Posted on Sep 1, 2019

A new final rule from the U.S. Department of Labor (DOL) clarifies some of the ins and outs of multiple employer plans (MEPs). These are defined contribution retirement plans — such as 401(k) plans — that are sponsored by an association or employer group on behalf of member employers.

Clarifying the Rules

Existing DOL rules already allow MEPs to exist. And the new rule, which goes into effect on September 30, 2019, was designed to “clarify and expand the circumstances under which U.S. employers … may sponsor or adopt [MEPs].”

Among other requirements, groups and associations of employers that sponsor MEPs can have as members either:

  • A group of local businesses (for example, a chamber of commerce), or
  • An association of businesses within the same industry, regardless of location.

MEPs to the rescue?

The idea behind multiple employer plans   (MEPs) is simple: When negotiating fees with retirement plan services companies, there’s strength in numbers. Fixed costs associated with managing a 401(k) plan make the average cost per plan participant higher for smaller employers than for large ones.

In fact, the average fee charged to plans with fewer than 100 participants is nearly 50% higher than that of larger plans, based on total fees’ percentage of plan assets, according to the 401(k) Book of Averages.

Besides direct plan administrative costs, reasons that small employers choose not to sponsor retirement plans include the amount of time it would take them to deal with the paperwork, plus the risk of litigation if things go badly with the plan.

Although MEPs can help employers lower the average cost per participant, it’s important to look beyond cost when deciding on a retirement plan. Employers should also consider the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor. Contact your financial advisor to discuss which options are available to you and what’s right based on your situation.

PEO Guidance

The most significant feature of the new rule is its roadmap for professional employer organizations (PEOs) to sponsor MEPs. PEOs assume the primary legal obligations of an employer, then lease its employees to companies that put them to work under contract with the PEO.

The final rule differs from the proposed version with respect to a PEO’s eligibility to sponsor MEPs. Specifically, the regulations provide a four-part “safe harbor” test.

  1. The PEO is responsible for paying wages to employees, without regard to the receipt or adequacy of payment from those clients.
  2. The PEO takes responsibility to pay and perform reporting and withholding for all applicable federal employment taxes, without regard to the receipt or adequacy of payment from those clients.
  3. The PEO plays a definite and contractually specified role in recruiting, hiring and firing workers, in addition to the client-employer’s responsibility for recruiting, hiring and firing workers.
  4. The PEO assumes responsibility for, and have substantial control over, the functions and activities of any employee benefit that the PEO is contractually required to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits.

The tests are designed to ensure that a company representing itself as a PEO acts as a bona fide employer, and bears responsibility for employee benefits, including a MEP-style plan.

Open MEPs

The new rule does not include a provision that would allow an association to open its membership to businesses of any industry sector in any part of the country to join. Such an entity would be called an “open MEP” or a “pooled employer plan.” Instead, the final DOL rule asks stakeholders to offer their ideas on several regulatory questions around open MEPs. Responses are due by October 29.

A new federal law would be needed to throw open the gates to open MEPs. In fact, proposed legislation — the Setting Every Community Up for Retirement and Enhancement (SECURE) Act — facilitating open MEPs passed in the House in May 2019. But opposition has held the bill back so far in the Senate.

Fiduciary Liability

Joining an association or PEO that sponsors a MEP can help eliminate a significant portion of the fiduciary liability associated with retirement plan sponsorship — but not all of it. For example, the entity that sponsors the MEP is held responsible for fulfilling the basic legal requirements of running the retirement plan. However, as an employer, you’re responsible for choosing a MEP wisely to safeguard your employees’ interests. You also must watch how the MEP is performing overall.

Additionally, individual employers participating in the MEP must satisfy anti-discrimination requirements. Those rules apply to all ERISA plans. They’re intended to ensure that benefits aren’t skewed towards higher paid employees at the expense of the lower paid ones. The MEP administrator would perform the discrimination testing for you. But if you fail, it’s up to you to remedy the situation.

Beware: Even though you’re compliant with the antidiscrimination rules, you could still have problems. How? If one or more employers participating in a MEP are violating the rules, the entire plan could be disqualified.

Right for Your Small Business?

If you currently aren’t sponsoring a retirement plan — or you’re unhappy with the cost of your existing plan — a MEP might be a good solution. Also, if the SECURE Act becomes law, you might have more MEP options to choose from. Contact your financial advisor to determine what’s best for your situation.

Posted on Mar 6, 2019

Audits of I-9 records quadrupled in 2018 over the prior year (the federal fiscal year). That means nearly 6,000 employers were audited, which led to several dozen civil and criminal convictions. The agency involved — Homeland Security Investigations (HSI) — “is carrying out its commitment to increase the number of I-9 audits in an effort to create a culture of compliance among employers,” it stated upon releasing audit statistics. To accommodate the increase, HSI is beefing up its army of auditors.

Most employers don’t intentionally falsify I-9 forms or knowingly accept falsified ones from employees. They simply make honest mistakes. And that’s what lets them get by with only a civil conviction instead of a criminal one. But, as the saying goes, ignorance of the law is no excuse. A civil offense conviction and its associated penalties still costs money and generates bad publicity. How can you avoid slipping up? With a quick review of basic I-9 employment eligibility verification requirements and common errors.

Timing Is Everything

First, be sure you’re using an up-to-date Form I-9. They’re easy to pull off of the U.S. Citizenship and Immigration Services (USCIS) website. The most current version expires on Aug. 31. New employees must complete their part of the form (Sec. 1) when hired. You need to complete the rest of it within three days of the employee’s start date.

Note the word “employee”: You don’t need to worry about independent contractors — unless you happen to know of any that aren’t authorized to work in the United States. Knowingly engaging such a person could expose you to serious legal sanctions.

That three-day deadline coincides with the deadline for employees to give you the documentation you need to complete Part 2. You must “physically examine each original document the employee presents to determine if the document reasonably appears to be genuine and relates to the person presenting it,” according to USCIS. And the employee you’re hiring needs to give you his or her documents personally, not anyone else.

The USCIS “E-Verify” system has been around a long time, but its use is voluntary for most employers. Federal rules, however, do require it for certain employers, and a handful of southern states require its use for all employers. Other states require it only for employers doing business with the state in question.

Reverification Requirement

If anyone you hire isn’t a U.S. citizen and is here on a visa that expires, it’s up to you to reverify that the employee’s work authorization has been renewed before the original visa expires.

You might be tempted to avoid hiring someone whose legal employment eligibility, such as having only temporary resident status, appears more complicated than you want to deal with. But employment antidiscrimination rules come into play here. Specifically, “citizenship status discrimination” is illegal. So too are “unfair documentary practices” (selectively asking people for more documents than are required) and “national origin discrimination.”

You need to hang on to those I-9s as long as employees are with you, and a bit longer. Specifically, you need to retain them for three years from the date of hire, or one year after the employee leaves you, whichever is longer. In other words, if an employee only stayed with you one year, you’d need to retain that I-9 for two additional years. You can retain the forms electronically using USCIS-approved formats.

Details Matter

The USCIS is quite particular when auditing I-9s. The agency has posted a list of “common mistakes” on its website. Most often, the errors involve omissions of basic information, such as the employee’s middle initial, job title and date of hire.

Also posted on the website is a list of general tips for filling out the form, including the following:

  • Ensure that the date of hire on the form matches payroll records.
  • Write legibly.
  • Use only commonly known abbreviations.
  • Complete all applicable sections.

If you fall short of compliance and are audited, you could face penalties for each mistake on each form. Penalties per mistake range from around $200 to around $2,000. That means that, if you consistently made the same mistake on each form, a penalty can grow exponentially.

Play It Safe

Don’t gamble with the important task of properly completing, submitting and retaining Forms I-9 for your employees. Work with your CPA and attorney to answer any questions that come up. Getting it right is too important to roll the dice.

 

Posted on Jul 25, 2018

The 2018 Cornwell Jackson Executive Pulse Survey reveals a highly optimistic group of business owners and executives who are confident in their business strategies while being concerned about internal culture and leadership transitions. Across six major industry segments, leaders believe the U.S. economy is better than 12 months ago while the Texas and Dallas Fort Worth economies are holding steady. To improve business opportunities, respondents cite available skilled labor, technology incentives and next generation business leaders at the top of their wish lists.

To attract and retain talent, companies and organizations are providing traditional benefits like health insurance, retirement funding and additional compensation, but also a wide array of incentives that include flexible schedules, referral compensation, revised dress codes and allowances for religion, as well as cafeteria plans and child care programs. More than 32 percent of leaders noted that millennials within their workforce have influenced acceleration in technology investments. More than 43 percent of leaders agreed that millennials are influencing “rethinking of leadership tracks” at their organizations. For almost 60 percent of respondents, their organizational culture is shifting through the influence of millennials.

With the anticipation of current and future labor shortages, leaders are investing in technology solutions to augment positions that are hard to fill. They are also maintaining close relationships with universities and trade schools to cultivate talent. Once in the door, employees continue to receive education and cross training at more than 32 percent of the companies and organizations surveyed.

At the time of this survey in early 2018, leaders were still taking a wait-and-see approach on the impact of the Tax Cuts and Jobs Act of 2017. While most believe it will have some impact on their businesses, the specifics regarding the tax code and planning were unclear. Although the survey revealed some concern over the Trump administration’s economic policies here and abroad, leaders appear most concerned with domestic issues that range from compensation and reputation management to the need for continuous innovation in their businesses.

According to more than 50 percent of leaders, one of the biggest threats to their business planning is the change in consumer demand tied to an increasing variety of procurement channels for goods and services (e.g. online purchases). As options increase for purchasing, leaders are closely monitoring consumer confidence and service standards. Top traditional concerns include an uncertain tax structure and staffing levels.

Competition will impact the operating metrics of more than 43% of survey respondents.

When it comes to financing, leaders in the survey noted strong cash reserves and little need for new capital. However, they emphasized the importance of strong relationships with their lenders and adequate existing lines of credit — regardless of whether they are using the lines or not. They note that banking flexibility is improving with regard to extension of credit to more companies and organizations.

For the coming year, the biggest operational focus of leaders in this survey vary, but some themes that came through include a focus on internal efficiency followed by growth of their customer base and the management of leadership transitions within the company.

Overall, the priorities for leaders in the Dallas Fort Worth area across industries include how to manage change with a dynamic workforce and the influence of increasing consumer choice and technological innovation.

Participant Statistics

The 2018 Executive Pulse Survey attracted more than 80 participants across five major industry sectors. The breakdown of executive and professional types is as follows:

About 85% of participants had businesses based directly in the Dallas Fort Worth metropolitan area, with outlying cities that included Plano, Carollton, Wylie, Irving, Addison and Farmers Branch. The average tenure of participants in their current position averaged about 12 years. Professional certifications varied, but the most common involved a J.D. or CPA licensure.

The average employment of businesses surveyed was about 150 employees. Actual 2017 revenue of participants averaged $21 million. Projected revenue for 2018 was slightly higher at $23 million.

About the Executive Pulse Survey Report

We’re very pleased to publish our first ever Executive Pulse Survey and Report. The survey, which was conducted exclusively in the Dallas Fort Worth area, targets executives in the Construction, Energy, Manufacturing and Distribution, Professional Services, and Real Estate industries.

The Pulse Survey is designed to explore the opinions of DFW-based executives on a wide range of topics and trends that impact how businesses and organizations operate. It is also intended to provide information regarding their peers’ thinking across a variety of industries and topics.

The Survey was developed by our firm in collaboration with our sponsors: Richard P. Slaughter Associates, Comerica Bank, Scheef & Stone, and Insperity. The survey would not have be possible to produce without our sponsor and participant support.

We hope you find the report useful and insightful.

Download the full report here: Download the Executive Pulse Survey Report

Posted on May 7, 2018

Glaring deficiencies in employee benefit plan audits across the accounting industry have prompted the U.S. Department of Labor’s Employee Benefits Security Administration to put several initiatives in place to improve the quality of audits and auditors in the coming years. Is your Employee Benefit Plan Audit auditor preparing for these new standards?

Firms with smaller employee benefit plan practices and correspondingly high levels of audit deficiencies may be subject to more discipline enforced through their state boards of accountancy. The DOL is also recommending amendments to the ERISA Act of 1974 to impose civil penalties more often on CPAs who fail to meet qualifications to perform the audit — or if the audit is determined to be largely deficient.

DOL Recommendations to Improve Audit Quality

The DOL recommended eight other changes and improvements to the oversight of employee benefit plan audits. They include:

  • Working with the American Institute of Certified Public Accountants Peer Review staff to improve the peer review process as it relates to employee benefit plans as well as enforcement of discipline on CPAs that don’t receive an acceptable peer review.
  • Amending the definition of “qualified public accountant” to include additional qualifications to ensure quality employee benefit plan audits.
  • Repealing the “limited-scope” audit exemption so that all auditors are required to file a formal and unqualified opinion — standing behind the quality of the organization’s financial statements.
  • Adding more authority to the Secretary of Labor to establish special accounting principles and audit standards that relate to financial reporting issues of employee benefit plan audits.
  • Expanding licensing requirements for CPAs that audit employee benefit plans. The AICPA is already planning to offer a certificate program to distinguish CPAs who specialize in EBP audits.
  • Expanding education for plan administrators on the importance of hiring a qualified employee benefit plan auditor.
  • Communicating with state boards of accountancy to ensure that only competent CPAs are performing employee benefit plan audits
  • Communicating with state CPA societies to add employee benefit plan audit training opportunities, particularly in states that have a large number of CPA members performing only a handful of audits annually.

The very nature of employee benefit plan audits is changing to support higher quality audit services. Auditors performing the audit must be aware of these changes and the increased educational requirements and scrutiny. For example, the DOL is calling for more transparency in the audit report that includes listing all plan participants and their beneficiaries as well as outlining management’s responsibilities for the plan. If you need a refresher on plan administration compliance, review this DOL report.

Security Enhancements and Form Changes for Benefit Plan Audits

In addition to how information is laid out in the EBP audit report, plan administrators must be mindful of issues such as cyber security and changes to the Form 5500 that require additional information.

Administrator responsibilities regarding cyber security include:

  • Written information security policies
  • Periodic audits to detect cyber security threats
  • Periodically tested back-up and recovery plans
  • Responsibility for losses through cyber security insurance
  • Training policies to reinforce security of data

Key changes to the Form 5500 include:

  • New questions about unrelated business taxable income, in-service distributions and trust information
  • A number of new provisions for multi-employer plans with 500 or more total participants (including retired employees or former employees that have not moved assets from the plan).

As you can see, plan administrators have a greater burden to hire a qualified auditor, given evolving training and certification of auditors and the complexity of the audit itself. It will greatly benefit any plan administrator or trustee to schedule time with a EBP auditor at Cornwell Jackson to understand these changes and pursue additional training if necessary.

To download the full whitepaper, click here: Choose Your Auditor Carefully for Employee Benefit Plans

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of over 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

For more information, check out our benefit plan audit blog here.

Originally published on July 7, 2016. Updated on May 7, 2018.

Posted on Apr 27, 2018

Does your employee benefit plan auditor really understand what’s at stake when performing your audit? It is more than a governmental requirement. It protects the assets promised to your employees and ensures that plan administration is in full compliance with the US Department of Labor and IRS.

The DOL has spent more than 25 years assessing the quality of employee benefit plan audits and taking aggressive action to improve them. The most recent study showed that only 61% of audits fully complied with professional standards compared to a 1997 baseline study that showed 81% of plan audit compliance. The decline correlates to an increasing amount of plan assets and number of plan participants at risk. This fact increases the chances of personal liability for your organization’s plan administrators and board members.

How is the DOL measuring audit deficiency? There are several areas it deems vital to compliance as defined by Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS) and the ERISA Act of 1974. ERISA was enacted by Congress to fix abuses in the nation’s private pension and welfare benefit plan system. Since then, the Act has been extended to apply to all defined contribution and defined benefit plans such as Simple IRAs and 401(k)/403(b) plans.

Let’s outline a few of these areas, and the questions you should ask your potential audit team about their knowledge or level of accomplishment in these areas.

Level of EBP Specific Continuing Professional Education

The DOL found that audit teams with at least 8 or more hours of continuing professional education specific to employee benefit plan audits in the previous three years had fewer audit deficiencies. CPAs with the fewest deficiencies (and who also performed the most audits) cited an average of 24 or more hours of continuing professional education in the last three years previous to the audit.

Ask your prospective employee benefit plan audit team about the level of CPEs they have achieved in the years leading up to your audit. Also ask them how many EBP audits they perform each year.

Compliance with Plan Documents

Cornwell Jackson audits more than 75 employee benefit plans a year. The number one issue we identify is that daily management of the plan often does not match the original plan documents. For example, definitions of compensation in the plan documents don’t match what is actually reported for employees. Auto enrollment is another area that requires careful management, since employees must be enrolled within a timely manner as soon as they are deemed eligible (unless they choose to opt out). The mere opportunity to enroll must be communicated to employees in a timely manner, too.

The DOL has noted other deficiencies in day-to-day management, including accurate recording of participant data, proper and timely payments of benefits and timely, accurate collection of employee contributions.

Quality independent auditors should be able to discuss the importance of consistency between plan documents and day-to-day management as well as internal controls — and how they test for such weaknesses.  

Limited Scope Audits

An increasing number of what are called “limited scope” audits appear to have contributed to a decline in audit quality since 2001. Limited scope audits allow auditors to issue “no opinion” on the plan’s financial statements. However, limited scope audits do not decrease the auditor’s duty to focus on all relevant audit areas. They simply allow auditors to exclude investments held and investment-related transactions and income already certified by qualifying entities (e.g. investment brokerage firms).

Almost 60% of limited-scope audits in the 2015 DOL study “contained major GAAS deficiencies in areas of the audit not related to investments, including contributions, participant data, benefit payments and internal controls.”

When considering a potential auditor for a limited-scope audit, ask about the audit team’s approach to ensure that all relevant audit areas were included in the audit engagement.

Clean Peer Review

Many of the auditors included in the DOL study were also found to show deficiencies in professional standards based on peer review. A qualified peer auditor with particular knowledge of EBP audits can identify these deficiencies. Peer review overall is designed to support high quality audit standards and best practices across all firms. However, the DOL found that many CPAs with deficient or rejected audits also did not have an acceptable peer review. Some of them did not undergo peer review at all.

Ask your potential EBP auditor about their history of peer review and whether they can attest to an acceptable peer review.

If you are concerned about your audit team’s qualifications to perform a quality independent employee benefit plan audit, include these questions and considerations in your RFP process and visit the AICPA EBPAQC to learn more. There is also an EBP audit preparedness checklist available through the AICPA at http://bit.ly/1pWHGIM.

Plan administrators have a greater burden to hire a qualified auditor, given evolving training and certification of auditors and the complexity of the audit itself. It will greatly benefit any plan administrator or trustee to schedule time with a EBP auditor at Cornwell Jackson to understand these changes and pursue additional training if necessary.

Continue Reading: For more information, check out our next blog post about Top Employee Benefit Plan Audit Quality Improvements here.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of over 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

 

Originally published on June 27, 2016. Updated on April 27, 2018.

 

 

Posted on Apr 16, 2018

The Department of Labor and IRS are ramping up efforts to improve compliance in corporate employee benefit plan administration. Frequent errors point to inadequate or improper administration by organizations, but also to auditors that lack the proper training and experience to conduct a technically appropriate employee benefit plan audit. Failure to make improvements can result in penalties and fines to companies and organizations — and even criminal charges in severe cases. That’s why it’s so important to choose an 401k Plan Audit team with experience once your organization reaches 100 eligible participants.

When seeking a quality, independent public accountant to perform a financial statements audit of your employee benefit plan, the AICPA outlines several guidelines to consider. First of all, auditors found to be out of compliance with professional standards had the following characteristics:

  • Inadequate technical training and knowledge
  • Lack of awareness regarding the unique factors of employee benefit plan audits
  • Lack of established quality review and internal process controls for each audit
  • Misperception that EBP audits are simply fulfilling a governmental requirement
  • EBP audits encompassing a very small percentage of the firm’s overall audit practice
  • Missing necessary audit work
  • Misinterpreting the limited scope audit exception
  • Limited time to adapt to new technical guidance

As you can see, there are many telltale signs that a potential auditor may not be highly qualified. When seeking an auditor, you must know how to evaluate knowledge and experience, licensing and ability to perform tests unique to employee benefit plan audits. Such tests may include:

  • Finding whether plan assets covered by the audit are fairly valued
  • Unique aspects of plan obligations
  • Timeliness of plan contributions
  • How plan provisions affect benefit payments
  • Allocations to participant accounts
  • Issues that may affect the plan’s tax status
  • Transactions prohibited under ERISA

Less experienced auditors may be assigned to perform routine aspects of the audit, but you need to make sure that a more experienced employee benefit plan auditor will be reviewing that work as well as performing more complicated aspects of the audit.

When looking for a quality, independent auditor, you might start by asking for references and discuss the quality of work with other EBP clients. Ask the firm about recent training and continuing education specific to employee benefit plans. Another simple way to compare quality auditors with one another is to search for the firms that are members of the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). These firms have made a voluntary commitment to audit quality by adhering to higher standards in their policies, procedures and training. At a minimum, auditors for these plans must be licensed or certified as public accountants through a state authority.

“The DOL noted that firms with membership in the AICPA EBPAQC had fewer audit deficiencies. By contrast, most CPAs performing the fewest audits and showing the most deficiencies were not members.” —U.S. Department of Labor

Given all of these factors, one more distinction that must be identified is if the firm has sufficient independence to satisfy ERISA standards for third-party reporting. An independent auditor or its employees, for example, should not also maintain the financial records for the employee benefit plan. The same firm may perform tax filing, but accounting work may be deemed a conflict of interest that would affect an objective audit report. For more information on selecting a quality auditor for EBP financial statement audits, refer to the AICPA report, http://bit.ly/1SN8w0h

The report even provides guidelines on developing a detailed RFP to engage auditors.

To download the full whitepaper, click here: Choose Your Auditor Carefully for Employee Benefit Plans

As you can see, plan administrators have a greater burden to hire a qualified auditor, given evolving training and certification of auditors and the complexity of the audit itself. It will greatly benefit any plan administrator or trustee to schedule time with a EBP auditor at Cornwell Jackson to understand these changes and pursue additional training if necessary.

Posted on Apr 6, 2018

The Department of Labor and IRS are ramping up efforts to improve compliance in corporate employee benefit plan administration. Frequent errors point to inadequate or improper administration by organizations, but also to auditors that lack the proper training and experience to conduct a technically appropriate employee benefit plan audit. Failure to make improvements can result in penalties and fines to companies and organizations — and even criminal charges in severe cases. That’s why it’s so important to choose an audit team with experience once your organization reaches 100 eligible participants.

The American Institute of Certified Public Accountants has made a concerted effort to cooperate with the Department of Labor and the IRS to inform companies and organizations about their fiduciary responsibilities regarding employee benefit plans. In 2014, the AICPA released an advisory report for plan sponsors, administrators and trustees on the basics of why employee benefit plans need an independent audit — and how to hire a qualified, independent public accountant.

This awareness is more important than ever. The DOL has noted an unacceptable level of errors in plan audits. Exploring further, they found that many plan administrators failed to properly administer and record plan information on behalf of qualified employees. An audit should catch administrative errors, but the auditors themselves are causing mistakes.

Auditors who perform only a handful of employee benefit plan audits a year may lack enough experience or credentials to identify areas of weakness in controls or plan operations. If companies and organizations aren’t aware of these weaknesses or don’t remedy them, they can face serious penalties. The DOL Employee Benefits Security Administration (EBSA) may reject plan filings and assess penalties on companies and organizations of up to $1,100 per day, without limit, for these deficient filings. Administrators and officers can even be held personally liable to restore losses incurred by the plan or other losses connected to employee payroll.

A 2015 report by the DOL found that nearly four in 10 Form 5500 filings had enough major deficiencies to merit rejection of the filing. This percentage encompasses $653 billion and 22.5 plan participants and beneficiaries at risk. The DOL report was based on Form 5500 filings from 2011, which sounded the alarm bells regarding the integrity of employee benefit plans for participants and their beneficiaries.

“There is a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed. CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate.” –U.S. Department of Labor

If CPA firms simply needed to perform more plan audits to improve audit quality, the accounting industry could encourage more intensive training and membership through the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). However, the nature of employee benefit plans and third-party administration continues to evolve and increase in complexity. Public accountants who have specialized for years in audits of employee benefit plan financial statements are at a clear advantage to deliver consistent quality to their clients into the future.

Any company or organization that has 100 or more eligible participants in an employee benefit plan is required to have a financial statement audit of the plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and DOL requirements. An independent, qualified public accountant must perform these audits to deliver a reliable report to participants, plan management, the DOL and other interested parties. The audit helps protect the financial integrity of the employee benefit plan so that the necessary funds will be available to pay retirement and other promised benefits.

The magic number of “eligible participants” may include more than just current employees. They could include former employees with funds still held in the benefit plan as well as retired employees receiving benefits. It also includes eligible but not participating employees. That’s why it’s so important to work with a qualified plan auditor to identify and assure compliance and accurate reporting.

To download the full whitepaper, click here: Choose Your Auditor Carefully for Employee Benefit Plans

Posted on Sep 24, 2017

Legislation enacted in 2015 established a new IRS audit regime for partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. Here’s a comparison between the old and new partnership audit rules, along with a summary of recently proposed guidance to help partners prepare for the changes that are effective starting with the 2018 tax year.

Important note: To keep things simple, we’ll refer to any LLC that’s treated as a partnership for tax purposes as a partnership and any LLC member that’s treated as a partner for tax purposes as a partner.

Relief to Partnerships that Missed the New Filing Deadlines

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the date by which a partnership must file its annual return. The  changes went into effect for the 2016 tax year.

Specifically, for calendar-year partnerships, the due date for filing the annual return or request for an extension changed from April 15 to March 15 (excluding weekends and holidays). For calendar-year partnerships, the due date for filing a return after receiving an extension also changed from October 15 to September 15 (excluding weekends and holidays).

Many partnerships filed their returns or their extension requests for tax year 2016 by the old April deadline. If not for the Surface Transportation Act, these returns and requests for extension of time to file would have been on time. The IRS has decided to provide penalty abatement for these partnerships, provided they meet the following criteria:

  1. The partnership filed tax returns with the IRS and furnished copies to the recipients (as appropriate) by the date that would have been timely under the old deadline, or
  2. The partnership filed an extension by the date that would have been timely under the old deadline.

Old Rules

Under the old rules, the federal income tax treatment of partnership items of income, gain, deduction and credit is generally determined at the partnership level, even though these tax items are passed through to the partners and reported on their returns. After a partnership audit is completed and the resulting adjustments to partnership tax items are determined, the IRS generally recalculates the tax liability of each partner and sends out bills for additional taxes, interest and penalties to the partners.

This set-up was deemed to be inefficient, so Congress established a new audit regime for partnerships. However, the old rules will continue to apply to most partnerships for tax years beginning in 2017.

The Big Difference

The new partnership audit regime applies to partnerships with more than 100 partners at the partnership level. The big difference under the new rules is that, subject to certain exceptions, any resulting additions to tax and any related interest and penalties are generally determined, assessed and collected at the partnership level.

Specifically, the partnership — not the individual partners — will be required to pay an imputed tax underpayment amount, which is generally the net of all audit adjustments for the year multiplied by the highest individual or corporate federal income tax rate in effect for that year.

However, the partnership can pay a lower amount if it can show that the underpayment  would be lower if it were based on certain partner-level information, such as:

  • Differing tax rates that may be applicable to specific types of partners (for example, individuals, corporations and tax-exempt organizations), and
  • The type of income subject to the adjustments (for example, ordinary income vs. capital gains or cancellation of debt income).

An alternative procedure, known as the “push-out election,” allows the partners to take the IRS-imposed adjustments to partnership tax items into account on their own returns. Or, if eligible, a partnership can elect out of the new rules altogether. (See below for more details on both elections.)

Partnership Representatives

The new partnership audit rules eliminate the tax matters partner role that applied under the old rules. Instead, partnerships will be required to designate a partnership representative. The partnership representative has the sole authority to act on behalf of the partnership in IRS audits and other federal income tax proceedings.

If the partnership doesn’t choose a representative, the IRS can select an individual or entity to fill that role. If the partnership representative is an entity (as opposed to an individual), the partnership must appoint a designated individual through whom the partnership representative will act.

Under the proposed regulations, the partnership representative has a great deal of authority, and no state law, partnership agreement, or other document or agreement can limit that authority. Specifically, the partnership representative has the sole authority to extend the statute of limitations for a partnership tax year, settle with the IRS or initiate a lawsuit. Any defense against an IRS action that isn’t raised by the partnership representative is waived.

With all this authority comes the associated risk, which may mean that some partnerships will have a hard time finding someone willing to act as the representative. Partnerships should consider indemnifying or compensating their partnership representatives accordingly.

According to the proposed regulations, partnerships must designate a partnership representative separately for each tax year. The designation is done on the partnership’s timely filed (including any extension) federal income tax return for that year.

Partnerships should amend their agreements to establish procedures for choosing, removing and replacing the partnership representative. In addition, the partnership agreement should carefully outline the duties of the partnership representative.

The Push-Out Election

As noted above, under the new rules, a partnership must pay the imputed underpayment amount (along with penalties and interest) resulting from an IRS audit — unless it makes the push-out election. Under the election, the partnership issues revised tax information returns (Schedules K-1) to affected partners and the partnership isn’t financially responsible for additional taxes, interest and penalties resulting from the audit.

As the name suggests, the push-out election allows the partnership to push the effects of audit adjustments out to the partners that were in place during the tax year in question. This effectively shifts the resulting liability away from the current partners to the partners that were in place during the tax year to which the adjustment applies. The push-out election must be filed within 45 days of the date that the IRS mails a final partnership adjustment to the partnership. This deadline can’t be extended. The proposed regulations specify the information that must be included in a push-out election. The partnership must also provide affected partners with a statement summarizing their shares of adjusted partnership tax items.

Partnership agreements should be updated to address whether the partnership representative is required to make the push-out election or the circumstances in which a push-out election will be made. When deciding whether to make the election, various factors should be considered, including:

  • The effect on partner self-employment tax liabilities,
  • The 3.8% net investment income tax,
  • State taxes, and
  • The incremental cost of issuing new Schedules K-1 to affected partners.

Partnerships may want to require their partnership representatives to analyze specified factors to determine whether a push-out election should be made.

Option to Elect Out of the New Rules

Eligible partnerships with 100 or fewer partners can elect out of the new audit rules for any tax year, in which case the IRS must separately audit each partner. However, the option to elect out of the new partnership audit regime is available only if all of the partners are:

  • Individuals,
  • C or S corporations,
  • Foreign entities that would be treated as C corporations if they were domestic entities,
  • Estates of deceased partners, or
  • Other persons or entities that may be identified in future IRS guidance.

The election out must be made annually and must include the name and taxpayer ID of each partner. The partnership must notify each partner of the election out within 30 days of making the election out.

Eligible partnerships may want to amend their partnership agreements to address whether electing out will be mandatory. In most situations, electing out will be preferable. However, partnerships looking to maintain flexibility in their partnership agreements should include provisions indicating how the decision to elect out will be made.

Partnerships choosing to elect out may want to amend their agreements to prohibit the transfer of partnership interests to partners that would cause the option to elect out to be unavailable. They also may want to limit the number of partners to 100 or fewer to preserve eligibility for electing out.

Important note: Many small partnerships may assume that they’re automatically eligible to elect out of the new partnership audit rules because they have 100 or fewer partners. That’s not necessarily true. For example, the option to elect out isn’t available if one or more of the partners are themselves a partnership (including an LLC that is treated as a partnership for tax purposes). Also, if there is an S corporation partner, each S corporation shareholder must be counted as a partner for purposes of the 100-partner limitation.

Coming Soon

Although the new partnership audit rules don’t take effect until next year, partnerships should start reviewing partnership agreements and amending them as necessary. At a minimum, partnerships that don’t expect to elect out of the new audit rules should appoint a partnership representative before filing their 2018 returns. Your tax advisor can help you get up to speed on the new partnership audit rules and recommend specific actions to ease the transition.

Posted on Mar 28, 2017

IRS examiners usually do their homework before meeting with taxpayers and their professional representatives. This includes reviewing any relevant Audit Techniques Guides (ATGs) that typically focus on a specific industry or audit-prone business transaction.

Auditor Specialization

In the past, IRS examiners were randomly assigned to audit taxpayers from all walks of life, with no real continuity or common thread. For example, after an examiner audited a dentist, the next assignment he or she received might have been a fishing boat captain or a convenience store owner. Therefore, there was little chance to develop expertise within a particular niche.

To remedy this, the IRS created its Market Segment Specialization Program (MSSP), which expanded rapidly during the 1990s. The MSSP allowed IRS auditors to focus on specific sectors. Through education and experience, examiners became better equipped to identify and detect noncompliance with the tax code.

The IRS started publishing ATGs as an offshoot of the MSSP. Most ATGs target major industries, such as construction, manufacturing and professional practices (including physicians, attorneys and accountants). Other ATGs address issues that frequently arise in audits, such as executive compensation and fringe benefits.

The IRS periodically revises and updates the ATGs and adds new ones to the list.

IRS Jumps into Golden Parachutes

In February 2017, the IRS updated its Audit Techniques Guide (ATG) on golden parachute payments. After a corporate takeover, officers who leave the company may receive “golden parachutes.” Such payments may be controversial with shareholders if they exceed severance given to other departing employees. Golden parachute payments are nondeductible and could trigger a 20% penalty if deemed excessive.

A parachute payment doesn’t include any reasonable amount paid for services to be rendered before, on or after the date of change in ownership or control. Certain exceptions may be made for qualifying small business corporations. And payments to or from a qualified pension or profit-sharing plan, 403(a) annuity, simplified employee pension or SIMPLE plan aren’t considered parachute payments.

The new ATG explains how examiners can detect golden parachute payments, including a nine-step guide and flowchart to performing a parachute examination. It also provides a laundry list of documents to review in connection with these issues.

The IRS updated several ATGs, including ones for conservation easements and cost segregation studies, at the end of 2016.
Though designed to help IRS examiners prepare for audits, ATGs are available to the public. So, small business taxpayers can review them, too — and gain valuable insights into issues that might surface during audits.

A Closer Look at ATGs

What does an ATG cover? The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

  • The nature of the industry or issue,
  • Accounting methods commonly used in an industry,
  • Relevant audit examination techniques,
  • Common and industry-specific compliance issues,
  • Business practices,
  • Industry terminology, and
  • Sample interview questions.

The main goal of ATGs is to improve examiner proficiency. By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides. The guides also help examiners plan their audit strategies and streamline the audit process.

Over time, the information and experience gained about a particular market segment can help examiners conduct future audits with greater efficiency. Some of this information is incorporated into periodic ATG updates. Furthermore, IRS examiners are routinely advised about industry changes through trade publications, trade seminars and information sharing with other personnel.

Site Visits and Interviews

ATGs also identify the types of documentation that taxpayers should provide and information that might be uncovered during a tour of the business premises. These guides may be able to identify potential sources of income that could otherwise slip through the cracks.

For example, the ATG for the legal profession identifies revenue streams derived from outside the general practice, such as serving on a board of directors, speaking engagements, and book writing or editing. The guide encourages IRS examiners to inquire about potential revenue sources during the initial interview with the taxpayer.

Other issues that ATGs might instruct examiners to inquire about include:

  • Internal controls (or lack of controls),
  • The sources of funds used to start the business,
  • A list of suppliers and vendors,
  • The availability of business records,
  • Names of individual(s) responsible for maintaining business records,
  • Nature of business operations (for example, hours and days open),
  • Names and responsibilities of employees,
  • Names of individual(s) with control over inventory, and
  • Personal expenses paid with business funds.

For example, one ATG focuses specifically on cash-intensive businesses, such as liquor stores, salons, check-cashing operations, gas stations, auto repair shops, restaurants and bars. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

Likewise, when auditing a liquor store owner, examiners are taught to search for off-book wholesalers and check cashers. For gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.

Bottom Line

During an audit, IRS examiners focus on those aspects that are unique to the industry, as well as ferreting out common means of hiding income and inflating deductions. ATGs are instrumental to that process.

Although ATGs were created to benefit IRS employees, they also help small businesses ensure they aren’t engaging in practices that could raise red flags. To access the complete list of ATGs, visit the IRS website. And for more information on hot tax issues that may affect your business, contact your tax advisor.

Posted on Nov 5, 2016

After a formal audit, audit rules require a management communication letter presented to the owners, leaders and/or audit committee that outlines control deficiencies. The individual(s) overseeing the audit process will need to confirm receipt of the management letter and sign off on the stated deficiencies and/or demonstrate how they have already been handled in a formal response. Financial institutions may request copies of these audit findings from the company.

 If there are deficiencies that require immediate or timely improvements by the company, the company will have to show how and when those deficiencies will be addressed and communicate the plan to the financial institution(s).

Beyond that, the audit team’s “job” is done. It is up to the company to determine how to make internal controls or process improvements that support compliance. However, a knowledgeable audit team will give leaders and owners some items to think about beyond fulfilling the requirements of the management communication letter.

Typically, a senior member of the CPA firm will follow up with the owner, CFO or accounting staff and talk to them about operational or financial health and efficiency. It is this discussion — before, during and after the audit — that sets audit teams apart. During that follow-up call, the audit team sets the tone for an ongoing relationship with management and business owners. Ideally, clients will contact the audit partner with questions or concerns throughout the year — for compliance and growth considerations. Owners may have questions about employment growth and overtime rules. They may want to know if an employee benefit plan audit is required, or the timing of a merger. Audit teams can often be the first people who see the advantages of a change in entity structure.

A proactive follow-up by your audit team can make the difference between a dreaded annual obligation and an anticipation of true advisory support. It may never be an amusing experience to see your audit team, but the right team can give leaders the value from their many years of reviewing financial statements, putting issues in context and identifying a new direction for the coming year. For us, it’s not just a job. It’s a relationship that begins — or strengthens — once your audit is complete.

Download the Whitepaper: The True Benefits of an Audit or Review of Financial Statements

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.