At the 2015 Savannah Fiduciary Seminar, Randall Webb of TJS Deemer Dana presented the most common deficiencies identified during plan audits and how plan sponsors should correct those deficiencies going forward.

1. 1
RANDALL M. WEBB, CPA
TJS DEEMER DANA LLP
EMPLOYEE BENEFIT PLAN GROUP
The Most Common Pitfalls and
Deficiencies Found in Plan Audits

2. 2
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Who is required to have an independent qualified
public accountant (“IQPA”) audit their plan?
• Employee Retirement Income Security Act
(“ERISA”) contains a requirement for annual audits
of plan financial statements by an IQPA. Generally,
plans with 100 or more participants (to be later
defined) at the beginning of the plan year are subject
to the audit requirement.

3. 3
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Who is defined as a participant by ERISA?
• For Internal Revenue Code (“IRC”) Section 401(k) qualified
cash or deferred arrangements, a participant means any
individual who is eligible to participate in the plan whether
or not the individual elects to contribute or has an account
under the plan. Note – this does not necessarily mean an
active participant which is how many plan sponsors
(employers) often try to define participants.

4. 4
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Why does this matter?
• This is the participant count that will impact whether your
plan will file as a small plan (schedule I) or large plan
(schedule H) with your annual Form 5500 filed with the
Department of Labor (“DOL”) and Internal Revenue
Service (“IRS”). If you file as a large plan you are required
to have an audit by an IQPA.

5. 5
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Again… why does this matter?
• The 80 – 120 Rule: DOL regulations permit plans that have between 80 and 120
participants (inclusive) at the beginning of the of the plan year to complete the Form
5500 in the same category (large plan [audit] or small plan [no audit]) as was filed
for the previous year. This privilege is limited to small plans that filed Form 5500
with Schedule I. Therefore, they can continue to file as a small plan (no audit until
they have 121 participants. This is why it is so important to “force” terminated
participants out of the plan. You may potentially avoid an audit.
• IRS and DOL rules allow plans to force distributions to former participants with
vested account balances of less than $5,000 after providing them with at least 30
days advance notice of their right to request a cash distribution or a rollover to an
IRA or a new employer's plan.

6. 6
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Late remittances of employee deferral contributions:
• DOL rules require that the employer deposit deferrals to
the trust as soon as the employer can; however, in no event
can the deposit be later than the 15th business day of the
following month. Keep in mind that the rules regarding the
15th business day isn't a safe harbor for depositing
deferrals; rather, these rules set the maximum deadline.
DOL provides a 7-business-day safe harbor rule for
employee contributions to plans with fewer than 100
participants.

7. 7
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
When you determine that you have late remittances of
employee deferral contributions:
• Determine which deposits were late and calculate the lost
earnings necessary to correct (Use DOL VFCP Calculator).
• Deposit any missed elective deferrals, along with lost
earnings, into the trust.
• Review procedures and correct deficiencies that led to the
late deposits.
• You can use self correction or voluntary correction
programs under the DOL and IRS.

8. 8
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
The incorrect compensation base was used in employee
deferral and match calculations:
• Misinterpreting the definition of compensation is
one of the most common operational errors for a
defined contribution plan.
• Eligible compensation is defined in the plan
document which specifies the various components
of compensation (for example: fringe benefits, base
wages, overtime, and bonuses).

9. 9
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Improper determination of eligible and ineligible employees:
• If employer census data is incorrect (DOH, DOB,
etc.) this potentially leads to allowing and/or
discriminating against employees who should or
should not be allowed in the plan and improperly
allocating employer match contributions
(depending on the plan document). This also
impacts vesting when a participant goes to
terminate from the plan (to be later discussed).

10. 10
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Auditing issues with participant loans:
A loan to a participant must meet a number of rules under IRC Section
72(p) to prevent the law from treating it as a taxable distribution.
The rules are:
1. The loan must be a legally enforceable agreement.
2. The amount of the loan can't be more than 50% of the
participant’s vested account balance up to a maximum of
$50,000.
3. The terms of the loan should require the participant to
make level amortized payments at least quarterly.

11. 11
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Issues with hardship withdrawals:
Like a loan there are very strict guidelines that must be followed:
• The IRS code that governs 401k plans provides for hardship withdrawals
only if:
• The withdrawal is due to an immediate and heavy financial need.
• The withdrawal must be necessary to satisfy that need (i.e. you have
no other funds or way to meet the need).
• The withdrawal must not exceed the amount needed by you.
• You must have first obtained all distribution or nontaxable loans
available under the 401k plan; and
• You can't contribute to the 401k plan for six months following the
withdrawal.

12. 12
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Issues with hardship withdrawals:
The following items are considered by the IRS as acceptable reasons for a hardship
withdrawal:
• Unreimbursed medical expenses for you, your spouse, or dependents.
• Purchase of an employee's principal residence.
• Payment of college tuition and related educational costs such as room and board for
the next 12 months for you, your spouse, dependents, or children who are no longer
dependents.
• Payments necessary to prevent eviction from your home, or foreclosure on the
mortgage of your principal residence.
• For funeral expenses.
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years
of age, you will incur the 10% withdrawal penalty. You do not have to pay the
withdrawal amount back.
A hardship distribution may not exceed the amount of the need. However, the amount
required to satisfy the financial need may include amounts necessary to pay any
taxes or penalties that may result from the distribution.

13. 13
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Failure to recognize a partial plan termination:
• Definition - A partial plan termination can occur when approximately 20% or
more of the plan participants are terminated by the plan sponsor usually due to
the closing of a plant, downsizing, or terminating a product line and the
affected participants were not already fully vested in their benefits at the time
of such event.
• The plan must 100% vest the accounts of all participants affected by a partial
plan termination prior to any distributions being made.

14. 14
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Vesting Issues:
• To properly comply with the vesting rules, employers must maintain service
records for all employees. Vesting schedules generally refer to “years of service”
when assigning a vesting percentage. If these records are incorrect, or if a
mistake is made when applying participant data to a vesting schedule,
participants will receive incorrect benefit amounts upon leaving the
plan. The amounts can be in excess of what is permissible or less than what
was due to the participant. The failure to properly follow the vesting
rules of the plan can cause the plan to lose its qualified status.
To correct the plan sponsors have options:
• Employee Plans Compliance Resolution System (“EPCRS”);
• Self-Correction Program (“SCP”); and
• Voluntary Correction Program (“VCP”)

15. 15
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Fidelity bonds versus fiduciary liability insurance:
Fidelity bonds:
The primary purpose of the fidelity bond is to protect the plan against fraud or dishonesty (such as
embezzlement from the plan). Therefore, the plan must be the named insured. A fidelity bond is
required for a plan by ERISA Section 412. Usually employee dishonesty policies meet the bonding
requirement; however, the plan should be the named insured either in addition to or in lieu of the
employer. For additional information on the Fidelity bonding requirements, see the Department of
Labor’s Field Assistance Bulletin 2008-4.
Fiduciary Insurance:
The purpose of fiduciary insurance is to protect the fiduciaries (for example, the decision makers) from
liability. For example, in the event of lawsuits against the fiduciaries for “breach of fiduciary duty"
from either the participants or the government. Fiduciary insurance is not required, but many
consultants recommend that the insurance be purchased to protect the decision makers of the plan. It
is possible that fiduciary insurance can qualify as fidelity bonding, but that depends on how the
insurance contract is written. In most cases, it is expected that a separate fidelity bond would be
needed.

16. 16
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Issues with forfeitures:
• Forfeitures occur in a plan when terminated participants are not fully vested in employer contribution
accounts. The IRS requires that forfeitures be used or allocated for the plan year in which they arise
or, in appropriate circumstances, the following plan year.
Forfeitures may be used to (Note - the plan must clearly define how to use):
• Pay a plan’s reasonable administrative expenses
• Reduce employer contributions
• Restore previously forfeited participant accounts
• Provide additional contributions to participants

17. 17
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Some of the most common reasons for failures to timely allocate forfeitures
include:
• The employer or third party administrator (“TPA”) fails to monitor the
forfeiture account to ensure the forfeitures are being used properly (per the
plan document).
• The employer and TPA both assume that the other party is monitoring
forfeitures – while neither party does.
• The plan document is vague in describing how forfeitures are to be handled and
they are handled incorrectly by the employer or TPA.
• A plan sponsor pays administrative expenses directly or through revenue
sharing, without thinking to use forfeitures to pay those expenses.
Corrections can be made through:
• EPCRS; SCP; VCP

18. 18
The Most Common Pitfalls and
Deficiencies Found in Plan Audits
Why is it important to pick a plan auditor with vast employee benefit plan audit
experience?
“One of the most common reasons for deficient accountants' reports is the
failure of the auditor to perform tests in areas unique to employee benefit plan
audits. The more training and experience that an auditor has with employee
benefit plan audits, the more familiar the auditor will be with benefit plan
practices and operations, as well as the special auditing standards and rules
that apply to such plans.”
“In some instances, a less experienced auditor may be assigned to perform
routine audit procedures in order to reduce audit costs. When this happens,
you should confirm that an experienced employee benefit plan auditor will
review his/her work, as well as perform the more complicated audit
procedures.” Per Department of Labor website.

19. 19
Contact Information:
Randall Webb, CPA, Audit Manager
TJS Deemer Dana LLP
912-238-1001
randall.webb@tjsdd.com
www.tjsdd.com