Megan Broomfield, The Daily Record Newswire
As you’re probably already aware, plan management can no longer hire a third-party administrator and let the plan operate on “auto-pilot.” It is a prudent step to do an internal controls check-up on your plan as it is an important fiduciary task. Each of the following questions addresses some of the common issues we’ve found during plan audits.
Is your plan documentation and operation up-to-date with recent law changes?
The IRS publishes information regarding required plan amendments at: www.irs.gov/Retirement-Plans/Recent-Guidance-That-May-Require-Interim-or-Discretionary-Amendments. We recommend using the IRS website or checking with your plan document provider to ensure your plan is in compliance. If there are any missed amendments, the plan sponsor can correct by adopting the necessary amendments and filing a VCP under the IRS EPCRS.
Does your plan document properly reflect current plan operations?
Differences between what the plan document says and what is actually done in administering the plan are the source of many plan defects. To mitigate operational errors, we suggest plan sponsors be proactive and compare the terms of the plan document to the actual day-to-day operation of the plan on at least an annual basis to ensure the plan document is being followed correctly.
When a plan document is updated, ensure that updates to the plan terms are correctly communicated to all providers and fiduciaries (including Human Resources, payroll and the plan recordkeeper). Some of the most commonly found plan defects are listed below. All of these errors can be corrected using the EPCRS:
• Does the definition of compensation used for calculating contributions or benefits agree with the plan document? An annual review of the payroll system can help ensure that the compensation used in plan-related calculations is in agreement with the plan document and includes/excludes different sources of compensation based on the terms of the plan document.
Be especially alert to such errors when there are either changes in the payroll system or the plan document. For instance, mistakes are common when there is a change in service providers, a new plan document is established or when the company adopts a new payroll system without a complete review to ensure the system conforms to the plan document.
• Have all eligible employees been given the opportunity to participate in the plan? Effective controls are especially important to ensure eligible employees are identified and offered the opportunity to defer elective contributions to the plan in a timely manner. Even if you utilize a third-party service provider to handle this task, plan management is still responsible to ensure eligible participants are provided an opportunity to participate in the plan.
Some of the internal controls that may need to be in place include monitoring of employee census information to identify newly eligible employees and review of documentation related to newly eligible employees.
• Have participant loans been made in accordance with the plan document? Understand your plan document’s rules for participant loans. Procedures are needed to prevent inaccurate loan issuances (which are prohibited transactions). Plan management should ensure that loan issuances and repayments follow the terms of the plan document, including the loan amount, the interest rate, the loan term and repayment terms. The plan document provisions should be clearly communicated with third-party service providers to ensure the provider accurately administers the loans.
• Have hardship distributions been made in accordance with the plan document? Some plan sponsors are seeing an increase in hardship distributions due to the downturn in the economy. Be sure personnel in charge of approving those requests fully understand the plan document’s provisions for hardship distributions. Even if the request is handled by the third-party service provider, the plan sponsor is still responsible to ensure that hardship distributions meet the plan requirements. Also, once the hardship distribution is made, monitoring and controls should be in place to ensure that the participant is properly suspended from making contributions to the plan based on the terms of the plan document.
Have all employee deferrals and participant loan repayments been deposited timely?
Keep in mind that it is the procedures and internal controls at your company that dictate the amount of time it should take to segregate the deferrals and loan repayments. The best way to determine whether the deposits were made timely is to evaluate all of the remittances that were made to the plan (or should have been made to the plan). For each remittance that should have been made, plan management should determine the earliest date that the assets could have been segregated from the general assets of the plan sponsor and then compare that date to the actual deposit date.
This comparison should be done for all remittances to the plan during the year to check whether the internal controls over the remittances worked for the entire year. If any remittance was past the date that plan management determined to be reasonable, the remittance is considered late. Any late remittance is a prohibited transaction, which should be corrected as soon as possible.
If you anticipate needing possible improvements or corrections for your plan, first make sure there are appropriate internal controls in place. Under the EPCRS, a plan sponsor has the ability to either self-correct or file under the VCP. For a plan to be able to use the self-correction method, the plan sponsor must have established internal controls designed to promote compliance with the applicable DOL or IRS requirements.
Second, the fixes must be made in a timely manner. For significant errors, the plan sponsor has only two years following the year in which the mistake occurred to correct under the self-correction program. Once you have made needed corrections, continue to monitor and improve the plan’s internal controls as it also may help your plan in the event of an IRS audit or inquiry.
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Megan Broomfield, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP and may be reached at Mbroomfield@mmb-co.com.
