Ten Issues for EP Examiners
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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
Top Ten Issues for EP Examiners
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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
Top Ten Issues for EP Examiners
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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:
The most common issues were:
• Prohibited transactions.
• 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.
The most common issues were:
• 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.
• Prohibited transactions.
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
Request for Information
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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
Request for Information
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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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