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Trending Topics in Employee Benefit Plans

Eric W. Glantz, Audit and Quality Control Partner Angelo G. Hermosura, Senior Audit Manager June 25, 2015

PROGRAM CONTENT

• PROPOSED CHANGES TO EMPLOYEE BENEFIT PLAN REGULATIONS

• COMMON AREAS OF NONCOMPLIANCE WITH EMPLOYEE BENEFIT PLAN REGULATIONS

• FIDUCIARY RESPONSIBILITIES OF PLAN ADMINISTRATORS

• EBP AUDITOR COMPLIANCE ISSUES – RESULTS OF DOL AUDIT QUALITY STUDY

• COMMON AUDIT DEFICIENCIES BY AUDITORS

• CURRENT DOL ENFORCEMENT ISSUES

• DOL AUDIT FOCUS

• IRS AUDIT FOCUS

• COMMON FRAUD RISKS AREAS

• RESOURCES

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LEARNING OBJECTIVES

• UPDATE YOUR UNDERSTANDING OF RELEVANT CURRENT ISSUES EFFECTING EMPLOYEE BENEFIT PLAN COMPLIANCE WITH EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) AND DEPARTMENT OF LABOR (DOL), INTERNAL REVENUE SERVICE (IRS) REGULATIONS

• LEARN THE COMMON AREAS OF EMPLOYEE BENEFIT PLAN (EBP) COMPLIANCE DEFICIENCIES BASED ON RECENT STUDIES AND AUDITS PERFORMED BY DOL AND IRS

• LEARN HOW TO AVOID COMMON NONCOMPLIANCE FOR YOUR PLAN

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PROPOSED CHANGES TO EMPLOYEE

BENEFIT PLAN REGULATIONS

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• NEW ACTUARIAL STUDY LONGEVITY IMPROVEMENTS CONSIDERATIONS

• NEW FORM 5500 REVISION

• FASB SIMPLIFICATION PROJECT

• AUDITING STANDARDS BOARD PROJECT TO IMPROVE AUDIT REPORTS

RP-2014 MORTALITY TABLES

• SOCIETY OF ACTUARIES RELEASED NEW MORALITY TABLES IN OCTOBER 2014

• NEW MORALITY TABLES SHOULD BE USED WHENEVER POSSIBLE – EVEN IF ACTUARY PERFORMED VALUATION AT THE BEGINNING OF THE PLAN YEAR - Clarifies that all information available through the date of the financial

statements are available to be issued should be evaluated to determine if the information provides additional evidence about conditions that existed at the balance sheet date

• PROJECTED 5%-10% INCREASE IN PLAN BENEFIT OBLIGATION

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FORM 5500 REVISION

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• AMENDED APPROXIMATELY EVERY 10 YEARS

• RESPONSIBLE GOVERNMENT AGENCIES WILL BE ASSESSING CHANGES TO THE FORM 5500 IN THE SUMMER OF 2015

• NO PROPOSED CHANGES HAVE BEEN MADE PUBLIC AND IT IS UNCERTAIN WHEN NEW FORM WILL BE RELEASED

FASB SIMPLIFICATION PROJECT

• SIMPLIFY CERTAIN MEASUREMENT AND DISCLOSURE REQUIREMENTS –Elimination of disclosure of individual investments over 5% of net

assets available for benefits –Elimination of net appreciation of investments by general type –Fully benefit responsive investment contract would be measured,

presented, and disclosed at contract value

• TARGET DATE OF FINAL ISSUANCE OF ACCOUNTING STANDARDS UPDATE (ASU): THIRD QUARTER OF 2015 –Removal of requirement to categorize within the fair value hierarchy

those investments measured at net asset value.

• FINAL ASU ISSUED IN MAY 2015 (ASU 2015-07)

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AUDITING STANDARDS BOARD PROJECT TO IMPROVE AUDIT REPORTS

• OBJECTIVE: PROVIDE MORE VALUE ON THE USE OF AUDIT REPORT

− Possibly address the audit reports to the participants and beneficiaries − Add clarity to the auditor’s responsibilities, especially under a limited

scope engagement −Possibly contain more identifying information of the audit firm

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COMMON AREAS OF NONCOMPLIANCE WITH EMPLOYEE BENEFIT PLAN

REGULATIONS

• FAILING TO OPERATE THE PLAN PRUDENTLY AND FOR THE EXCLUSIVE BENEFIT OF PARTICIPANTS –Unreasonable plan and investment fees –Non-compliance with fee disclosures to participants –Untimely remittance of contributions

• USING PLAN ASSETS TO BENEFIT CERTAIN RELATED PARTIES TO THE PLAN, INCLUDING THE PLAN ADMINISTRATOR, THE PLAN SPONSOR, AND PARTIES RELATED TO THESE INDIVIDUALS

• FAILING TO PROPERLY VALUE PLAN ASSETS AT THEIR CURRENT FAIR MARKET VALUE

• FAILING TO FOLLOW THE TERMS OF THE PLAN (UNLESS INCONSISTENT WITH ERISA) –Definition of compensation –Eligibility of participants –Hardship withdrawals and benefit payments –Loan terms compliance

• FAILING TO PROPERLY SELECT AND MONITOR SERVICE PROVIDERS; –Absence of request for proposal process –Due diligence

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ERISA CIVIL VIOLATIONS

FIDUCIARY RESPONSIBILITIES OF PLAN ADMINISTRATORS

• EXCLUSIVE BENEFIT: ACTING SOLELY IN THE INTEREST OF PLAN PARTICIPANTS AND THEIR BENEFICIARIES AND WITH THE EXCLUSIVE PURPOSE OF PROVIDING BENEFITS TO THEM

• PRUDENCE: CARRYING OUT DUTIES AS AN EXPERT WOULD

• DIVERSIFICATION: BALANCING PLAN INVESTMENTS TO AVOID LARGE LOSSES

• DOCUMENTS: FOLLOWING PLAN DOCUMENTS AND OTHER GOVERNING DOCUMENTS (UNLESS INCONSISTENT WITH ERISA)

• PLAN EXPENSES: PAYING ONLY REASONABLE PLAN EXPENSES

• PARTIES IN INTEREST TRANSACTIONS: HAVE A PROCESS IN PLACE FOR IDENTIFYING PARTIES IN INTEREST TRANSACTIONS AND UNDERSTAND AND COMPLY WITH RULES UNDER SUCH TRANSACTIONS.

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RESPONSIBILITIES

FIDUCIARY RESPONSIBILITIES OF PLAN ADMINISTRATORS

• FIDUCIARIES WHO DO NOT FOLLOW THE BASIC STANDARDS OF CONDUCT MAY BE PERSONALLY LIABLE TO RESTORE ANY LOSSES TO THE PLAN, OR TO RESTORE ANY PROFITS MADE THROUGH IMPROPER USE OF THE PLAN’S ASSETS RESULTING FROM THEIR ACTIONS.

• IN ADDITION TO PERSONAL LIABILITY, FIDUCIARIES CAN BE SUBJECT TO CRIMINAL PENALTIES.

• DOL CAN ASSESS A CIVIL PENALTY OF UP TO 20% OF THE APPLICABLE RECOVERY AMOUNT.

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LIABILITIES

FIDUCIARY RESPONSIBILITIES OF PLAN ADMINISTRATORS

• DEVELOP PROPER COMMITTEE STRUCTURES FOR PLAN GOVERNANCE

• ESTABLISH WRITTEN PRACTICES FOR GOVERNING THE PLAN, FOLLOW THEM AND DOCUMENT MEETINGS AND RESULTS

• INVENTORY PLAN SERVICES AND FEES AND REVIEW TO ENSURE FEES ARE REASONABLE

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BEST PRACTICES

EBP AUDITOR COMPLIANCE ISSUES RESULTS OF DOL AUDIT QUALITY STUDY

STATISTICAL SAMPLE OF 400 PLAN AUDITS

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• RELEASED IN MAY 2015

• READ THE FULL REPORT AT WWW.DOL.GOV/EBSA/PDF/2014AUDITREPORT.PDF

• POPULATION FOR THE STUDY WAS BASED ON 2011 FORM 5500 FILINGS

• 6 STRATA BASED ON SIZE OF THE AUDITOR’S EBP PRACTICE –1-2 plans –3-5 plans –6-24 plans –25-99 plans –100-749 plans –750+ plans

• 1 AUDIT IN LOWEST 2 STRATA, 5 IN ALL OTHERS

EBP AUDITOR COMPLIANCE ISSUES RESULTS OF DOL AUDIT QUALITY STUDY

DOL SAMPLING

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• TYPE OF AUDIT –80% = Limited scope –19% = Full scope –1% = Other

• PLAN TYPE –89% = DC Pension Plan –6% = DB Pension Plan –5% = Welfare Plan

• SPONSOR TYPE –95% = Single Employer –3% = Multi Employer –2% = Multiple Employer

• EBPAQC MEMBER –55% = Yes –45% = No

EBP AUDITOR COMPLIANCE ISSUES RESULTS OF DOL AUDIT QUALITY STUDY

FINDINGS

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• SIZE OF EBP MATTERS –Correlation between a firm’s EBP Practice and deficient work –Nearly 75% of plan audits were deficient in firms who audit 1-2 plans

annually • Deficient audits in this strata also had many more deficiencies • Less EBP specific training by firms in this strata

• PRACTICE MONITORING/PEER REVIEW ARE NOT USEFUL IDENTIFIERS OF QUALITY EBP AUDITS –Firms had clean peer review reports where DOL identified deficient

EBP audit work • 52% in the 1-2 strata • 58% in the 3-5 strata • 63% in the 6-24 strata

EBP AUDITOR COMPLIANCE ISSUES RESULTS OF DOL AUDIT QUALITY STUDY

FINDINGS

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• OTHER USEFUL FINDINGS –Plan Administrators continue to have a difficult time differentiating

between firms that have the expertise to perform quality audits and those that do not

–EBPAQC member firms had a lower deficiency rate than non-member firms

–Audit work is often of lesser quality in engagements where firms have less expertise

–Problematic audit areas continue to be the same EBP-specific areas as previously identified

–No meaningful correlation between audit fees and the quality of audit work

–Recommendation from the study - DOL to communicate to Plan Administrators that currently use an auditor that performs fewer than 5 plan audits per year – provide information about how to select a qualified plan auditor

–Resources - www.dol.gov/ebsa/publications/selectinganauditor.html

• REFERRALS OF DEFICIENT AUDIT WORK –131 referrals made to the AICPA’s Professional Ethics –13 referrals made to state boards of accountancy – unlicensed CPA’s

CURRENT DOL ENFORCEMENT ISSUES

REPORTING COMPLIANCE ENFORCEMENT

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• HIGH RISK AUDIT ENGAGEMENTS –Health and Welfare Plans – claim and adjudication process not properly

audited – 20% of claims are processed incorrectly –ESOP’s – sub-standard closely-held stock appraisals –EBP Plan’s that hold hard to value assets – proper fair valuation of those

assets –Re-inspection of CPA firms that perform fewer than 100 audits annually

• OTHER ENFORCEMENT ISSUES –Reporting of fidelity bonding status – Questioned on Form 5500 (about

1,200 answered no) – typically 10% of plan assets not to exceed $500,000 – Field Assistance Bulletin 2008-04

–Missing audit reports – not filed with Form 5500 –Compliance with Small Pension Plan Audit Waiver requirements – waiver

claimed by plans not entitled – 95% of plan assets need to be held with a financial institution or have fidelity bond

–Delinquent Filer Voluntary Correction (DFVC) program compliance –Plan asset accountability – different beginning and ending net plan assets –Health and welfare plan non-filers –Stop filers (cooperative initiative with IRS)

DOL AUDIT FOCUS

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• ERISA TITLE I –Participant Rights and Benefits

• Fee disclosures –Fiduciary Compliance

• Follow plan terms • Act solely in participants’ interest and avoid conflicts of interest • Pay only reasonable fees from plan • Apply prudent expert standard

–Annual Reporting Compliance • Form 5500, including audit of large plans

IRS AUDIT FOCUS

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• TAX QUALIFICATIONS –Plan Documents

• Timely executed • Properly drafted

–Operational Compliance • Adhering to plan terms • Non-discrimination testing • Contribution Limitations

–Reporting Compliance • Form 5500, 8955-SSA, 1099R • Forms 5330 and 990-T

COMMON FRAUD RISKS AREAS

•DOL CRIMINAL CASES –Theft and embezzlement of plan assets using wire transfers, forged

checks and other means. –Failure to deposit employee contributions into the plan. –Funneling contributions into a secret account. –Transfer of funds from the plan to an outside account in the plan’s

name. –Unauthorized withdrawals. –Unauthorized use of plan assets to invest in other business interests. –Issuing fraudulent statements and dividend checks to clients.

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COMMON FRAUD RISKS AREAS

•DOL CRIMINAL CASES –Making materially false statements in the plan’s annual report and

fraudulent annual report. –Defrauding the company by issuing duplicate paychecks. –Failure to pay pension benefits due to employees. –Kickbacks. –Failure to deposit checks to be rolled over from a predecessor’s plan

into a new plan. –Defrauding a lending company. –Fraudulently obtaining funds from outside sources.

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• WWW.DOL.GOV/EBSA

–For DOL publications, FAQs, copies for Form 5500, instructions and related schedules

• EBSA OFFICE OF THE CHIEF ACCOUNTANT (202) 693-8360

• EBSA OFFICE OF REGULATIONS AND INTERPRETATIONS (202) 693-8500

–For questions about ERISA reporting, filing, or other regulatory requirements

• DOL EFAST HELP CENTER (866) 463-3278 –For questions about Form 5500 and the related schedules

•WWW.AICPA.ORG/INTERESTAREAS/EMPLOYEEBENEFITPLANAUDITQUALITY

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BEST PRACTICES

RESOURCES

THANK YOU!

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QUESTIONS?

Eric Glantz - Partner eglantz@raffa.com 202.955.5412

Angelo Hermosura – Senior Audit Manager ahermosura@raffa.com 240.283.6815