top common code section 403(b) problems and solutions

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Top Common Code Section 403(b) Problems & Solutions

Brian Montanez, AIF®, CPC, QPA, QKA, TGPC

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A Principal of the Multnomah Group, Brian is responsible for client service and business development in Northern California. Brian advises an array of organizations, including hospitals, educational institutions, not-for-profit organizations and private employers. Brian regularly consults with plan sponsors and industry experts on fiduciary governance issues, investment menu construction, vendor fees and services, as well as plan design. Brian has over 19 years of combined experience working in the securities, investment advisory, and retirement services industries. Prior to joining Multnomah Group, Brian served as both Vice President and Regional Sales Director with other national investment advisory and retirement services firms. Brian is an Accredited Investment Fiduciary (AIF®), certified by the Center for Fiduciary Studies, as well as a Certified Pension Consultant (CPC) and Tax Exempt & Governmental Plan Consultant (TGPC), certified by the American Society of Pension Professionals and Actuaries (ASPPA). He holds a B.S. in Economics & Finance from Bentley University in Massachusetts.

Agenda

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1. Brief Overview of IRS Correction Programs

2. Brief Overview of DOL Correction Programs

3. Common Document Issues

4. Common Governance Issues

5. Common Compliance Errors and Failures

Correction Programs

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IRS: Employee Plans Compliance Resolution System (EPCRS) General correction principles under the EPCRS:

• Internal controls to prevent recurrences

• Reasonable an appropriate IRS defined correction

• Restore/Make whole participants

Under EPCRS, there are generally 4 types of Qualification Failures:

• Plan Document Failure – a plan provision (or absence thereof) that, on its face, violates the requirements of Section 403(b) of the Code

• Operational Failure – arises solely from the failure to follow plan provisions

• Demographic Failure – failure to satisfy the nondiscrimination requirements, or coverage requirements that is not an Operational Failure

• Employer Eligibility Failures – the employer is not eligible to sponsor type of plan

Correction Programs

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IRS: Employee Plans Compliance Resolution System (EPCRS) Self-Correction Program (SCP)

• Limited to Operational Failures (not following document provisions) • Insignificant, or Significant if within 2 years of PYE • No notification or fees to the IRS is required

Voluntary Correction Program (VCP) • For plan Qualification Failures and errors that are not eligible for self-correction, OR for when

you want IRS assurance about the methods used to fix the error • You must make a written submission and pay a compliance fee to IRS • Errors are corrected and plan status preserved with IRS help and approval

Audit Closing Agreement Program (Audit CAP) • Permits you to correct errors and preserve the tax benefits for plan participants and sponsors • Fee to the IRS will be greater than the fee required under VCP, but less than the tax, interest

and penalties due if the plan lost its tax-favored status

Correction Programs Cont.

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DOL: Employee Benefits Security Administration (EBSA)

Delinquent Filer Voluntary Compliance Program (DFVCP) • Assists late or missed Form 5500 filers in coming up to date with corrected filings

Voluntary Fiduciary Correction Program (VFCP) • Affords plan sponsors and officials the chance to correct any of a specific 19 transaction • The VFCP also provides immediate relief from payment of excise taxes under a class

exemption which covers six transactions • Violations can be fully and correctly resolved in four steps. • For a list of violations and corrective actions, visit www.dol.gov/ebsa and click on “Correction

Programs”

Common Plan Document Issues

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Issue: No Plan Document by December 31, 2009

No signed plan document Late adoption Correction: Locate and Review:

• Any type of plan documents, contracts, service agreements • Board resolutions or minutes • Call Vendor(s)

Submit under VCP and pay the applicable compliance fee

See IRS VCP Submission Kit specifically intended for 403(b) plan sponsors that missed the 2009 deadline for adopting a written plan

If the failure to timely adopt a written plan was the only failure – and if the submission is made by December 31, 2013 – 50% reduction in the compliance fee


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Issue: Missing Amendments Legally Required

Voluntary/Discretionary

Correction: May correct failure by making a submission under VCP and paying the applicable fee

Consider retroactive amendments to expand benefits See IRS VCP Submission Kit specifically intended for 403(b) plan sponsors that missed the 2009 deadline for adopting a written plan


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Issue: ERISA vs. Non-ERISA Many still claiming Non-ERISA 401(a) match based on 403(b) participation To be exempt:

• Statutory - Church or Governmental • Design or Practice

• Voluntary participation • Solely enforceable by participant • Limited ER involvement (loans, hardships) • ER received no compensation • More than one 403(b) contractor (unless burdensome)

Correction/Best Practice: If 2007-2 is not clear to you, find counsel

See DOL FAB 2007-02 and/or DOL FAB 2010-01 exemption descriptions

Prior Form 5500 filings – DOL’s DFVCP


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Issue: Multiple 403(b) Plans Do you have more than one 403(b) plan

• ERISA or Non-ERISA • Extra administration • Extra communications • Extra confusion for participants

Best Practice: Review benefits rights and features

Review testing

Review investments structure

Consider consolidating plans


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Issue: Missing or Outdated Beneficiary Designations Participants fail to designate or update designation to reflect life events

Multiple plan vendors:

• Contract or Plan level designation • Who is coordinating for distributions

Best Practice: Have default beneficiaries in Plan doc

Conduct annual education program for reminder

See our white paper, “Best Practices for Beneficiary Designations in Retirement Plans”

Common Compliance Errors/Failures

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Issue: Definition of Compensation (Testing & Understanding) Whose Compensation is effectively excluded (HCE vs. NHCE)

• Bonus • Overtime

Definition testing 414(s)

Severance vs. Post Severance Compensation

• Termination date • 2 ½ Months

5-Year Post Severance Correction: Amend definition to Safe-Harbor or reasonable definition

Is restoration of benefits required


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Issue: Failure to “Administer” to the Definition of Compensation Actual deferrals do not match participant instructions

Match or Non elective contributions are based on wrong compensation

Incorrect nondiscrimination testing

Exceed individual limits under 402(g) or 415(c)

Determination of HCE could be wrong

Correction/Best Practice: Read, question and understand all that is included and excluded in definition

Simplify definition of compensation (Cost v Value)

Restore participant to place as if no error (missed $ and earnings)

Self-Correction Program may be used to correct insignificant operations problems

See Rev. Proc 2013-12 Section 8.2 for determination of Insignificance


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Issue: Excess Contributions

Compensation Limits ($255,000 for 2013) Salary Deferral limits

• 402(g) • Age 50 • 15-Year (included in 415(c))

Excess Employer Contributions Correction/Best Practice: Review limits prior to each year end

Refund and 1099-R

Multiple prior years – SCP or VCP


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Issue: Eligibility Universal Availability

• IRS: if any employee of the employer is eligible to make elective deferrals, all employees must be eligible

• Five permitted exclusions • Improperly excluded participants

Rehires

• Break in Service • Auto Enrollment

Correction/Best Practice: Confirm that vendor or benefits is tracking rehires

Potential retroactive entry dates (ER and salary deferrals)

Restore via SCP, or VCP if significant error

Compliance Errors/Failures

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Issue: 15-Year special catch-up Data availability

HR & participant understanding of rule

Ordering rules

Correction: Recharacterize

Refund and report on 1099-R

Submit via SCP

VCP if significant


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Issue: Notice Delivery SAR, SPD/SMM, 404(a), Universal Availability, QDIA, ACA

Who is responsible

• TPA • Recordkeeper • Staff • RPAC

Delivery method

Best Practice: Outsource delivery and document

Assign a responsible internal party and document delivery


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Issue: Late Deposit of Employee Deferrals Small plans

Large plans

7 Days, 15 Days Or ? Correction: Make deposit plus earnings adjustment

Correct under DOL’s VFCP


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Issue: QDIA DOL Provides clear guidance:

• DOL FAB 2008-03

Sponsor default investing mistakes • Non-QDIA

Correction/Best Practice: Document DOL approved QDIA choice

Make participant whole under VCP

Correct Prohibited Transaction under VFCP


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Issue: Termination Dates Plans not timely notifying recordkeepers of participant termination dates

Legacy Vendors

Multiple Vendors

Effects distributions

• Regular post severance distributions • RMDs

Correction/Best Practice:

Develop a practice of notifying all vendors at the same time

Perform an annual audit of termination dates

Common Governance Issues

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Issue: QDRO Administration Legal document being approved by non legal resources

The QDRO must contain certain specific information

The QDRO may not require some common distributions

Best Practice: Outsource to Recordkeeper if available

Establish relationship with legal resource


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Issue: Lack of Plan Oversight Compliance obligations

• Who is responsible and how are they ensuring compliance Fiduciary obligations

• Who is responsible and how are they ensuring prudence Best Practice: Create a board delegated RPAC

• Governance Charter

• Investment Policy Statement

• Fee Policy Statement

• Minutes

• Document, Document, and Document


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Issue: Lack of Fee Benchmarking Not a claim of excessive fees

Evidence of no fiduciary oversight of fees

Best Practice: Understand details of 408(b)(2) notice

Benchmark fees annually

Consider per head pricing

Hire an independent professional


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Issue: Lack of Internal Controls Anyone who touches the plan or its operations could commit an administrative or fiduciary violation

• Payroll processing • Benefits communication • Distributions processing • Disclosures delivery • Investment decisions • Required Government filings

Best Practice: Read and understand your plan auditor’s management letter (not a compliance review)

Create a checklist of administration and fiduciary obligations and annually verify that each person who touches any aspect of the plan understands their responsibility and is executing their responsibilities accurately

Resources

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Web Search For: IRS EPCRS

403(b) Fix It Guide

403(b) Check List

Delinquent Filer Voluntary Compliance Program

Voluntary Fiduciary Correction Program

Questions

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Contact: [email protected] (888) 559-0159, ext. 105

Disclosures

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Multnomah Group, Inc. is an Oregon corporation and SEC registered investment adviser.

Any information and materials contained herein or on our website are provided for general informational purposes only and are not intended to be comprehensive for any particular subject. Multnomah Group utilizes information from third party sources believed to be reliable but not guaranteed, and as a result, information is provided to you "as is." We do not represent, guarantee, or provide any warranties (either express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Multnomah Group shall not be liable to you or any third party resulting from any use or misuse of information provided.

Receipt of information or materials provided herein or on our website does not create an adviser-client relationship between Multnomah Group and you. Multnomah Group does not provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation.

top common code section 403(b) problems and solutions

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