1. Avoiding Issues in Audit
Jason Loden, Partner
Thompson & Knight LLP

2. Audit by IRS
Qualified plan audits are handled by Employee Plans (EP) Examinations.
EP Examinations conducts examinations to analyze operational features of qualified retirement plans.
Large plan audits are handled through the Employee Plans Team Audit Program.

3. Employee Plans Team Audit Program (EPTA)
An EPTA is an examination of an employee benefit plan with 2,500 or more participants.
During an EPTA, the auditors will ask questions about plan administration and internal controls and will question the payroll department, HR personnel, and the plan administrator.
At the end of an EPTA, a closing agreement is used to balance the sanction amounts with the violations.

4. Most Common EPTA Issues
Failure to amend plan document for tax law changes by the end of the period required by law
Failure to follow plan document in operation
Definition of compensation
Eligibility provisions
In-service distribution provisions
Matching formula
Maximum deferral percentage
Failure to satisfy IRC Section 401(a)(9) minimum distributions
Failure to retain records
Failure to correct the ADP/ACP nondiscrimination failures

5. DOL Investigations
The DOL Employee Benefits Security Administration has the authority to conduct periodic investigations of employee benefit plans to determine whether such plans conform with the provisions of Title I.
Such investigations consist of interviews and records reviews of plans.

6. Consequences of Plan Disqualification
Disallowance of deductions taken by employer
Taxation of trust earnings
Employees lose:
tax deferred benefits
the ability to rollover distributions

7. Self-Audit
An internal review of all qualified plans may permit employers to correct errors and pay smaller penalties than if these errors are discovered during an IRS audit.
Such an approach may also be looked at favorably by the IRS if there is an audit at a later date and errors are discovered.
Certain IRS and DOL programs allow for correction of errors.

8. Employee Plans Compliance Resolution System
EPCRS is an IRS program that allows employers to correct qualified plan errors.
EPCRS is composed of three programs:
Self-Correction Program (SCP)
Voluntary Correction Program (VCP)
Audit Closing Agreement Program (Audit CAP)

9. Self-Correction Program (SCP)
SCP allows for correction of Operational Failures.
The SCP permits plan sponsors to self-correct insignificant Operational Failures at any time.
A plan sponsor may self-correct significant Operational Failures within two years of the year in which the failure occurs.
For significant Operational Failures, the plan must have a favorable determination or opinion letter.
There are no fees or application or reporting requirements under the SCP.

10. Failures Permitted Correction under SCP
The factors considered in determining whether Operational Failures are insignificant include, but are not limited to:
Whether other failures occurred during the period being examined;
The percentage of plan assets and contributions involved in the failure;
The number of years the failure occurred;
The number of participants affected relative to the total number of participants in the plan;
The number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure;
Whether correction was made within a reasonable time after discovery of the failure; and
The reason for the failure.

11. Eligibility for the SCP
Plans for which sufficient compliance practices and procedures have been established are eligible for the SCP.
Practices and procedures may be formal or informal.
Practices and procedures must be routinely followed.
Practices and procedures need not be in place for a specific failure.
A plan document alone is not sufficient to establish evidence of good practices and procedures.

12. Correction Procedure under the SCP
Revenue Procedure provides general correction principles for determining the appropriate method of correction.
If complied with, the correction is deemed to be a reasonable and appropriate correction for the failure.
A plan sponsor may use SCP to correct certain Operational Failures by amending the plan in order to conform the terms of the plan to the plan’s prior operations.
Upon examination, the IRS has the right to review whether such failures were eligible under the SCP and whether the correction method is acceptable.

13. Voluntary Correction Program (VCP)
The VCP may be used by plan sponsors who cannot, or do not wish, to resolve Qualification Failures under the SCP.
If the plan sponsor discovers failures prior to the plan coming under examination, it may correct such failures through the VCP.
The plan sponsor pays a fee based on the number of participants in the plan.
The plan sponsor submits to the IRS a detailed description of the failures and the method for correcting the failures.
The plan sponsor works with the IRS to correct the failures.

14. Failures Permitted Correction under VCP
The VCP is available for all Qualification Failures:
An Operational Failure is a failure that arises solely from the failure to follow plan provisions.
A Plan Document Failure is a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of Code § 401(a).
A Demographic Failure is a failure to satisfy the requirements of Code § 401(a)(4), 401(a)(26), or 410(b) that is not an Operational Failure or an Employer Eligibility Failure.
An Employer Eligibility Failure is the adoption of a plan intended to satisfy the requirements of § 401(a) by an employer that fails to meet the employer eligibility requirements to establish a qualified plan.

15. Correction under the VCP
Revenue Procedure provides general correction principles for determining the appropriate method of correction.
A plan sponsor may use VCP to correct Plan Document, Demographic, and Operational Failures by plan amendment.
An Operational Failure may be corrected by plan amendment to conform the terms of the plan to the plan’s prior operations.
amendment must otherwise comply with § 401(a)

16. Audit Closing Agreement Program (Audit CAP)
If failures are discovered during audit, plan sponsor may correct such failures under the audit correction program.
The plan sponsor pays a sanction that is based on an amount that is directly related to the amount of tax benefits preserved.
The sanction imposed will bear a reasonable relationship to the nature, extent and severity of the failure.

17. Audit CAP Closing Agreement
If the IRS and the plan sponsor reach an agreement with respect to the correction of the failure(s) and the amount of the sanction, the IRS will issue a closing agreement.
The closing agreement is binding with respect to the tax matters identified therein for the periods specified.
If the IRS and the plan sponsor cannot reach an agreement with respect to the correction of the failure(s) or the amount of the sanction, the IRS may pursue disqualification of the plan.

18. Plan Amendment under the Audit CAP
A Plan Sponsor may use Audit CAP to correct Plan Document, Demographic, and Operational Failures by plan amendment.
An Operational Failure may be corrected by plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of § 401(a).

19. Department of Labor Programs
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 self- correct 19 violations prohibited under ERISA

20. Delinquent Filer Voluntary Compliance Program (DFVCP)
The DFVCP gives delinquent plan administrators a way to avoid potentially higher civil penalty assessments by satisfying the program’s requirements and paying a reduced penalty amount.
Eligibility is limited to plan administrators with filing obligations under Title I of ERISA who have not been notified in writing by the DOL of a failure to file a timely annual report under Title I of ERISA.

21. Procedure for Correction under the DFVCP
The plan administrator must first file with EBSA a complete Form 5500, including all schedules and attachments, for each year relief is requested.
The plan administrator must also submit to the DFVCP a copy of the Form 5500, without the schedules and attachments, and the applicable penalty amount.
The plan administrator is personally liable for the applicable penalty amount, and amounts paid under the DFVCP cannot be paid from the assets of a qualified plan.

22. Penalties under the DFVCP
The basic penalty under the program is $10 per day for delinquent filings.
The maximum penalty for a single late annual report is $750 for a small plan (generally a plan with fewer than 100 participants at the beginning of the plan year) and $2,000 for a large plan.
The DFVCP also includes a “per plan” cap that limits the penalty to $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports filed for the plan at the same time.
The penalty amount for “top hat” plans and apprenticeship and training plans is $750.

23. Voluntary Fiduciary Correction Program (VFCP)
VFCP is designed to encourage employers to voluntarily comply with ERISA by self-correcting certain violations of the law.
Anyone who may be liable for fiduciary violations under ERISA is eligible, including plan sponsors, officials, and parties-in-interest, may voluntarily apply for relief from enforcement actions.
Persons using the VFCP must fully and accurately correct violations.
If rejected, applicants may be subject to enforcement action, including assessment of civil monetary penalties.

24. 19 Transactions Covered by the VFCP
Delinquent participant contributions and participant loan repayments to pension plans
Delinquent participant contributions to insured welfare plans
Delinquent participant contributions to welfare plan trusts
Fair market interest rate loans with parties-in-interest
Below market interest rate loans with parties-in-interest
Below market interest rate loans with non parties-in-interest
Below market interest rate loans due to delay in perfecting security interest
Participant loans failing to comply with plan provisions for amount, duration, or level amortization
Defaulted participant loans
Purchase of assets by plans from parties-in-interest
Sale of assets by plans to parties-in-interest
Sale and leaseback of property to sponsoring employers
Purchase of assets from non parties-in-interest at more than fair market value
Sale of assets to non parties-in-interest at less than fair market value
Holding of an illiquid asset previously purchased by plan
Benefit payments based on improper valuation of plan assets
Payment of duplicate, excessive, or unnecessary compensation
Improper payment of expenses by plan
Payment of dual compensation to plan fiduciaries

25. Correction under VFCP
Applicants must restore the plan, participants, and beneficiaries to the condition they would have been in had the breach not occurred.
Plans must then file, where necessary, amended returns to reflect corrected transactions or valuations.
Applicants must provide proof of payment to participants and beneficiaries or properly segregate affected assets in cases where the plan is unable to find missing individuals.

26. Procedure for Corrections under the VFCP
First: Identify any violations and determine whether they fall within the transactions covered by the program.
Second: Follow the process for correcting specific violation.
Third: Calculate and restore any losses and profits with interest and distribute any supplemental benefits to participants.
Fourth: File an application with the appropriate EBSA regional office that includes documentation showing evidence of corrected financial transactions.

27. Recent DOL Regulations
In January, the DOL issued a final rule establishing a safe harbor period during which amounts that an employer has received from employees or withheld from wages for contribution to certain plans will not constitute “plan assets.”
In March, the DOL issued a proposed rule for investment advice to participants and beneficiaries in individual account plans such as 401(k) plans.

28. “Plan Assets” Safe Harbor Rule
Only available for small plans (fewer than 100 participants)
Applied on a deposit-by-deposit basis
Contributions must be deposited in trust no later than the 7th business day following the day on which such amount is received by the employer or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash

29. Questions?

30. Jason Loden Partner Thompson & Knight LLP (214) 969-1556 jason
Jason Loden Partner Thompson & Knight LLP (214)