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.

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 »

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.

A determination letter from the IRS gives you the assurance and validity that your plan meets the criteria for contributions to the plan to be tax exempt (non-Roth IRAs). However, if you make any changes to your retirement plan, including amendments, then you need a new determination letter. So, if you made changes to the plan that were due by December 31, make sure that you also take care of these three things:

1. Request a new determination letter. Work with your third party administrator to ask the IRS to review your revised plan document and issue you a favorable determination letter. The plan prototype may already have been deemed acceptable by the IRS and if this is the case make sure that you retain a copy of the letter.

2. Check the letter for consistency with your amendments. If you find an error, fax the letter sent to you with an explanation of the correction needed.

3. Administer the plan to according to the plan document. Failure to follow your plan document can nullify the tax exemption awarded by the IRS’ determination letter.

To request corrections for errors or to get a copy of your current determination letter, send your request via fax to 513-263-4330 and include:

-         Plan sponsor’s name, EIN and phone number

-         Plan name and number

-         Year that the letter was issued

-         Fax number to send the copy of the determination letter

If you prefer to mail your request, send to: Attn: Manager, EP Correspondence, IRS, P.O. Box 2508, Room 5-120, Cincinnati, OH 45201

For more information, see a list of FAQs about determination letters.

Understanding and communicating plan fees is just one way to be a prudent fiduciary. Another way you can assure your plan participants of good financial management is to put your plan out to bid every two to three years. While this will require extra effort from the plan sponsor, the benefits can be worth the process to ensure reasonable fees and justify services. Some companies hire a third party consultant to handle the process, taking the burden off of the plan sponsor. However, the plan sponsor is ultimately responsible and will still need to prepare search information. Here are six steps to initiating a search:

Read the rest of this entry »

This year, when you make New Year’s resolutions, be sure to have one about checking on the fees you pay to administer your plan. Even a company like Walmart, with its extensive legal resources, recently agreed to pay $13.5 million dollars along with Merrill Lynch for a class action settlement. Without admitting any fiduciary wrongdoing, they agreed to eliminate funds from their plans that carried high fees. A few reminders:

1. Know what fees you pay and be prepared to justify them to your plan participants as well as the DOL.
2. Be sure that record-keeping fees are documented separately from investment management fees.
3. Diversify your plan portfolio, offering choices to plan participants.
4. Communicate all changes to your plan participants and employees – clearly and promptly to avoid any misunderstandings.

Your plan auditor is a good source of information about ways to keep your plan in top fiduciary shape. Another good resource is the AICPA’s Accounting and Auditing Resource Centers.

Many workers are staying in jobs past traditional retirement age, and the rules regarding distributions at age 70 ½ can be complicated. Plan participants can make contributions and take required minimum distributions at the same time. As an employer, you’re required to continue making contributions for an employee as long as they are employed and participate in your plan. Here are IRS guidelines that you need to know and follow:

When to distribute:

-         Required minimum distributions (RMDs) are required at age 70 ½ or the year in which the participant retires (if after age 70 ½).

-         In the case of a SIMPLE IRA, SEP or if the participant is at least a 5% owner, RMDs must occur at age 70 ½, regardless of retirement status.

How to calculate required minimum distributions:

-         Generally, the value of the retirement plan or IRA on December 31 of the prior year is divided by the life expectancy of the plan participant.

-         Life expectancy is determined by one of three tables in Publication 590 (Appendix C), based on marital status and age difference of spouse.

When to schedule payment:

-         Participant must take the first RMD by April 1 of the year following age 70 ½ or retirement.

-         In the following years, the participant must take the RMD by December 31, including the year that the distribution was taken by April 1.

Additionally, you must also give your employee the option to continue deferring salary after age 70 ½, if permitted by your plan.

The IRS announced cost of living adjustments for contributions to various types of retirement plans in the 2012 tax year. You can use the information in an IRS easy-to-understand chart to communicate contribution limits to your employees.

In an effort to save money, some companies are terminating their retirement plan options. However, as long as funds are still present in a plan, companies with more than 100 eligible participants remain required to have an annual audit even if the plan is terminated.

The key word is ‘eligible.’ If a plan is active, participants are considered eligible if they have an opportunity to participate, even if they do not elect to do so. If you terminate your plan due to reduction in force, you need to know how many participants (present and former employees and beneficiaries of deceased former employees receiving benefits) you have to determine if you still need an audit. A reduction in force that creates a 20% or greater drop in participants is called a ‘partial termination.’

One important consideration about full or partial termination of a plan is that the matching contributions and other employer contributions must be fully vested for all participants when a plan is terminated. This rule applies regardless of the vesting schedule. A participant’s elective deferrals in a 401(k) plan are always fully vested, but the employer portion is based on the plan document provisions.

Here are the criteria for a fully terminated plan:

-         An established date of termination

-         A description of the benefits and liabilities of the plan as of the termination date

-         Distribution of plan assets as soon as administratively feasible, typically within one year after the termination date

If a plan is a qualified plan, then participants will have tax-favored status for the distribution amount. Otherwise, participants are liable for taxes, or can designate a rollover account to defer taxes on the distribution amount.