Employee benefit plan audits require specific tests. Since plan sponsors are ultimately responsible for the audit, be sure that you get what you need to remain in compliance. Here are seven questions to confirm with your auditor that will keep you covered as long as the answers meet compliance standards:

1. Have the plan assets been fairly valued? What is the standard used to value the assets?
2. Are plan obligations properly stated and described?
3. Are contributions to the plan received in a timely manner?
4. Are benefit payments made in accordance with the plan terms?
5. Are participant accounts fairly stated?
6. Are there any issues with the plan that may impact the plan’s tax status?
7. Are there any identified transactions that are prohibited under ERISA?

Answers to the questions above will provide a dialogue with your auditor from which you can form a plan to make necessary corrections. Hiring an auditor with specific employee benefit plan experience makes it easier to prioritize the adjustments.  Your plan participants need the assurance that their benefit plan meets ERISA standards.

One of the most significant errors in retirement plans is the calculation of compensation for plan contributions. The IRS views such errors as very serious, with consequences that can lead to operational failures and ultimately, disqualified status. Here are examples of compensation errors:

-          Contributions to the plan by the employer on base compensation only. If a plan document states that profit-sharing contributions are to be calculated for base compensation plus commission, be sure that contributions are also made for commissions paid to the employee.

-          Exclusion of overtime or other ‘extra’ pay from definition of compensation. If overtime or other pay is excluded, then the contribution rate becomes unequal for highly-compensated vs. non-highly-compensated employees.

-          Using a higher amount of compensation than allowed by the IRS Code §404. Going above the approved IRS amount may result in a nondeductible contribution and the employer owing additional tax, including excise tax.

-          Failure to use the IRS’ statutory definition of compensation. The IRS specifies limits and minimums.

Here are tips from the IRS to avoid compensation-related failures:

1. Review your plan document’s definitions of compensation for each plan purpose.
2. Use the statutory definition of compensation when required.
3. Transmit accurate compensation data for each employee to your payroll processor and plan administrator.
4. Consider amending your plan to use one definition of compensation for all plan purposes.
5. Periodically review your plan for errors and fix them as quickly as possible using IRS correction programs.

One of our readers asked a question about the small employer health insurance credit. For the answer, I consulted Lisa Potter, CPA and senior tax manager, who has a blog that focuses on issues for nonprofit organizations, www.990taxhelp.com.  Our firm also has a blog specific to churches, www.thefaithfulsteward.com.

The question:

Our church has three pastors.  One pastor has a family plan that we pay.  The other pastor is retired and we reimburse him for him and his wife’s Medicare and Medicare supplement insurance.  The third pastor’s wife works and has insurance through her employer.  We reimburse him the amount withheld from her check for insurance.  Are any of these eligible for the 8941 tax credit?

Response:

The credit for small employer health insurance premiums is only available for premiums paid directly by the employer.  This means
that any reimbursements paid to employees are considered fringe benefits to the mployees, but the employer may not claim credit on Form 8941 for reimbursements for payments employees make to other plans.

Whether or not a credit may be claimed for the pastor on the family plan depends on several criteria.

1) The church must pay premiums for employee health insurance under a plan offered by the church.  This credit (25% for non-profit entities) is claimed by filing Form 990-T along with Form 8941.

2) The church must have fewer than 25 fulltime equivalent employees (FTE’s) for the year.  Ministers do count as employees for the purposes of calculating this credit, even though they are treated as self-employed for social security and Medicare purposes.

3) The church must have paid average annual wages for the tax year of less than $50,000 per FTE.

If you think you have met the three criteria listed above, you should then refer to the Form 8941 instructions.  This credit involves many complex calculations that must be considered on a case-by-case basis to determine whether the credit is available and worth filing the necessary paperwork to claim it.

If you think you qualify for the credit, and would like additional assistance, please contact one of our tax advisors and set up a consultation to discuss the details of your particular situation.

Bloggers and financial planning professionals are talking about the DOL’s upcoming requirement to disclose details about administrative fees for 401(k) plans. July 1 is the date that sets all of the wheels in motion regarding fee disclosures. Right now, you can plan ahead and be ready, and make any adjustments you feel are needed for your plan. The DOL has a worksheet that takes you through a series of steps to determine the fees you pay. Using this worksheet will give you clarity about your fees and ample time to prepare how to address the fees and present them to current employees and other plan participants. Here are the key dates to remember:

July 1 – Plan administrators and mutual funds must disclose details of administrative fees (direct and indirect compensation) in 401(k) plans.

August 30 – Plan administrators must furnish plan participants with a copy of the fees by this date.

November 14 – Date by which fees and expenses must appear on the quarterly statement for fees incurred from July to September, 2012.

With the information you uncover about your fees, you may want to consider benchmarking your plan against other plans with similar number of participants and assets. Having benchmark information will also help your justification of fees with employees. Remember that many employees are unaware of fees and will require justification because the fees affect their ultimate savings.

The formal name for setting auditor expectations is ‘written representations.’ Without a document of representations, the auditor is limited in his or her ability to provide a thorough opinion of the plan. The plan managers who are responsible for financial statements need to prepare a complete document for the auditor that includes the following:

-         Financial records and related transaction information

-         Minutes of meetings related to the plan such as plan committees, trustees or directors

-         Communications from regulatory agencies

In addition, the document must also include the following eight disclosures:

1. Acknowledgement of the fair representation of the financial statements of net assets available for plan benefits and  statement of benefit obligations
2. Statement that any uncorrected misstatements are immaterial to the financial statements as a whole
3. Internal control responsibility and procedures to prevent and detect fraud
4. Knowledge of any suspected fraud by management, employees former employees, regulators or others
5. Knowledge of violations or possible violations of regulations or unasserted claims
6. Intentions for the plan that may affect the classification of assets or liabilities
7. Verbal or written guarantees or gain/loss contingencies that affect the plan’s liabilities
8. Documentation of assets that are pledged as collateral

Your auditor will also want to know answers to these five questions: Read the rest of this entry »

401(k) plans require much maintenance to meet fiduciary requirements. There are many mistakes that can creep in over time that put you out of compliance. Here’s a list of potholes that can wreck your plan with the IRS:

-         Not updating your plan to reflect current laws

-         Not operating the plan in accordance with the plan document

-         Incorrect definitions of compensation for deferrals and allocations

-         Lack of consistency with employer matching contributions

-         Failing the 401(k) ADP and ACP nondiscrimination tests

-         Excluding eligible employees

-         Not making timely deposits of employee elective deferrals

-         Incorrectly administering participant loans or hardship distributions

-         Not making required minimum contributions

-         Delaying filing the Form 5500-series return

-         Not distributing a Summary Annual Report to all plan participants

Instead of losing sleep over the problems that come with non-compliance, the IRS provides a simple to understand 401(k) plan fix-it guide. The guide includes how to find, fix and avoid mistakes. Regular review of this list and making note of your compliance actions can save you time and work when it’s time for an audit.

Your 401(k) auditor has two essential and one optional step to take with regard to internal control deficiency findings. Before you hire your auditor, ask what you can expect with regard to communication and recommendations. By including your expectations in your engagement letter, you’ll get a better quality audit and can get information that will help you.

Two essential steps for your auditor

1. Evaluate the severity of deficiencies – Your auditor will determine if an individual or combination of deficiencies are material weaknesses or significant deficiencies. The measure used to determine severity is the:

• Magnitude of the potential misstatement
• Degree of possibility that the plan’s controls will fail to prevent, or detect and correct a misstatement of an account balance or disclosure.

2. Communicate the deficiencies in writing – Your auditor has no more than 60 days following the financial statement issuance date to communicate the deficiencies to you. For plans that file a Form 11-K with the SEC, the deadline is to communicate within 45 days. If no deficiencies are found, the auditor must also communicate a lack of deficiencies.

Note: Auditors are required to put the same deficiencies in writing repeatedly until the deficiency is corrected. And, the deficiencies found must be put in writing even if they were corrected after a verbal notice of the deficiency.

One optional step for your auditor

Recommend steps to take to improve internal controls – To me, this step separates an adequate auditor from a good auditor. Your organization can gain valuable insight from the recommendations prepared by your auditor. The recommendations give you fiduciary guidance that you can use to evaluate the costs and benefits for revising internal controls.

Such focused attention on internal controls gives plan fiduciaries a confirmation of governance, which is justification of a well-managed plan.

One of the most significant points of your benefit plan audit is determining the strength of internal controls with regard to reliable financial reporting. Here is a description of the three types of deficiencies that you want to avoid:

1. Material weakness – A deficiency, or combination of deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
2. Significant deficiency – A deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
3. Deficiencies in internal control – Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

Because internal controls are critical to good fiduciary management, I want to make sure that you have examples of issues that could cause a problem for you. Here are types of circumstances that may be material weaknesses or significant deficiencies: Read the rest of this entry »

Your auditor’s engagement letter details the expectations of the roles of both auditor and plan sponsor. Understand that if the scope of services changes, the engagement letter may need to be updated during the course of the audit. Because an update typically means more work for the accountant, that can translate to paying higher fees. So, it’s better to fully vet the issues before beginning by asking these questions:

1. Can we perform a limited-scope audit, or do we need a full-scope audit to satisfy the DOL?
2. Do we have all of the financial records up to date and easy to locate?
3. Do we need to file a Form 11-K with the Securities and Exchange Commission (SEC)?
4. Do we have a list of internal controls by which the auditor can assess the risks of material misstatement of the financial statements?
5. What is the auditor’s responsibility regarding supplemental schedules required by the DOL?
6. Is tax-exempt status an issue? If yes, will the auditor give an opinion regarding the plan’s qualification in that regard?
7. Will the auditor be responsible for information for the Form 5500 and/or Annual Report?
8. How will the auditor communicate ERISA compliance issues found during the audit – verbally or in writing?
9. What is the auditor’s responsibility regarding electronic filings?
10. Have we agreed upon estimated delivery time, fees and billing arrangements?

Asking these questions will set expectations and fulfill your fiduciary responsibility to your plan participants. We recommend keeping a written record of all correspondence and requesting verbal communications to be confirmed in writing.

While we wait for the official DOL ruling about plan fees, here’s a Wall Street Journal article that offers some explanation and perspective.