Posting by Jason Edwards, CPA
P: 301.272.6086 | E: edwardsj@bbcpa.com

Apprenticeship and other training plans covered under the US Employee Retirement Income Security Act of 1974 (ERISA) have been a recent focus of the US Department of Labor (DOL).  Programs for private sector workers and financed from trust funds are considered ERISA apprenticeship and training plans.

Increased Audits
The DOL is increasing regulation enforcement with audits of these plans, specifically focusing on kickbacks and other fiduciary violations.  A kickback is defined as an illegal, secret payment made in return for a recommendation which results in a contact or a transaction.  For example, a trustee of an apprenticeship plan receiving payment from one of the plan’s advisors for the advisor’s service relationship with the plan would be considered a kickback.

Lack of oversight of plan assets is the predominant issue identified from DOL audits.  The most common ERISA violations identified were prohibited transfers of properties, improper loan transactions, improper leasing of facilities, financial mismanagement, and payment for improper expenses.  The DOL states that improper expenses include excessive food and travel expenditures.  Other fiduciary violations drawing the interest of the DOL are those involving gifts and gratuities.

How to Prepare
Your plan should have written policies which detail the receipt of items of value, such as meals, entertainment, gifts, and educational conferences.  Many plans prohibit trustees and plan employees from receiving anything of value from service providers.

Another way to prepare for the eventuality of a DOL audit is to have an operational audit performed.  This is a preventive measure and should be carried out by a knowledgeable outsider who can help your plan avoid, and if necessary, address any compliance problems and issues.  Apprenticeship and training plans with self-identified violations can enter the DOL’s Voluntary Compliance Program that allows for correction of 15 specific transactions, including improper plan expenses.

Prepare now for the possibility of a DOL audit by talking with your plan’s accountant to ensure that the proper policies and controls are in place for your plan.

We’ve just released the latest edition of the Fund-a-mentals Newsletter!  This issue includes more information on the new Department of Labor disclosure requirements affecting retirement plans, as well as an over view of the new Form 5500.

Download the Fund-a-mentals Winter 2012 Newsletter
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Posting by Fabricia Edwards, CPA
P: 301.272.6054 | E: edwardsf@bbcpa.com

During the past few years, the US government has issued incentives for Americans to save more for retirement, including opportunities for automatic enrollment in 401(k) and other retirement savings plans.  Unfortunately, many Americans are still not saving enough money for retirement.

As life expectancy increases and retirement periods lengthen, Americans are at risk of outliving their retirement assets.  This is known as longevity risk.  Research has shown women are especially susceptible to longevity risk because their life expectancy exceeds that of men (for example, a 65 year old woman is projected to have an even chance of living past age 86 while her male counterpart is projected to have an even chance of only living past age 84).  It is hard to predict life expectancy, but it is critical to improve retirement security, and most importantly, learn how to budget savings.

On February 2, 2012, the Internal Revenue Service issued proposed regulations that will help Americans manage retirement savings by encouraging life annuity options that provide a guaranteed stream of lifetime income.  One of the regulations makes it easier for defined benefit pension plans to offer combinations of lifetime income and single-sum cash payments (REG-110980-10). Another regulation includes a modification to the current required minimum distribution rules in order to help participants in tax-qualified defined contribution plans to purchase a deferred annuity that is scheduled to begin at 80 or 85 years old using a portion of the participant’s account (REG- 115809-11).

These proposals will enable employees who receive lump-sum cash payouts from their employer’s 401(k) plan to transfer some or all of those amounts to the employer’s defined benefit pension plan in order to receive an annuity.  The longevity contracts will help retirees hedge the risk of drawing down their benefits too quickly and thereby outliving their savings.

Managing longevity risk is a challenge and building sufficient retirement savings raises legitimate concerns.  These proposed changes will help Americans establish strategies for managing retirement savings and increase financial security.  The IRS has scheduled a hearing on June 1, 2012 to review comments and other topics related to the new regulations.  Keep checking www.benefitplanaccounting.com for more updates on these and other retirement plan regulations.

Posting by David Miller
P: 301.272.6031 | E: miller@bbcpa.com

The Department of Labor (DOL) has released the 2011 Form 5500.  There are only a few changes from last year’s instructions.  These changes mainly add clarifications to the instructions rather than actually changing the Form 5500 or the information requirements.

Expenses.  Further guidance has been provided concerning contributing employers in a multi-employer or multiple-employer plan paying the expenses of the plan.  Whether the expenses are paid directly by the employer, or the employer reimbursed the plan for the expenses, they should be treated as being paid by the plan sponsor.  Any expenses that are paid by the plan sponsor do not need to be disclosed on Schedule C as a payment to a particular vendor.  Although not previously in the instructions, this is consistent with previous guidance provided by the DOL.

Remitting Participant Deferrals.  The instructions for Schedule I were updated concerning timeliness of remitting participant deferrals.  Employers have always needed to remit employee deferrals as soon as they can reasonably be segregated from the employer’s general assets.  The changes now stipulate that plans with fewer than 100 participants at the beginning of the plan year can consider contributions to be submitted timely if they are paid within seven (7) days of when the employee would have been paid, had the money not been deferred.  However, for plans with more than 100 participants, there is still no safe harbor time frame.

Pension Obligations.  The instructions for schedules MB and SB, which show the actuarially calculated value of future pension obligations, have been modified to incorporate provisions of the Preservation of Access to Care for Medicare Beneficiaries and the Pension Relief Act of 2010.

Reporting Requirements for Puerto Rican Plans.  Lastly, the instructions have been clarified concerning the reporting requirements for certain sponsors of Puerto Rican plans.

For additional details regarding these changes, visit the DOL website at http://www.dol.gov/ebsa/5500main.html.

Posting by David Miller
P: 301.272.6031 | E: miller@bbcpa.com

On February 2, 2012, the Department of Labor (DOL) released the final service provider fee disclosure rule.  Under this new rule, certain service providers of both defined benefit and defined contribution retirement plans need to disclose, in writing to plan fiduciaries, comprehensive information concerning fees.  The purpose is to aid plan fiduciaries in better understanding the services and fees of these service providers while also helping identify potential conflicts of interest.  These disclosures must include the following:

• All direct compensation (paid from plan assets) and indirect compensation (paid by a source other than plan assets or the plan sponsor) received by the service provider;
• Any allocation of compensation to subcontractors that are paid as a result of charges made against plan assets or on a transaction basis;
• If applicable, an investment’s annual operating expenses and any ongoing operating expenses.

Information must  be provided to the plan fiduciaries by July 1, 2012.  If a covered pension plan makes a payment to a service provider who is obligated to make these disclosures but fails to do so, that disbursement will be a prohibited transaction that will be subject to an excise tax.

The disclosures can be made electronically; if the information is posted to a Web site or other electronic medium, plan fiduciaries must be given clear notification of how to access the information when needed.

One other important item of note is the impact this has on the disclosures that 401(k) plans need to provide to individual participants.  These notices are due to participants 60 days after the service provider fee disclosures go into effect.  Since we now know the official effective date is July 1, 2012, the first 401(k) fee disclosures will be due to participants by August 30, 2012.  This is to allow plan sponsors time to process and understand the fee information supplied by the service providers before reporting to the participants.  Your plan should begin preparing for these changes now to ensure compliance by the specified 2012 dates.

Click here to read the final regulation.

Posting by David Miller
P: 301.272.6031 | E: miller@bbcpa.com

New reporting requirements for IRS Form 8955-SSA are now in place for employee benefit plans. While December 31 year-end plan filings for the 2009 and 2010 plan years were due on January 17, 2012, there is still time to submit non-December 31 year-end plan filings, which are due when filing the 2010 Form 5500, including extensions.

The IRS recently released Announcement 2011-21 with additional clarifications about these Form changes. Here is an overview of the new reporting requirements:

Background
In 2011, the IRS released Form 8955-SSA, replacing Form 5500 Schedule SSA. This form is used to report participants who have separated from a retirement plan with a deferred vested balance. The government uses this information to inform or remind individuals who apply for Social Security benefits that they have earned benefits from a retirement plan during their working career.

Individual Statements to Participants
The new Form 8955-SSA contains the following question regarding participant statements: “Did the plan administrator provide an individual statement to each participant required to receive a statement?” The inclusion of this question has raised some concerns that the IRS intends to begin enforcement of a long-standing requirement that plan sponsors mail statements to the participants reported on Form 8955-SSA. Penalties do apply to plans that fail to send this statement.

When sending participant statements, the information reported should match the information reported on the Form, including: the name of the plan, the name of the participant, the vested benefit amount, how often the payment is made (lump sum, monthly, etc.), and a notice (if applicable) indicating which benefits are forfeitable if the participant dies prior to a certain date. Participant statements should be sent prior to filing the Form 8955-SSA with the IRS.

Filing Deadlines
The IRS did not release the new Form 8955-SSA in time for Plans to report the information for 2009, so the IRS extended the 2009 plan year reporting to coincide with reporting for plan year 2010. As mentioned above, December 31 year-end plan filings for the 2009 and 2010 plan years were due on January 17, 2012. Non-December 31 year-end Plan filings are due when filing the 2010 Form 5500, including extensions. The filings for 2011 plan years will be due the same time as the 2011 Form 5500, including extensions.

For additional information on Form 8955-SSA, visit the IRS website.

Posting by Larry Beebe, CPA
P: 301.272.6025 | E: beebe@bbcpa.com

Fiduciaries have the ultimate responsibility for an employee benefit plan.  A fiduciary is any person who:

• Exercises control over plan assets
• Provides investment advice to the plan
• Has responsibility for the administration of the plan

The Trustees of an employee benefit plan are fiduciaries as is the plan administrator and the plan’s investment advisors.  Professional service advisors such as independent auditors, actuaries and attorneys are normally not fiduciaries.

A fiduciary must:

• Act solely in the interest of plan participants and beneficiaries
• Use plan assets exclusively to pay benefits and reasonable plan expenses
• Diversify plan investments
• Act in accordance with plan documents
• Act prudently

There are certain transactions between a plan and a fiduciary that are prohibited.  In addition to the transactions prohibited to a party-in-interest, the following are prohibited to plan fiduciaries:

• Dealing with plan assets in their own interest
• Acting on behalf of a party with interests contrary to those of the plan
• Receiving any consideration for their personal account in connection with plan asset transactions

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) is revising the rule on the definition of a fiduciary.  The new rule is expected to be issued in early 2012.  For more information and anticipated revisions, visit EBSA’s website and continue to check our blog for regular updates.

Posting by Marcella Pascal, CPA
P: 301.272.6028 | E: pascal@bbcpa.com

A party-in-interest is defined by the Employee Retirement Income Security Act of 1974 (ERISA) to include the following:

• Any person who provides services to the plan,
• Fiduciaries and employees of the plan,
• An employer whose employees are covered by the plan,
• A person who owns 50 percent or more of such an employer or employee association, and
• Relatives of any of the aforementioned individuals.

Certain plan transactions with parties-in-interest are prohibited under ERISA. These transactions are:

• A sale, exchange, or lease of property;
• A loan or other extension of credit (including late deposits of employee deferrals to the trust);
• The furnishing of goods, services or facilities;
• A transfer of the plan’s assets to a party-in-interest for the use or benefit of a party-in-interest;
• An acquisition of employer securities or real property in violation of the 10 percent limitation.

There are certain exceptions regarding party-in-interest transactions that do not prevent a party-in -interest from receiving reasonable compensation for services to a plan or receiving benefits from a plan as a participant or beneficiary, as long as the benefits are in accordance with the terms of a plan as applied to all other participants and beneficiaries. In addition, payments to parties-in-interest for reasonable compensation for office space and other services necessary for the operation of a plan are permitted.

Understanding these concepts will help your plan create an effective anti-fraud policy and help fiduciaries maintain their proper legal and financial roles.

Posting by Linh Crider, CPA, CFE
P: 301.272.6004| E: crider@bbcpa.com

Studies have shown that 5% to 15% of dependents covered under health plans are not eligible per Plan requirements.  Therefore, Plan management should ensure that all participants enrolled are entitled to benefits.  Not only does this control costs, but it fulfills Plan sponsors’ fiduciary obligations as required under ERISA.  As auditors, we frequently observe situations in which dependent eligibility status is questionable.  Often, these dependents are unable to prove their relationship with the Plan members.

The most frequent issue we see involves dependents enrolled as children.  Since the Affordable Care Act was implemented in September 2010, most plans are required to cover children up to age 26.  This provision of the law has resulted in a dramatic increase in the number of enrolled children for all plans.   Although all plans require proof of relationship to support the enrollment of a new dependent, not all plans adhere to this requirement for adult children since there is an assumption that they were previously covered before the law changed.  Documentation of proof of relationship should not be overlooked.

We have also noted instances where daughters-in-law, stepchildren, or foster children were added to the plans as dependents without any proper supporting documentation.  In the case of daughters-in-law, they may appear legitimate since they usually have the same last name as the member.  In audits, we have determined that some enrolled stepchildren were not qualified as legal stepchildren because their father or mother was not married to the enrolled member.  Finally, we have noted in the case of foster children, the supporting documents did not qualify under the relationship requirement.

Although not as pervasive as child dependency issues, eligibility situations with enrolled spouses also create potential problems – following are a few examples.  Some plans do not provide coverage for spouses if they are eligible for health coverage at their own jobs.  In these instances, plans should have policies and procedures in place to obtain information regarding other insurance coverage before enrolling the spouse.  Another area of concern is enrollment of spouses that are deemed common-law spouses.  Most plans only allow common-law marriage if it is recognized by the state and the member provides supporting documents to confirm its legitimacy.  Since there is no marriage certificate, the documentation requirement must be defined and communicated to the plan participant (e.g., notarized legal documents).  This step is sometimes overlooked by the eligibility staff.  Lastly, there is the difficult issue of former spouses.  In general, no plans allow former spouses as dependents.  Sometimes, members and their ex-spouses make arrangements not to report the divorce to the Plan in order to keep the ex-spouse enrolled.  This will increase the plan’s costs.  Unfortunately, it is difficult to know the existence of the divorce without extensive research.  Sometimes this information can be obtained from member actions in other plans such as the pension plan via a Qualified Domestic Relations Order or a change in beneficiaries.

We have shown some ways that ineligible dependents can be enrolled in your health plan.  Plan management should implement control procedures to ensure that their policies regarding dependents are enforced.  This includes a thorough review of proof of relationship documentation with any new enrollment, including re-enrollments.  We also strongly recommend periodic formal dependent audits.  As many as 5% to 15% of the dependents in your plan could be ineligible; what are you going to do about it?

Posting by Sherwin Abellera, CPA
P: 301.272.6036 | Abellera@bbcpa.com

Adjusting to new things takes time.  Consider the revised Form 990.  The Form itself was released by the IRS in 2007, but clients and practitioners continue to struggle with its filing requirements.  To assist filers, the IRS has a resource called “Filing Tips for Form 990 (Tax Years 2008 and Later)”.

One of the more confusing requirements deals with compensation.  Compensation can be defined in many different ways by different organizations, thus the question of where, what and when to report compensation components on the 990 can be confusing.  Consider Form 990 Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensation Employees, and Independent Contractors.  Compensation should include all forms of salary and benefits, including pension plan contributions, dental or medical insurance, and other employee benefits (whether or not taxable to the employee), not just wages.  Consider another example:  Schedule J, Part II – Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, Column F.  This column heading reads “Compensation reported in prior Form 990 or Form 990-EZ.”  If taken at face value, one would probably report compensation as reflected from the prior year Form 990, but this column was intended to report total compensation included in an individual’s current W-2 that was previously reported on Form 990 as deferred compensation.

Given today’s economic woes, the public perception of compensation and the public availability of Form 990, the proper and accurate reporting of officers’, directors’, trustees’ and key employees’ compensation is now more important than ever.