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.

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.

Here are seven tips for employers to remain compliant regarding financial distributions from 401(k) plans:

1. Include language in your plan document regarding the circumstances for which distributions can occur. (Include definition of hardship distributions.)

2. If the loan document allows loans, then all nontaxable loans should be made prior to making a hardship distribution.

3. If a hardship distribution is made, be sure that the distribution does not exceed the total elective contributions.

4. Retain hardship application files in case of an IRS audit.

5. If an employee receives a hardship distribution, then he or she is prohibited from making elective contributions for at least six months after the distribution is received.

6. Participant account statements need to document elective contributions vs. other types of contributions, such as employer contributions.

7. File form 1099-R for all employees who receive distributions.

You may not think of your retirement plan as ‘illegal,’ however, the IRS views it that way if a plan is out of compliance. And, the IRS is getting better at identifying out-of-compliance employee benefit plans.  To be in compliance, a plan must:

-          Operate under the provisions of the plan document

-          Make timely contributions to the plan

-          Show proof of properly classified assets that satisfy liabilities

The Employee Plans function of the IRS uses a methodology to target plans for examinations. In an effort to protect the financial investments of plan participants, the Employee Plans function is able to predict emerging issues in plans that can put a plan in jeopardy of being able to fulfill its financial obligations. The methodology is partly based on knowledge of market segments that tend toward non-compliance. In addition, the IRS sources examinations from special projects, using information from changes to the Form 5500, legislative changes, and other available research. The Employee Plans function also selects plans that come from IRS-wide information sources about fraudulent tax schemes, and that come from referrals.  If the IRS finds a plan is currently or has the potential to be out of compliance, the IRS will work with plan administrators to correct the examination issues. For more information about the research from the Treasury Inspector General for Tax Administration, view the full report.

Do your employees really read and understand the documents they sign or do they robo-sign thousands of documents in minutes?  What are the future business consquences? Attorney, John Palter of Riney Palter PLLC in Dallas addresses this topic in his article “Robo-Signing Roulette.”