Compliance August 9, 2013

IRS Announces New Self Audit Tool

Having good internal controls can help retirement plan sponsors eliminate or reduce errors in plan operation.
Reported by

During a phone forum, Monika Templeton, director of Employee Plans Examinations at the Internal Revenue Service (IRS) in Washington, D.C., said good internal controls allows plan sponsors to quickly identify errors to correct via the agency’s Self-Correction Program (SCP) with minimal cost. Good internal controls also impact Audit Closing Agreement Program (Audit CAP) sanction negotiations.

Templeton noted that having practices and procedures in place to promote or facilitate compliance is a prerequisite for entering into the SCP. Having a plan document alone does not imply established procedures. During examinations, agents often find no internal controls in place or internal controls that are not consistently followed, she said.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Templeton explained that the Employee Plans (EP) agent will evaluate the effectiveness of the plan’s internal controls to determine whether to perform a focused audit (just look at three to five issues) or to expand the scope of the examination. Good internal controls are a key factor in keeping an audit “focused.”

The internal control interview helps the examiner determine whether the plan is well-run or there are serious compliance risks that would give rise to expanding the scope of the audit.

“The EP agent will make every effort to ensure your internal control systems are running smoothly when the audit concludes,” Templeton said. As a side note, she added that if a self-correction action is more than 65% complete, even if the error is significant, it can be self-corrected during the audit.

Janice Gore, EP area manager for the Great Lakes, shared some examples of insufficient internal controls found during EP audits:

  • Third-party reports frequently have inaccurate data, such as dates of hire and termination, employee age and service and compensation;
  • Decentralized payroll systems without internal controls – If each subsidiary determines eligibility, highly compensated employee (HCE) status, or what constitutes plan “compensation,” it can result in incorrect coverage and allocations; and
  • Data used for Form 5500 fails to conform to actual records (i.e., payroll data).

 

Templeton said a yearly checkup needs to confirm there are good internal controls in place, and there needs to be good communication between the company and its different locations or subsidiaries.

During the phone forum, it was announced that the IRS has repackaged the 401(k) Questionnaire (see “29% Chose Deferral Higher than Default”) as the QSAT (Questionnaire Self Audit Tool), scheduled to be released in 2013. The QSAT will help plan sponsors find, fix and avoid costly mistakes. According to Gore, it asks questions an EP examiner will ask.

Gore and Templeton shared examples of commonly found errors, questions the QSAT will ask to help plan sponsors avoid or find those errors, and suggested tips for good internal controls.

For example, nondiscrimination testing errors can occur due to not properly identifying HCEs, excluding those who elect not to defer salary from the test, not using the correct “compensation” definition, and not using the testing method defined by the plan document (current or prior year).

The QSAT asks the following internal control questions related to nondiscrimination testing:

  • Who verifies that correct data was used to complete the annual testing?;
  • Who determines which participants are highly compensated employees?;
  • Who verifies deferrals allocated to participants' accounts are correct?;
  • Who determines whether participants compensation for deferral purposes are correct?;
  • How are matching and nonelective contribution amounts determined?; and
  • Who ensures that each participant receives the correct matching and/or nonelective contribution?

 

Internal control tips to help avoid nondiscrimination testing errors include establish/amend the plan to be a safe harbor plan; eliminate communication gaps between the employer and plan vendor; and verify the accuracy of employee classifications, family aggregation and definition of compensation.

Until the QSAT is released, the IRS has other tools plan sponsors can use at www.irs.gov/Retirement-Plans.

Compliance August 9, 2013

Case Dismissed on Presumption of Prudence

A federal appeals court found the application of the presumption of prudence to be appropriate at the motion to dismiss stage.
Reported by

In Kopp v. Klein, the 5th U.S. Circuit Court of Appeals supported the decision by the U.S. District Court for the Northern District of Texas to dismiss the Employee Retirement Income Security Act (ERISA) lawsuit for the plaintiff’s failure to state a claim.

The appellate court said “regardless of whether the Idearc Defendants had discretion to cease permitting new Fund investments in Idearc stock or liquidate Fund investments in Idearc stock, the ‘presumption of prudence’ applies at the motion to dismiss stage, and Kopp failed to allege sufficient facts to overcome the presumption.” The court also found the plaintiff did not allege sufficient public information to overcome the presumption that the defendants acted prudently by choosing not to liquidate Idearc stock. The court pointed out that “much of the information Kopp relied on to show the defendants were aware of threats to Idearc’s viability is nonpublic information.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

In addition, according to the court opinion, “the amended complaint did not state a claim for violating the duty of candor by ‘omitting material information, making allegedly incorrect statements about Idearc’s financial stability, or failing to correct these alleged misstatements in the filings’ because the Summary Plan Description did not incorporate Idearc’s public filings. No general duty to disclose non-public information exists under ERISA or under our precedents.”

The plaintiff, Randy Kopp, was an employee of Idearc, Inc. and a participant in its retirement plan. He filed the lawsuit against various members of the company’s board of directors, officers, Plan Benefits Committee and Human Resources Committee (aka, Idearc Defendants). The suit represented plan participants whose individual accounts the plan purchased or held shares of the Idearc Stock Fund (aka, the Fund). When the company later declared bankruptcy, the stock became worthless.

Kopp alleged the Idearc Defendants breached their fiduciary duties. While the district court dismissed his original complaint for failure to state a claim, they allowed him to file an amended complaint, which claimed seven bases for relief.

  • Counts I and IV alleged the Idearc Defendants violated a fiduciary duty by allowing plan participants to buy and hold Idearc stock when it was no longer prudent to do so;
  • Count II alleged the defendants violated ERISA fiduciary duties by making materially inaccurate representations and failing to disclose material information about the fund;
  • Count V alleged the defendants breached a fiduciary duty to appoint, inform and monitor the Benefits Committee and Members of the Benefits Committee;
  • Count VI alleged the defendants breached co-fiduciary duties; and
  • Counts III and VII alleged the defendants breached fiduciary duties to avoid divided loyalties and conflicts of interest.

With regard to Count III, the court said, “Kopp does not allege the defendants’ compensation was impermissibly tied to the price of Idearc’s stock, but that their compensation was impermissibly tied to Idearc’s financial performance. Kopp cites no provision of ERISA or case that supports his contention that such a compensation scheme violates ERISA’s duty to avoid conflicts of interest.”

Counts V, VI and VII were found to be derivative claims, with “no underlying breach of fiduciary duty.”

The full text of the appeals court decision can be found here.

«