The Internal Revenue Service (IRS) recently released “Issue Snapshots” on a number of topics related to tax-qualified retirement plans, including both pension and savings plans. Historically, the snapshots have explained new(er) laws and guidance, and have often included audit tips for IRS examiners. As a result, although the IRS has indicated that the snapshots are not official pronouncements of law or directives, the snapshots provide helpful insight into issues that the IRS thinks merit further discussion or clarification. Therefore, the snapshots can be instructive for plan sponsors and plan administrators.
The Department of Labor’s fiduciary rule has recently been rendered unenforceable following a recent 5th Circuit Court of Appeals decision. In an article published by the Society for Human Resource Management, McDermott partner Brian Tiemann weighs in on what this means for plan sponsors. “As a result of the Fifth Circuit’s ruling, the suitability standard is effectively restored” for advising plan participants on investments, distributions and rollovers, Tiemann observed. He also points out that advisors may want to revise service agreements with plan fiduciaries to clarify the scope of advice that fiduciaries will provide participants.
In a recent 2-1 decision, the Fifth Court vacated the US Department of Labor’s controversial expansion of the ERISA fiduciary regulations (the New Fiduciary Rule). If the DOL does not seek a rehearing, the Fifth Circuit will enter a mandate revoking the New Fiduciary Rule nationwide. However, given recent fiduciary regulations proposed by the Securities and Exchange Commission, the DOL may be less likely to appeal the ruling and no longer seek to enforce the New Fiduciary Rule.
Last month, the Internal Revenue Service (IRS) published Revenue Procedure 2018-4, which modified the user fee schedule for submissions under the IRS’s Voluntary Correction Program (VCP).
Under the new fee schedule, all VCP compliance fees are now based on the total net plan assets reported on a plan’s annual Form 5500-series return. This means that for VCP submissions filed on or after January 2, 2018, compliance fees will be:
$1,500 for plans with assets of $500,000 or less;
$3,000 for plans with assets of over $500,000 to $10,000,000; and
$3,500 for plans with assets of over $10,000,000.
Prior to January 2, 2018, compliance fees were generally based on the total number of plan participants reported on a plan’s Form 5500, and ranged from $500 (for plans with 20 or fewer participants) to as much as $15,000 (for plans with 10,000 or more participants). In addition, special reduced compliance fees applied to VCPs involving some of the most common plan failures (e.g. certain plan loan and required minimum distribution failures). However, under the new fee schedule, most reduced fees have been eliminated. Only the reduced user fee for group submissions and the special fee waiver for terminating orphan plans remains unchanged.
Ultimately, for many large plan sponsors, the new asset-based fee schedule could significantly reduce the VCP compliance fee for correcting certain plan errors. However, for small plans covering fewer than 100 participants, the cost of correcting plan errors will increase to at least $1,500 (and perhaps even more, depending on the total net assets held by the plan). In addition, for all plan sponsors, the cost of correcting many of the most common plan errors will actually increase significantly.
After some speculation about a delay in implementation of the final rules on claims adjudication of disability claims under welfare and retirement plans (the Final Rule), the US Department of Labor (DOL) confirmed that the Final Rule will be applicable beginning April 1, 2018. McDermott’s article detailing the new requirements in the Final Rule can be found here. A disability welfare or retirement benefit claim, as well as claims under certain executive compensation arrangements, severance plans and other payment plans subject to ERISA’s claims procedures, will be subject to the Final Rule if the benefit is conditioned upon a claimant’s disability, and the claims adjudicator must make a determination of disability in order to decide the claim. However, if a plan links the finding of disability to a determination made by a party other than the plan (e.g., a finding made under the employer’s long-term disability plan or a determination of disability made by the Social Security Administration), then the special rules for disability claims are not applicable to a claim for benefits under such plan.
Plan sponsors and administrators should review retirement, welfare, executive compensation and severance plans to determine whether such benefits are subject to the Final Rule’s additional requirements. Any language detailing claim procedures in plan documents and summary plan descriptions should be updated, and disability claim and appeal administrative practices and procedures, as well as disability claim and appeal notices should be revised to comply with the Final Rule.
CMS released a broad-ranging proposed rule for the Medicare Advantage and Part D Programs on Thursday, November 16, 2017. The proposed rule addresses a broad and diverse range of MA and Part D regulatory requirements, affecting not only Medicare Advantage Organizations and Part D Sponsors, but also health care providers, pharmacies, pharmaceutical manufacturers and others.
The IRS recently issued new mortality tables for 2018, which will likely increase pension funding liabilities for many plan sponsors. Plan sponsors should consider options to delay the use of the new mortality tables for funding purposes, while large plan sponsors should consider the option to utilize plan-specific mortality tables instead.
The 2016 proposed regulations significantly expanded 457(f) plan sponsors’ ability to permit elective deferrals, use noncompetition agreements and make larger severance payments than otherwise permitted under 409A without immediate taxation to participants. In a recent presentation, Ruth Wimer, Mary Samsa and Joseph Urwitz discuss the surprising opportunities with respect to tax-exempt and governmental entities’ “ineligible nonqualified deferred compensation” arrangements in 2016 regulations. They also address the rules and limitations of the short-term deferral exception, the interaction of the 2016 regulations with existing regulations, other types of arrangements potentially affected, as well as best practices for employers.
Recent reports show that the number of retirement plan audits by government agencies is increasing. A survey released by Willis Towers Watson indicates that one in every three plan sponsors has experienced a retirement plan audit by a government agency in the past two years. Unofficial reports also indicate that the US Department of Labor (DOL) has added staff to conduct more retirement plan audits.
The increase in audit activity is not surprising after the DOL released its report last year on the quality of audit work performed by independent qualified public accountants. That report—“Assessing the Quality of Employee Benefit Plan Audits”—found that nearly four out of 10 (39 percent) employee benefit plan audits completed by independent qualified public accountants for the 2011 filing year contained “major deficiencies with respect to one or more relevant GAAS requirements” which “would lead to rejection of a Form 5500 filing.” Common audit deficiencies cited in the DOL report include insufficient review of plan documents and administration, failure to obtain evidence of required communications to participants, inadequate review of employee eligibility, participant accruals and non-discrimination testing, and failure to obtain evidence of adequate internal controls.
The reports of increased audit activity and the DOL findings on the quality of plan audits illustrate the importance for plan sponsors to continually monitor their employee benefit plans for compliance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Plan sponsors and fiduciaries may erroneously assume that once the independent audit is complete they can rest assured that the plan complies with legal requirements. However, an independent audit is not enough—plan sponsors have a fiduciary obligation to ensure their plans are properly maintained and administered beyond what is required to complete the annual audit.
For a summary of the most common issues under audit examination, please see our article on the “Top IRS and DOL Audit Issues for Retirement Plans.” The article describes numerous steps plan sponsors should take to review their plans to identify problems that come up on Internal Revenue Service and DOL audits, and to make sure they have proper internal controls to avoid those problems in the future. Regular review of these issues and proper focus on internal controls can help prevent costly fines and fees when a government agency audits a plan.
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