Auditing Employee Benefit Plans. Josie HammondЧитать онлайн книгу.
but are not subject to the ADP test. In addition, there is a special expanded contribution limit for long-service participants in a 403(b) plan. Most violations for a 403(b) plan only go to the tax status of the benefits for the affected participant. Violations of the written plan document requirement or universal availability can jeopardize the tax status of the entire plan.
Welfare plans, currently, have separate, less rigorous standards. Typically, the violation of the nondiscrimination rules for welfare plans does not affect the plan’s operation. They only affect the tax status of the benefit received by the participant and, potentially, a penalty to be imposed on the plan sponsor.
For more information on the compliance rules applicable to retirement plans, the auditor may wish to review the IRS webpage at www.irs.gov/Retirement-Plans/A-Guide-to-Common-Qualified-Plan-Requirements.
All qualified pension plans and 403(b) plans are subject to funding. This means that assets must be set aside to cover such benefits. Contributions to defined benefit pension plans are made throughout the year. Money purchase pension contributions are due no later than 8½ months following the end of the plan year. Discretionary plans, such as 401(k) plans or profit sharing plans, are not required to receive contributions every year, but the IRS rules require periodic and significant contributions to retain tax-qualified status.
Defined benefit retirement plans are to have obtained a certification of funded status not later than September 30th of each year. This is necessary because the PPA limited certain plan actions based upon the plan’s funded status.11 Some relief on the required funding of defined benefit plans was granted by the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 and in Moving Ahead for Progress in the 21st Century Act (MAP–21) in 2012. All of this activity means that it is important for auditors of defined benefit plans to stay up to date on developments, watch for plan amendments and pay close attention to the work done by the actuary.
Neither the tax nor the ERISA rules require that welfare plans be funded, but it is not uncommon to see plan document provisions requiring some level of funding.
Vesting
Pension plans are subject to minimum vesting standards. Plans can vest benefits more rapidly than these standards, but not less rapidly. A “year of service” for vesting purposes will be defined in the plan document. It is important to recognize that this may vary from the measurement used to determine eligibility or benefit accrual.
The following are examples of the maximum vesting tables available to defined benefit plans (other than cash balance and other statutory hybrid plans):
| Cliff Vesting: | 0% through year 4100% after 5 years of service |
| Graduated Vesting: | 0% through year 2 20% after 3 years of service |
| 40% after 4 years of service 60% after 5 years of service | |
| 80% after 6 years of service | |
| 100% after 7 or more years of service |
For defined contribution plans, the permissible vesting schedules are not later than the following:
| Cliff Vesting: | 0% through year 2100% after 3 years of service |
| Graduated Vesting: | 0% through year 1 20% after 2 years of service 40% after 3 years of service 60% after 4 years of service 80% after 5 years of service100% after 6 or more years of service |
There is no required vesting concept for welfare plans.
Distributions
The distribution rules for pension plans follow a slightly different classification than we have applied to this point. Rather than splitting up plans between defined benefit and defined contribution or pension plans and discretionary plans, the division is between plans subject to joint and survivor rules and other plans. In general, discretionary plans are not subject to joint and survivor. All defined benefit and money purchase plans are subject to the joint and survivor rules. Other plans are if the plan terms call for the normal benefit distribution form to be an annuity. Thus, for example, many 403(b) plans could be exempt from these rules but have chosen to provide annuity distributions and must, therefore, comply with the joint and survivor requirements.
Plans subject to the joint and survivor annuity rules require many notices. There are preretirement elections, spousal consents and post-separation distribution elections. The rules are required to be described in the plan document. Compliance with these notice requirements is a qualification standard.
Note: This is an area where violation could have a significant effect upon the plan’s financial statements. If a distribution is made to the participant without the spousal consent, it is possible that the spouse has a claim for half of the previously distributed benefit. If funds cannot be recovered from the participant, the plan sponsor might have to contribute additional funds to cover this additional distribution.
Other plans have fewer restrictions on distributions. Again, the terms and conditions for distributions will be described in detail in the plan.
Plan termination or merger
Virtually all plans can be terminated, whether through liquidation or combination. Again, the procedures for these events will be outlined in the plan document. Most defined benefit pension plans face a formal approval process by the Pension Benefit Guaranty Corporation prior to termination. Money purchase pension plans require a participant notice to terminate. Other single employer plans can generally be terminated through the unilateral action of the employer or Plan Administrator. Multiemployer or multiple employer plans may involve other entities in the termination process.
Relief for violation
The tax code rules are complex. They require a high level of communication between the parties involved in the administration of the plan and an extremely precise execution of all of the tasks associated with operating a plan. Due to this strenuous environment and the fact that where a plan violation occurs, the tax consequence is to harm the typically innocent participant, rather than the party who made the error, the IRS has developed a comprehensive relief system. The basic goal of the relief system is to place the affected participants in the position that they would have been had the error not occurred.
The Employee Plan Compliance Relief System is currently only applicable to pension plans of all types – defined benefit, defined contribution, and 403(b) plans. It includes three basic relief concepts – self-correction, requested correction, and enforced correction. Self-correction is for minor operational defects, where the employer can unilaterally correct for the error and retain the plan’s exempt status without notifying the IRS. Requested correction applies where the sponsor identifies an issue that is of some substance. The sponsor submits a formal request for relief to the IRS. Sometimes, the correction must be negotiated with the IRS, but at the end of the process, the sponsor will receive a letter from the IRS agreeing that the correction was sufficient to retain the plan’s exempt status. Enforced correction is where the defect is discovered