2. Brian Montanez, AIF®, CPC, QPA, QKA, TGPC
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.
2
3. Agenda
1.
2.
Brief Overview of DOL Correction Programs
3.
Common Document Issues
4.
Common Governance Issues
5.
3
Brief Overview of IRS Correction Programs
Common Compliance Errors and Failures
4. Correction Programs
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
4
5. Correction Programs
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
5
6. Correction Programs Cont.
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”
6
7. Common Plan Document Issues
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
7
8. Common Plan Document Issues
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
8
9. Common Plan Document Issues
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
9
10. Common Plan Document Issues
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
10
11. Common Plan Document Issues
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”
11
12. Common Compliance Errors/Failures
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
12
13. Common Compliance Errors/Failures
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
13
14. Common Compliance Errors/Failures
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
14
15. Common Compliance Errors/Failures
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
15
16. Compliance Errors/Failures
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
16
17. Common Compliance Errors/Failures
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
17
18. Common Compliance Errors/Failures
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
18
19. Common Compliance Errors/Failures
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
19
20. Common Compliance Errors/Failures
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
20
21. Common Governance Issues
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
21
22. Common Governance Issues
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
22
23. Common Governance Issues
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
23
24. Common Governance Issues
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
24
25. Resources
Web Search For:
IRS EPCRS
403(b) Fix It Guide
403(b) Check List
Delinquent Filer Voluntary Compliance Program
Voluntary Fiduciary Correction Program
25
27. Disclosures
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.
27