Author Archives: Mark Flanagan

About Mark Flanagan

Mark Flanagan is a director in Aronson’s Specialty Tax Group. He has over 20 years of experience in the compliance and technical aspects of qualified and non-qualified benefit plans, including plan design, consulting, and technical administration

Mark Flanagan

IRS Releases Proposed 409A and 457 Deferred Compensation Guidance

The IRS recently released proposed Section 409A and Section 457 guidance.

Since the original 409A regulations were issued in 2007, the practicing community has anxiously awaited additional guidance; hoping it will make the requirements under 409A and 457 easier for employers and practitioners to administer. In general, 409A outlines the rules and regulations for all employers maintaining non-qualified deferred compensation plans, while 457 specifically relates to plans maintained by tax-exempt organizations and state and local governments. The new proposed regulations provide some clarifications but do not alleviate many of the difficulties associated with administering deferred compensation arrangements.

Some of the highlights of the proposed guidance are detailed below:

  • Currently, a separation of service may or may not occur when an employee terminates employment but continues to be employed in a consulting capacity. The determination is made based on the reasonable expectation of the number of hours to be worked as detailed in the employment agreement. The new rules seem to indicate that a separation of service does not occur until a separation of service has occurred under the rules (service levels would decrease to less than 20% of the levels prior to the employment change).
  • Clarification that stock rights designed to avoid 409A inclusion are not deemed to be deferred compensation solely because the amount payable due to a service provider’s termination for cause or that was within their control, is based on a valuation method that is less than fair market value.
  • The proposed regulations allow a stock option to be granted by an entity prior to the date the employee is actually hired, as long as it is reasonably anticipated they will be hired by the entity within the next twelve months. Previously, the employee actually had to be employed by the entity prior to granting the option.
  • As a result of the death of an employee, an inadvertent 409A violation will not occur if payment is made to the beneficiary by 12/31 of the year following the year of death.
  • Clarification that the 409A regulations apply separately and in addition to the rules under IRC 457A.
  • Enhanced definition of what constitutes a “substantial risk of forfeiture” under 457(f).
  • Exclusion of certain types of bona fide severance and vacation pay plans from 457.

The non-qualified deferred compensation plan rules are quite complex. In particular, the interplay between 409A and 457 is very challenging. The proposed regulations do help with some of the complexity but in the end, those of us affected by these complex rules were hoping for so much more.

Employers should work with their advisors to understand the impact of the proposed changes now and moving forward. To further discuss the impact of the proposed regulations, please contact Aronson’s Compensation and Benefits Practice Director Mark Flanagan at 301.231.6257.

Significant Changes to Form 5500 Proposed

The Internal Revenue Service “IRS”, the Department of Labor “DOL” and the Pension Benefit Guaranty Corporation “PBGC” (the agencies) recently proposed significant changes to the Form 5500 requirements for employer sponsored benefit plans. If approved, the changes would be the most significant since implementing the EFAST2 electronic filing system in 2009. As such, the filing system has allowed for easier data collection leaving the agencies anxious to obtain more robust data from plan sponsors about their plans. While the new reporting requirements are scheduled to take effect for plan years beginning on or after January 1, 2019, employers, investment companies, custodians, record-keepers, third-party administrators, and trustees, etc. would be impacted by the new requirements, which could cause rollout delays.

The changes are quite ambitious and clearly reflect the agencies’ desire for additional and more valuable data in the areas of concern. The proposed changes focus on the following areas:

Plan investments

There is continued sentiment that many plans include high-risk, hard to value assets. Proposed modifications to the Schedule H Financial Information, would disclose the assets that create the greatest concern. New information would be gathered on derivatives, limited partnerships, private equity and hedge funds.

Service provider fees and expenses

Fees paid by plan participants continue to be a huge focus, along with continued frustration from the agencies as to how these amounts are being reported via the current Form structure. Additional reporting would be required on the Schedule H, while the  Schedule C Service Provider Information, would be modified to more closely align with the 408(b)(2) indirect compensation reporting for covered service providers. Schedule C reporting would also be required for small retirement and welfare benefit plans along with additional new inquires on the Form.

Information on plan operation and compliance

The 2015 Forms included several new questions focused on plan provisions and testing. Shortly after being released, the agencies relented and eliminated the requirement that these questions be answered. It is not clear at this point when answers to these questions will be required, but they remain a reminder of just how much new information the agencies can obtain. The additional proposed compliance questions revolve around other plan administration areas, including service provider compensation, uncashed checks, default investment alternatives and participant disclosures.

New and enhanced reporting requirements for employer sponsored healthcare arrangements

Employers who sponsor welfare benefit plans, including health plans that generally have greater than 100 participants, are required to file Form 5500. This filing typically consists of the Form itself along with Schedule A Insurance Information, and sometimes Schedule C. Small welfare benefit plans have been exempt from this requirement. However, under the proposed rules, the exemption would be modified. ERISA covered group health plans, regardless of size, would be required to file Form 5500. Additionally, applicable employers would be subject to filing the new Schedule J Group Health Plan Information, which includes a myriad of questions required under the Public Health Service Act.

Other areas impacted by the proposed changes include: additional ESOP questions on Schedule E ESOP Annual Administration, enhanced reporting on Form 5500-SF, new reporting requirements for small plans not eligible for Form 5500-SF, revised Schedule G Financial Transaction Schedules, merger and termination reporting on Schedule H, and changes to Direct Filing Entity “DFE” reporting.

Employers sponsoring ERISA covered plans have been quite fortunate that Form 5500 reporting requirements have generally been reduce over the last 10 to 15 years. This is the first time in quite a while that enhanced Form 5500 reporting requirements are likely. Given the expansive nature of the proposal, some increases are almost certain to be enacted. As previously stated, the proposed reporting changes are a huge undertaking that would greatly impact employers that sponsor retirement plans and/or group health plans. The new reporting for group health plans in particular could present challenges as generating the additional proposed information by health insurance vendors would not be an easy task. Enhanced retirement plan investment fee reporting would also pose difficulties. These challenges will likely result in significant push back from the impacted plan service providers, which has historically resulted in modifications prior to release of the final version.

Employers and service providers have been afforded ample time to prepare for the changes and how the agencies respond to the public’s comments is worth watching. There is no doubt that it is much easier for the agencies to gather and analyze information on employer sponsored plans and they are very interested in the benefits and associated costs of that which is being provided. As an employer, be preparing for change.

Please contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at 301-231-6257 to further discuss the impact of the proposed Form 5500 changes.

Retirement Plan Corrections Get Easier

Several weeks ago, the IRS released two new revenue procedures (2015-27 and 2015-28) designed to make plan corrections easier and less costly to employers through the Employee Plans Compliance Resolution System “EPCRS.” Rev. Proc. 2015-28 provides particular relief related to the correction of certain employee salary deferral errors for employers sponsoring 401(k) and 403(b) plans.

Retirement plans are required to operate per the rules set forth by the Internal Revenue Code and the governing plan document. Failure to abide by these rules gives rise to a plan failure called an operational defect. The EPCRS was established by the IRS in order to provide a framework for the correction of such operational failures so that employer-sponsored plans could maintain their qualified tax status. Correction of these errors can be made through a formal submission via the EPCRS or through self-correction depending on the facts and circumstances of the error(s). The IRS has worked diligently over the years to encourage employers to correct errors as soon as possible and to streamline corrections under the EPCRS.

Prior to the new revenue procedure, the standard correction for missed employee pre-tax salary deferrals was a corrective contribution made by the employer equal to 50% of the missed salary deferral  and 100% of the missed employer matching contribution plus lost earnings. Revenue procedure 2015-28 established some new safe harbor correction methods for certain missed deferral errors that require reduced corrective contributions by the plan sponsor.

A general description of the new safe harbor corrections is detailed below:

Failure to Implement an Automatic Contribution Feature Includes auto enrolling an eligible participant at the auto percentage, implementing an affirmative election made by a participant in lieu of the auto percentage, and failure to implement the proper auto escalation percentage. If the failure to implement the correct withholding does not extend past 9 ½ months after the year of failure, then no corrective employer contribution is required to correct the missed deferral. However, the entire missed matching contribution must be contributed as if the participant withholding began when it should have. Earnings must be included as part of the corrective deposit and notice must be provided to the participant no later than 45 days after correct deferrals begin.

If the failure to implement the correct automatic contribution withholding extends past 9 ½ months but deferrals begin prior to the end of the second year following the end of the year the failure began, then the employer must make a corrective contribution equal to 25% of the missed employee contribution. The remainder of the correction methodology follows the process detailed above.

Failure to Implement Employee Deferrals – If the failure to properly implement employee salary deferral elections is corrected by the first payment of compensation three months after the failure occurred, then no employer corrective contribution is required.  However, the entire missed matching contribution must be contributed as if the participant withholding began when it should have. Earnings must be included as part of the corrective deposit and notice must be provided to the participant no later than 45 days after correct deferrals begin.

If the failure to implement the correct contribution withholding extends past three months but deferrals begin prior to the end of the second year following the end of the year the failure began, then the employer must make a corrective contribution equal to 25% of the missed employee contribution. The remainder of the correction methodology follows the process detailed above.

Errors caught after the timeframes referenced above or failure to provide the required notice revert back to the standard correction methodology.  This clearly provides additional motivation for employers to police their plans carefully so they can benefit from these new safe harbors and reduce the cost of certain plan corrections.

This is designed to merely be a brief description of the new correction rules. Any employer that believes they have plan errors that can be corrected through the new safe harbor methods should contact Mark Flanagan of Aronson’s Employee Benefit Plan Services Group at 301.231.6257

The DOL Says Your Benefit Plan Audit Might Not Be as Good as You Think!

The Department of Labor (DOL) recently formally released the results of their “audit the employee benefit plan auditor” campaign and the results were underwhelming, to say the least. Their report indicates that audit quality is actually getting worse, not better. While this is not shocking to the DOL, AICPA or many practitioners, including accounting firms, it has been shocking to the media and general public. The DOL and AICPA have indicated for several years that there is tremendous concern that benefit plan audits are not being performed in accordance with standards and they insist that employers should be very careful when hiring a plan auditor.

From an auditing perspective, benefit plan audits are very different from corporate audits, and the technical requirements resulting from the IRS Code and ERISA make them very unique. The DOL has long contended that accounting firms need to perform a certain number of engagements to truly be qualified to do the work.

The DOL reviewed 400 Form 5500 plan audits from tax year 2011 and found 39% had major deficiencies. The report indicated that this deficiency rate would put $653 billion and 22.5 million retirement plan participants at risk. Previous DOL reviews supported a deficiency rate closer to 33%. The increase is nothing short of alarming given the efforts by the plan audit community over the last several years to educate accountants and plan sponsors of the importance of a quality plan audit. The results showed a direct correlation between the number of audits performed and the deficiency rate.  The deficiency rate for plan audits by firms that only performed one or two audits was 76%, and the rate declined as the number of audits performed by accounting firms increased.

It is easy for plan fiduciaries to fall into the trap of a low cost/low effort benefit plan audit. However, the costs associated with a rejected 5500 due to a deficient audit ($1,000/day) far exceed those associated with a quality plan audit – not to mention the cost of correcting years’ worth of plan operational defects that could have been caught early. Plan sponsors also fail to realize that the DOL has no authority to sanction accounting firms that perform poor quality audits, resulting in plan sponsors paying the price, not the auditor.

Aronson has been banging the “quality audit” drum for many years and our own experience supports the DOL’s finding. Our Employee Benefit Plan Services Group performs hundreds of plan audits each year, and we have found significant deficiencies in prior years’ audits performed by underqualified auditors.

For more information about Aronson’s benefit plan audit services or to discuss the DOL results, please contact Mark Flanagan at 301.231.6200.

 

PCORI Fee Due for Many Health Insurance Arrangements by July 31, 2015

Under the Patient Protection and Affordable Care Act “PPACA,” certain types of health insurance arrangements are required to pay the Comparative Effectiveness Research Fee, which is also known as the PCORI fee because the monies are used to help fund the Patient-Centered Outcomes Research Institute. The types of arrangements subject to the fee are:

  • Fully insured medical plans
  • Self-insured medical plans
  • Health Reimbursement Accounts (HRAs)
  • Plans sponsored by private, government, nonprofit and church employers
  • Individuals on a temporary US visa who reside in the US
  • Retiree-only plans
  • Certain Flexible Spending Accounts (FSAs), if the employer contribution is greater than $500 and it is more than the employee contribution

The fee is reported and remitted to the IRS via Form 720 and is due by July 31st of the year following the last day of the plan year.

The fee is based on the average number of covered lives during the plan year. Covered lives include the covered employees of the plan sponsor and all other covered dependents. The IRS has prescribed various methods for determining the average number of lives.

The amount of the fee is $2 per covered life for policy years ending on or after Oct. 1, 2013, and before Oct. 1, 2014; and $2.08 per covered life for plan years beginning on or after Oct. 1, 2014 and ending before Oct. 1, 2015.

In fully insured arrangements, the insurance companies are required to pay the fee and submit Form 720. Self-insured plan sponsors are required to both pay the fee and submit Form 720. Unlike other aspects of the Act, the PCORI fee requirement is applicable to all affected plans, regardless of employer size.

Please contact Mark Flanagan of Aronson’s compensation and benefits practice at 301.231.6257 to further discuss the payment of these fees and the filing of Form 720.

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