how to find and correct plan errors

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HOW TO FIND AND CORRECT PLAN ERRORS

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AGENDA

• Where do plan sponsors make most mistakes?

• Plan audits – what are those pesky auditors up to?

• How to find, correct, and prevent a plan error

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WHERE DO PLAN SPONSORS GO WRONG?

Compensation

• Most common error: operations do not match document

− Plan document controls

− Non-cash taxable fringe benefits – included or excluded?

− Limited to $250,000 (2012 limit) – adjusted annually (applies to employer contributions only)

− Different compensation definitions for employee and employer contributions

− Allowing deferrals equal to 100% of compensation

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Eligibility

• Not following the proper Entry dates

• Excluded classes of employees (e.g. per diem)

• Age and years of service requirements

• Different requirements for employee and employer contributions

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• Plan documents control − Hardship withdrawals

− In-service distributions

− Force outs?

• Plan documents control − Improper amount

− Improper repayment

− Default loan timing

Distributions

Participant loans


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Plan Document

• Required plan amendments (e.g., EGTRRA, PPA) Failure to sign!

• Maintaining signed amendments or documents

• Timely elective plan amendments for plan changes − Compensation − Eligibility − Distribution provisions

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Miscellaneous

• Timely deposit of participant contributions

• Failing to file Form 5500 or other forms e.g., welfare benefit plans!

• Not retaining copies of signed salary reduction agreements

• Overall review of the plan (e.g. investment performance, plan documents, etc.

GAIN CONTROL

WHAT DO AUDITORS DO, ANYWAYS?

• Read the plan document for basic requirements

• Test samples of transactions

• Obtain an understanding of internal controls

• Verify filings are made timely

• Review results of non-discrimination testing

• Verify employee deferrals are remitted timely

GAIN CONTROL

WHAT DON’T AUDITORS DO?

• An audit is not a complete, comprehensive review of your plan document or the Plan’s operations

• Auditors do not find every instance of error or fraud

• Auditors don’t test every transaction

GAIN CONTROL

WHAT IS PARTICIPANT DATA TESTING?

• Select sample of employees and/or participants

• Obtain census, payroll reports and participant account information

• Verify indicative data between plan and employer records

• Determine participants’ eligibility to participate

• Verify contribution rates

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• Agree gross wages to W-2 or other substantive documentation

• Reconcile gross wages to plan wages

• Recalculate employee and employer contributions

• Reconcile recalculated contributions to plan records

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• Verify eligibility

• Proper Authorization

• Verify amount − Gross amount − Withholding − Vesting

• Proper amount

• Terms within limits

• Repayment

Distributions

Participant Loans


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OOPS, WE MADE A MISTAKE! NOW WHAT?

Correct affected Plan Years

• Self-Correction – No filing with the IRS

• Voluntary Correction Program – must file with the IRS

• Audit Closing Agreement Program (CAP) – Not good!

GAIN CONTROL


Compensation – but the plan document is wrong!! Oops – we underfunded the employee

• Recalculate contributions for all affected employees − Fix all affected plan years − Employer is responsible for these contributions − Employee contributions – fund a minimum of 50% of lost

contributions, − Employer contributions – fund 100% of lost contributions

• Adjusted for lost earnings – Generally not the DOL rate!

• Correct operations prospectively

− Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of

compensation

GAIN CONTROL


Compensation – but the plan document is wrong!! Oops – we overfunded the employee

• Recalculate contributions for all affected employees − Employee contributions – refund 100%, plus applicable

earnings − Same plan year – correct outside of the plan

− Employer contributions – forfeit 100%, plus applicable earnings

− Is it material? Does it matter?

• Correct operations prospectively − Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of

compensation

GAIN CONTROL


Compensation – we want to amend the plan document

• Avoid ambiguous terms in the Plan document

• Describe what’s included, rather than excluded Depends on the type of Plan document

• Keep it simple!

• Make amendments effective at the beginning of the plan year!

GAIN CONTROL


Eligibility – but the plan document is wrong!! Oops – we excluded an eligible participant

• Recalculate contributions for all affected employees − Employer must fund these corrective contributions − Employee contributions – fund a minimum of 50% of lost

contributions − What is the lost contribution − Employer contributions – fund 100% of lost contributions

• Determine lost earnings

• Correct operations prospectively

− Adjust payroll so that plan wages agree to plan document OR − Amend the plan document to restate the definition of

compensation

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Eligibility – but the plan document is wrong!! Oops – we included an ineligible participant

• Amend plan to permit affected employees to participate Must not be Highly Compensated Employees

• Refund contributions?

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Eligibility – but the participant never returned an enrollment form!!

• Employer contribution – if no matching requirement, participant should be given the contribution

• Qualified default investment alternative

• Keep constant communication with the employee

GAIN CONTROL


• Untimely deposits of participant contributions − Calculate lost earnings − Fund 100% of the lost earnings − File with the DOL under the Voluntary Fiduciary Correction

(VFC) Program?

• Failure to file Form 5500 − File the required form(s) under the DOL Delinquent Filer

Voluntary Correction (DFVC) Program − Pay penalty of $2,000 per plan, per year, limited to $4,000

GAIN CONTROL


No signed salary reduction agreement

• Perform a self audit of participant files

• Send confirmations to participants with their current deferral election and ask them to sign the confirmation

• Request participants to fill out a new form

• Require all new hires to sign a form during orientation

• Checklist

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Participants received excess contributions

• Maintain list of annual limits each year (2012 limits) − Compensation $250,000 (employer contributions only)

− Salary Deferral Contributions: $17,000

− Catch-up contributions $5,500

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Overall review of the plan

• Assign oversight responsibilities to a group − Review investment performance − Review SSAE 16 (formerly SAS 70) reports − Review and approve plan amendments

• Perform self audits by randomly selecting employees and

recalculating their contributions

• Consider an independent Plan review

how to find and correct plan errors

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