Embed Size (px)
Citation preview
Agenda
• Why Employee Plans (EP) audits are necessary
• Identify strategic EP changes
• Impact of audit changes
• Issues by plan type
• Employee Plans Compliance Correction System (EPCRS)
• Discuss best practices
• Mitigate audit risks
2
Poll Question #1
What error do you see most often?
A. Distribution error (including failure to obtain consents)
B. Eligibility error
C. Vesting error
D. Compensation error
E. Contribution error (including excess limit)
F. Other
3
Why Are EP Audits Necessary?• When no regulatory enforcement things go off the rails quickly
• Helps good professionals
– If no audits, then lost business to less-scrupulous competition
• Helps professionals and employer know what type of issues should be addressed in non-audit reviews of plans for internal control
• How audits can increase business
– More chances to be involved with your client
– For those that are not being audited may be convinced they need self-audit
– Helps client to listen to your advice
4
Impact of IRS Funding on Employee Plans
• EP had to try to try to change their delivery of services
• These choices directly impact you and your clients• Whether the correct choices have been made is yet
to be determined
5
Funding Impacts on EP Workforce
• No major hires for over 15 years
• As employees retired they have not been replaced
• EP has lost a tremendous number of experienced employees
• EP still has quality personnel
6
Actions Taken by EP and TEGE
• Drastically curtailed outreach
• Changed the Determination Letter Program
• Created combined Compliance Planning and Classification groups (CP & C)
• Discontinued Employee Plans Team Audit (EPTA) as separate audit group
• Disbanded Compliance Planning Groups
• FSLG moved under EO
7
Funding Impact on Training Auditors
• Limited face-to-face training
• Most training over their internal web
• Cost effective but limits the spread of ideas and discussions among auditors, which impacts employers with inconsistent enforcement positions
8
Knowledge Sharing Group (K-Nets)
• Attempt to deal with loss of knowledge and experience through retirements
• Have separate specialized areas
• Designed to help agents with research on technical issues
• Has ownership of the “Issue Snapshots”
‒ https://www.irs.gov/retirement-plans/ep-issue-snapshots
9
EP’s Changing Utilization of Employees
• New hires will be placed in offices that have audit and determination functions
• Cross-train employee to perform both examinations and determinations
• Determination agents in Cincinnati were recently trained for examinations
• Just-in-time training to support the compliance strategies
10
Changes to EP Audit Selection
Compliance Strategies
Next Best Case
Referrals
RAAS
Claims
Other
11
Compliance Strategies• See TEGE FY2019 program letter
– https://www.irs.gov/pub/irs-tege/fy2019_program_letter_final.pdf
– Agents recommend issues
– Approval by TEGE’s Compliance Governing Board (CGB)
• Partner with IRS Research, Applied Analytics, and Statistic Division (RAAS)
• Appears to be an attempt to have defensible position for case selection – may be best case (yet to be determined)
12
Compliance Strategies – Audit Selections
• Distributions
– Listed number one
• Stop filers – Form 5500
• 403(b)/457
• Small plans large assets
• Simplified Employee Pensions (SEP)
• Terminated cash balance
• Look at Exempt Organization workplan
13
EPCU Activity – Program Letter
• https://www.irs.gov/retirement-plans/employee-plans-compliance-unit-approved-projects
• Compliance contacts
• Soft letter
• Deductions in excess of 25 percent of compensation
• SEP-IRA plans with required minimum distribution failures
• Stop filers of Form 5500/5500-SF
14
EP Audit Selection
• Next best case
– Overriding assignment criteria
– Based upon compliance strategies generally
• Referrals from other business units
– Some of the most productive work
• Claims for refunds
• Other case work
• Note: Any of the above could be next best case
15
Impact of EP Changes on Auditors
• Next best case
– Agents traveling everywhere
• Correspondence audits
• Auditors may request determination agent review individually designed plans
• Most audits will still be focused audits
16
Impact of EP Changes on You and Your Clients
• Inexperienced auditors
– Most determination agents have not audited
• Not dealing with agents reasonably local to you and client
– Working with different Audit CAP Coordinators
• Correspondence audits
– May be more focused (not a requirement)
– Allows more audits
17
Common Errors All Plans
18
Distribution Errors
19
How IRS Could Identify
• 5500 SCH H
– Line 4(l)
• Has the plan failed to provide any benefit when due under the plan?
– Line 1(c)(8) – Participant loan amount
– Line 2(g) – Deemed distributions of loans
• Form 1099-R Box 7, code L – Taxable Loans
• The above questions help EP have an analytical approach to selecting distributions
20
Distributions – #1 Compliance Strategies
• RMD missing participants– https://www.irs.gov/government-entities/tax-exempt-and-government-
entities-interim-guidance-and-directives
• Issues the IRS has been addressing for several years
• Tip and best practice
– Establish policies and procedures to try to ensure current addresses are maintained
– Identify all terminated employees near 70½ and make sure the distributions commence
– If missing, then take steps outlined in IRS Administrative Guidelines and document your efforts
– Make sure five-percent owners are properly identified for distribution at 70½ even if still employed
21
Distribution Errors - Calculation
• Not fully vesting at NRA
• Miscalculating vesting because of breaks, transfers
• IRS looks closely at partial termination
• Not utilizing forfeitures in timely manner (according to plan)
– Allocate
– Reduce employer contributions
– Pay expenses
22
Distribution Errors - Consents
• Failure to obtain spousal consents
• Distributions prior to normal retirement age or age 62 made without the consent of the participant
• Involuntary cash-out greater $1,000
– Failure - auto-rollover IRA
• Distributions greater than $5,000 no participant consent
• Failure to follow plan language when provides for mandatory cash-out
• Failure to give 402(f) notice
23
Distribution Errors - In Service
• Impermissible in-service distributions
– Generally not following plan provisions– https://www.irs.gov/retirement-plans/plan-participant-employee/when-
can-a-retirement-plan-distribute-benefits
• Distributable events
– PS/403(b)
– Pension
• Other in-service distribution errors
– Hardship distribution errors (subsequent slide)
– Loans errors (subsequent slide)
24
Hardship Distributions Errors
• Not following plan provisions
• Not following six-month suspension when using safe harbors
– Removed effective plan years beginning 2019
• Failure to sufficiently document
– https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
– Maintain all documentation or
– Summary substantiation method
– Whatever you chose follow the correct procedures
• Not addressing 2019 changes
25
Distributions – Loan Failures
• A loan is a distribution unless it meets the requirements law:
– Term failure
– Maximum amount failure
– Reasonable rate of interest
– Enforceable loan agreement
• Document does not provide for loans but loans allowed
• Defaulted loans not properly handled
26
Correction - Distributions
• RMD –EPCRS
– SCP but no excise tax forgiveness under IRC 4974
– VCP – May request IRC 4974 relief
• Correction loan defects
– Must be through VCP
– Failure to provide for loans – allowed in operation
– Improper repayment schedule
– Defaulted loans
• Hardships
• Consent failures
27
Plan Document Errors
28
How IRS Could Identify
• No good way for the IRS to identify these errors through data analysis
• Including failure to follow the plan under document errors
• Remember the compliance questions IRS wanted to add to 5500 SCH R
29
Plan Document – Errors Start Here• Failure to timely amend
• Failure to follow written plan – operational error
– Problem for all plans
• Payroll problems
– Payroll/HR system not matched to the document requirements
– Big problem when change payroll systems
• Document is changed and no longer matches operations
• Best practice
– Is there a system in place to monitor plan changes and compare to operation?
30
• Not maintaining the written plan that shows compliance with Notice 2009-3
• Other documents in conflict with written plan
• Tip: Identify this problem by having the sponsor explain how they determine benefits etc.
• Tip: Sponsor should have committee that monitors changes to all documents addressing the plan to maintain consistency
• Think about paperclip approach prior to IRS audit if needed
403(b) - Written Plan
31
Plan Document – Best Practice
• Keep signed copies of plan and all amendments
– Reflecting date signed
• Make sure the following match plan document
– SPD; website; orientation materials; employee handbooks
– Critical under the new determination letter environment
• System in place to monitor plan changes and compare to operation
32
Documents - History
Compensation Errors
33
How IRS Could Identify
• No good way for the IRS to identify these errors through data analysis
• They can perform analysis of W2 data, but I do not see how this provides any good inroads to compensation errors
34
Compensation Impacts
• Employer contribution formula
• 402(g) deferrals
• 415 limits
• 401(a)(17) limits
• Catch-up limits
• Determining HCE
• ACP/ADP testing
• Other
35
Compensation Errors
• #2 on VCP list of top-ten failures
• Payroll does not match plan compensation definition
– Excludes amounts not in document
– Post-severance compensation does not match document
– Include amounts not in the document definition
• IRS Information Document Requests (IDRs) are often not clear on what compensation they are requesting
• Tip: Should check particularly on takeovers
– Review payroll codes and compare to plan document as likely to be missed on takeovers
– Actually talk to the individuals that are familiar with the payroll system
36
Compensation Errors - Examples
• Using different definition of compensation when have multiple plans
– Payroll most likely uses one definition
• Post-severance – Common error
• Housing allowance in church-plan environment
– Document often does not address but employer contributions usually considered
37
Compensation Errors – Best Practice• Have yearly conversation with client about compensation
• Very important to drill down on take-over clients
– Review payroll codes and compare to plan document as is likely to be missed on takeovers
– Actually talk to the individuals that are familiar with the payroll system
38
Limitation Errors
39
How IRS Could Identify
• W2 box 12
• 5500 SCH H line 2(f)
• Form 1099R Box 7 Code 8
• Form 1099-R Box 7 code E
40
Limitation Errors
• IRC 401(a)(17) – 2019 limit - $280,000
• IRC 402(g) Limit - 2019 Basic limit - $19,000
– Multiple plans
• IRC 415(c) Limit - 2019 limit - $56,000
– Special 403(b) aggregation rules
• IRC 457(b) Limits - 2019 Basic limit - $19,000
• EPCRS correction
– Correction procedures for the excess amounts
– Note: 457(b) of tax-exempt non-governmental has extreme risk for failure, not exactly EPCRS
41
Special 403(b) Limitations• IRC 402(g) Limit
– Basic $19,000 plus
– Age 50 catch-up plus
– Special 15 YOS catch-up
– Tip: Before records are purged by old vendor, sponsor should request electronic file
• IRC 415(c) Limit
– Plan Aggregation – Employers are not taking steps to address DC plan controlled by participant
– Tip: Should be could in SRA and annual effective opportunity notice
• Should start now even though prototype language might not be in effect
42
457(b) Annual Limits – Errors
• Limit includes both employer and employee contributions
• Available limits
– Basic Limit - $19,000 for 2019
– Age 50 catch-up (only governmental plans)
– Special 457(b) catch-up
• Last three years ending before YR of NRA
– Governmental employees are not allowed both catch-ups, unlike 403(b)
• All contributions considered for FICA wages
43
TIGTA Report - 10/25/2018
• Taxpayers generally comply with tax laws on 401(k) limits
• Some 401(k)s did not prevent limits from being exceeded
– Recommend: EP should identify and provide guidance to 401(k) plans that potentially exceed limits – most likely audits
• Some taxpayers exceeded limits by contributing to multiple plans
– Recommended: SBSE should take action to bring contributions into compliance for those contributing to multiple plans
44
Eligibility Errors
45
How IRS Could Identify
• No easy approach for the IRS
• Could use form 5500 participant information
• Could use W2 box 12
• All of these approaches have limitations
46
Eligibility Errors
• Failure to include eligible employees
• Failed to implement deferral options when eligible
• Improper determination of hours of service or elapse time rules
• Rehires – EP looks for this in audits
• Auto enrollment failures
• 403(b) – Universal availability errors
• Allowing employees to participate earlier than plan requires
47
Worker Classification
• Workers improperly classified as independent contractors
– Impacts all plans
• Reclassification most often occurs through IRS employment tax examinations
• 403(b)/401(k) must be concerned with failure to provided opportunity – QNEC correction
– Note: 403(b) plans language can not exclude the reclassified individuals (unlike 401(a) plans)
• Best practice – Tread carefully
48
Eligibility Errors - Corrections
• Failure to include eligible employees
– Elective deferral QNEC
• Amount depends upon how quickly you make correction
– Full employer contribution
• Allowing employees to participate earlier than plan requires
– May correct by removing from the plan or
– VCP filing – plan amendment to allow participation
49
Eligibility Errors – Best Practice
• Review and maintain enrollment package materials
– IRS is asking for negative elections for elective deferrals
• Should have consistent enrollment package no matter who is delivering
• Consider adding plan information to the material employees sign for in enrollment
• Review of eligibility procedures should be part of annual check-up
– Pull samples
– Establish internal controls
50
Other Errors
• Discrimination testing
– ACP failure
– ADP Failure
– Remember the proposed 5500 compliance questions
• Failure to provide top-heavy minimum benefit
• Vesting determined incorrectly
• Non-qualified deferred compensation errors (NQDC)
– Taxable entities - 409A
– Tax-exempt entities - 457(f) and 409A
51
Mitigating Audit Risks
• Client should perform self-audit (with your assistance?)
• Identify operational practice and procedures (internal controls)
– Should be in writing
• Compare written plan with other documents for consistency
• Keep documentation on all corrections
• Protect institutional knowledge
• Be alert in changing payroll systems
• If client is selected for audit
– The above will greatly reduce the chance for adjustments
52
Mitigating Audit Risks
• If you have errors better to identify to the IRS upfront when being audited
• Don’t try to hide the skeletons in your closet
53
Compensation Error
Eligibility Error
Limitation Error
Distribution Error
Questions?
54
