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 Aug 1, 2019

Manufacturing company owners and managers generally focus their attention on what’s happening — or isn’t happening — on the plant floor. Activities in overhead departments, such as human resources (HR), can become a secondary consideration. If this sounds like your company, consider this: Manufacturing is a labor-intensive industry, and you can’t afford to ignore HR.

A well-oiled HR department enables your business to run on all cylinders and overcome many challenges. Conversely, HR problems can slow down your company’s growth. If, for example, HR doesn’t proactively search for new machine operators, you may not be able to fill a big order that comes in unexpectedly.

7 Critical Functions

Here are seven ways HR departments can support a manufacturing company’s operational and performance objectives:

1. Recruitment.

This may be HR’s most important function. Finding the best talent to keep the plant humming without breaking the bank is always an issue, but it’s even more so in the current tight labor market. Today’s unemployment rate has reached record lows in some markets, and many applicants lack the skills and training to operate complex machines and computers that are used by advanced manufacturers.

One challenges for HR is that Millennials have shown less interest in manufacturing than previous generations. This may be due to a widely held misconception that manufacturing isn’t “cutting-edge.” Some younger workers may also believe that manufacturing jobs aren’t secure due to a reliance on temps to handle seasonal or periodic work.

The numbers bear this out. According the National Association of Manufacturers (NAM), in the first quarter of 2019 more than 25% of manufacturers had to turn down new business opportunities for lack of skilled employees. By 2025, millions of manufacturing jobs are expected to go unfilled. Your HR department must constantly strategize and think creatively to ensure that this doesn’t happen to your company.

2. Compensation.

For many manufacturers, compensation is the second largest business expense next to raw materials. Of course, wages alone aren’t enough to attract the top talent. Today, jobseekers look for a complete package that includes a good salary, benefits and perks, such as bonuses, paid time off and retirement plans.

Your HR team needs to know enough about the labor market to offer the best combination of these elements. At the same time, HR must align salary and incentive programs with your company’s performance markers — all while working within a tight budget. It’s a tough balancing act.

3. Health care benefits.

No question, the biggest-ticket under the benefits umbrella is health insurance. As health care costs rise, premiums will also continue to soar.

HR managers must balance the needs of employees against the cost to your company. Increasingly, this means asking workers to pay a larger percentage of premiums and accept high deductibles. But your company can’t put too much of the burden on employees or it risks losing them. HR must understand the health insurance marketplace and know how to find the best “deals” without sacrificing quality or violating laws governing employer-sponsored health insurance. This may require them to outsource some work to benefits experts.

4. Training.

Manufacturers hoping to rely on “interchangeable” workers probably won’t last long in the global marketplace. You need workers with specialized skills — and that means devoting resources to training.

Extra training isn’t only about the right hands operating critical machines. When workers are well-trained, they tend to care more about the quality of work, leading to higher productivity. Accordingly, HR should use every tool at its disposal, including mentoring, coaching, internships, career development plans, tuition reimbursements and motivational speakers.

5. Performance management.

Skilled performance management promotes employee success and, if HR is successful, results in better financial performance. Many HR managers design and implement internal employee appraisal programs. But input from performance management consultants can be valuable as new “best practices” emerge.

6. Labor relations.

In most U.S. states, manufacturers can’t ignore unions. Managing union relations may fall to your HR department. It’s important that this team maintains a positive and productive relationship with unions and union members. Of course, if conflict arises, upper management must step in.

7. Compliance.

Whether they want to be or not, HR managers must be labor law experts. Your HR manager may be responsible for drawing up policies that protect workers and keeping corporate officers abreast of changing regulations. There’s little room for error because failure to comply with labor laws can lead to litigation and financial penalties.

Protect Your Assets

Your company’s HR department to integral to its success. Make sure that this team receives the budgetary and other support it needs to excel at recruiting, training, reviewing, compensating and protecting your most valuable asset — your workforce.

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

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

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


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,

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 Mar 26, 2018

Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. As it stands today, employees seeking to take money out of their 401(k) accounts are limited to the funds they contributed to the accounts themselves, and only after they’ve first taken a loan from the same account. Loans must be repaid, of course. The theory behind the loan requirement is that employees would be less apt to permanently deplete their 401(k) accounts with hardship withdrawals.

Thanks to the Bipartisan Budget Act (BBA) enacted in February, the rules change, beginning in 2019. Under the BBA, the employees’ withdrawal limit will include not just amounts they have contributed. It also includes accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

Liberalized Participation Rule

In addition to the changes above, the BBA also eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This is good news on two fronts: Employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And for plan sponsors, it means they won’t be required to dis-enroll and then re-enroll employees after that six-month hiatus.

One thing that hasn’t changed: Hardship withdrawals are subject to a 10% tax penalty, along with regular income tax. That combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have in order to wind up with the same net amount.

For example, an employee who takes out a $5,000 loan from his or her 401(k) isn’t taxed on that amount. But an employee who takes a hardship withdrawal and needs to end up with $5,000 will have to take out around $7,000 to allow for taxes and the 10% penalty.

Hardship Criteria

The BBA also didn’t change the reasons for which hardship withdrawals can be made. Here’s a  reminder of the criteria, as described by the IRS: Such a withdrawal “must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” That can include the need of an employee’s spouse or dependent, as well as that of a non-spouse, non-dependent beneficiary.

The IRS goes on to say that the meaning of “immediate and heavy” depends on the facts of the situation. It also assumes the employee doesn’t have any other way to meet the needs apart from a hardship withdrawal. However, the following are examples offered by the IRS:

  • Qualified medical expenses (which presumably don’t include cosmetic surgery);
  • Costs relating to the purchase of a principal residence;
  • Tuition and related educational fees and expenses;
  • Payments necessary to prevent eviction from, or foreclosure on, a principal residence;
  • Burial or funeral expenses; and
  • Certain expenses for the repair of damage to the employee’s principal residence.

The IRS gives two examples of expenses that would generally not qualify for a hardship withdrawal: buying a boat and purchasing a television.

Finally, a financial need could be deemed immediate and heavy “even if it was reasonably foreseeable or voluntarily incurred by the employee.”

Deadline Extension

Another important and somewhat related change in 401(k) rules was included in the 2017 Tax Cuts and Jobs Act (TCJA) that took effect this year; it pertains to plan loans. Specifically, prior to 2018, if an employee with an outstanding plan loan left your company, that individual would have to repay the loan within 60 days to avoid having it deemed as a taxable distribution (and subject to a 10% premature distribution penalty for employees under age 59-1/2).

The TCJA changed that deadline to the latest date the former employee can file his or her tax return for the tax year in which the loan amount would otherwise be treated as a plan distribution. So, for example, if an employee with an outstanding loan of $5,000 left your company and took a new job on Dec. 31, 2017, that individual would have until April 15 (or, with a six-month fling extension, Oct. 15) 2018 to repay the loan.

Alternatively, the former employee could make a contribution of the same amount owed ($5,000, in this example) to an IRA or the former employee’s new employer’s plan, assuming the new plan permitted it. In effect, that $5,000 contribution to a new plan would be treated the same as a rollover from the old plan.

While this new flexibility might seem like a boon to plan participants, it could also represent a financial trap. Employees typically aren’t accumulating enough dollars to put themselves on track to retire comfortably at a traditional retirement age. Therefore, although you can’t prevent a plan participant from taking advantage of the new rules if they qualify, you can redouble your efforts to help employees understand the importance of thinking of their retirement savings as just that — savings for retirement, and not a “rainy day” fund.

Posted on Feb 22, 2018

When filing the Form 5500 annual report for employee benefit plans that is required under the Employee Retirement Income Security Act (ERISA), employer-sponsors must also be sure to include a financial statement audit for certain types of plans.

Small Plan Waivers

Small plans were once automatically exempt from audits. But the Labor Department amended the regulations and now small plans must meet certain conditions for an audit waiver.

By and large, small plans don’t require an audit, but they must disclose that they are waiving the audit on Form 5500 Schedule I. To claim the waiver, at least 95% of the plan’s assets must be “qualifying assets” such as employer securities, assets held by regulated financial institutions or shares of a registered investment company.

If that is not the case, any person handling non-qualifying assets must be bonded in an amount at least equal to the value of those assets. Additional disclosure requirements also apply.


The audit, which must be made by an independent qualified public accountant, is aimed at ensuring that a plan’s financial statements are presented fairly in all material respects and that they conform to U.S. generally accepted accounting principles (GAAP).

Pension and 401(k)-type plans typically fall under the audit requirement. While both large and small plans must file Form 5500 annually, typically only large plans need an audit. “Large” generally means plans with more than 100 eligible participants at the beginning of the plan year. (See right-hand box for discussion of audit waivers for small plans.)

Because the focus is on eligible participants, former employees who remain in the plan with balances or benefits, and active employees who are eligible but choose not to participate, count toward the 100-participant threshold. This is an important distinction in 401(k) plans.

Plans that fluctuate in size between 80 and 120 participants may be able to use the “80-120 rule.” This rule allows plans that have participants within the numerical range use the same small or large category they used the previous year when they file their annual reports. This can affect the audit requirement, so consult with your benefits professional to be sure the rule is being applied correctly.

A “limited-scope audit” is available in cases where a bank, trust company or insurance company, acting as a plan trustee or custodian, certifies that the investment information on the plan is complete and accurate. In these circumstances, the independent accountant doesn’t have to audit the certified financial information.

However, this is not an exemption from the audit requirement. It is simply a reduction in the scope of the auditor’s responsibilities. That can streamline the audit and cut costs. The accountant still must audit non-investment information, such as contributions and participant data, as well as assets that aren’t held by a certifying institution.

Auditors must be licensed or certified as public accountants by the state regulatory authority and cannot have a financial interest in the plan or the sponsoring employer.

Note: Welfare benefits plans — medical, dental, disability and the like — require an audit only if they are funded. If your company’s plan pays those benefits through some other means, check with your benefits professional to determine whether the plan requires an audit.

Posted on Feb 13, 2018

The new Tax Cuts and Jobs Act (TCJA) eliminates some deductions that have been staples of businesses for years.

Case in point: The TCJA repeals the employer deduction for providing transportation fringe benefits, although the perks presumably will remain tax-free to employees if they are still offered.

The Way It Was: Three Eligible Benefits

Under the previous law, employers could deduct expenses for certain transportation fringe benefits. There are three main types of fringe benefits that employers were allowed to provide, either individually or in any combination.

1. Mass transit passes. This category includes: Any pass, token, fare card, voucher or similar item, entitling a person to ride free or at a reduced rate on mass transit or in a vehicle seating at least six passengers, if a person in the business of transporting for pay or hire operates it. Mass transit may be publicly or privately operated and includes transportation by bus, rail or ferry.

2. Commuter highway vehicle expenses. These are vehicles that carry at least six passengers. There must be a reasonable expectation that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces and employees must occupy at least 50% of the vehicle’s passenger seats.

A tax-free arrangement may involve van pooling in one of the following forms:

  • Employer-operated van pools. The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.
  • Employee-operated van pools. In this arrangement, employees independently operate a van for commuting purposes.
  • Privately or publicly operated van pools. The arrangement qualifies if the van seats at least six passengers, but the “80/50 rule” (see above) doesn’t have to be met.

3. Qualified parking fees. This benefit features employer-provided parking for employees on or near the workplace. It also covers fees for parking on or near the location from which employees commute using mass transit, commuter highway vehicles or carpools (for example, the parking lot for a train station). However, it doesn’t extend to parking at or near the employee’s home.

The Protecting Americans from Tax Hikes (PATH) Act, eventually placed these three fringe benefits on an equal footing with a maximum exclusion of $250 per month. The PATH Act also provided inflation indexing in future years. For 2017, the maximum that could be excluded by employees was increased to $255 a month, and for 2018, it increases to $260 a month.

Qualified transportation benefits may be provided directly by an employer or through a bona fide reimbursement arrangement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item isn’t readily available for direct distribution by the employer.

The Way It Is Going Forward: Changes

The TCJA includes significant changes for the deduction of transportation fringe benefits. No deduction is allowed for the expense of a qualified transportation fringe benefit an employer provides. However, the law generally doesn’t address the tax-free treatment afforded to employees receiving the benefits (see box below, Bicycling Benefit Comes to Screeching Halt). As a result, the benefits appear to remain tax-free for now.

Moreover, an employer can’t deduct any expense incurred for providing transportation — or any payment or reimbursement — to its employees. In other words, you can’t circumvent the crackdown by simply reimbursing employees for their commuting costs.

Key exception: The ban on deductions doesn’t apply to payments made for an employee’s safety. The IRS will likely flesh out this exception in new guidance, but existing regulations point to two possible scenarios:

1. An employer pays for an employee’s transportation home when they work late at night and it’s not safe to ride on public transportation, and

2. The employer provides employees with special vehicles (for example, armored cars) or chauffeurs for safety reasons.

Rethinking Benefits Packages

As a result of the changes under the TCJA, an employer may want to rethink its fringe benefit package for employees. Although the rules can’t be circumvented through reimbursements or similar payments, additional wages can help make up the shortfall for employees, taking into account that wages are taxable to recipients. Consider the best approach for your company under the new law.

Bicycling Benefit Comes to Screeching Halt

Now the Tax Cuts and Jobs Act bars employers from deducting bicycling benefits and eliminates the corresponding tax exclusion for employees (unlike the three main transportation benefits for which only the employer deductions are specifically eliminated).

These changes take effect in 2018, but sunset after 2025.

Before the law change, an employer could provide a tax-free fringe benefit to cyclists who rode their bikes to and from work. The maximum monthly allowance of $20 a month could be used to pay for reasonable expenses such as the cost of a bike, repairs, improvements and storage. However, this bicycling benefit couldn’t be offered in conjunction with any other transportation fringe benefit.

Posted on Feb 6, 2018

Being a joint employer means that you and another employer share, both “individually and jointly,” the responsibility of complying with labor laws and regulations. So if this classification applies to your business, it’s critical that you pay close attention to how your fellow joint employer deals with the employees you share.

Most employers take pains to avoid joint employer status for that reason, but it doesn’t always work out that way. Three years ago, the National Labor Relations Board (NLRB) took a hard line position on this status in a case involving Brown Ferris Industries (BFI).

Union Representation Case

A group of workers employed by Leadpoint (a staffing services company) who performed services for BFI were seeking union representation. The union (Teamsters Local 350) wanted BFI to be ruled a joint employer, with the expectation that BFI could afford to offer a more generous contract than would be possible with Leadpoint. The conflicting opinions were taken to the NLRB for resolution.

BFI argued, in effect, that it wasn’t a joint employer because it only had “indirect” control over those employees, and that although it might in theory be able to exercise some level of control over the employees, it hasn’t done so. But the majority of NLRB members disagreed, ruling that even with only unexercised and indirect control, BFI should be considered a joint employer. BFI appealed the ruling to the federal court system and the case hasn’t yet been decided. However, in light of recent changes at the NLRB, the company may be in a much more favorable position.

After the election of Donald Trump, the composition of the NLRB was modified, resulting in a more business-friendly majority which takes a dim view of the Board’s 2015 ruling in the BFI case. It expressed that opinion in a new case involving an employment services company and a construction company. The majority opinion stated that the “indirect control” standard applied in the BFI case represented a “distortion of common law,” and that it would prevent the NLRB from “fostering the stability of labor-management relations.”

Joint Employment Scenarios

So returning to square one, here are the relevant criteria you can use to assess whether you could be pulled into joint employer status, as described by the Department of Labor (DOL) Wage and Hour Division. The most common joint employment situations are the following:

1. Where the employee has two (or more) technically separated or associated employers, or

2. Where one employer provides labor to another employer and the workers are economically dependent on both employers.

Here are some examples of a possible joint employer relationship under the first scenario offered by the DOL:

The employers have an arrangement to share the employee’s services,

One employer acts in the interest of the other in relation to the employee, or

The employers share control of the employee because one employer controls, is controlled by, or is under common control with the other employer.

Degree of Association

The joint employer status determination will “focus on the degree of association between the two employers,” according to the DOL. Questions that will lead to a determination include:

  • Who owns or operates the possible joint employers?
  • Do the employers have any overlapping officers, directors, executives or managers?
  • Do the employers share control over operations?
  • Are the operations of the employers intermingled?
  • Does one employer supervise the work of the other?
  • Do the employers share supervisory authority over the employee?
  • Do the employers treat the employees as a pool of workers available to both of them?
  • Do they share clients or customers?
  • Are there any agreements between the employers?

Under the second scenario (that is, where one employer provides labor to another employer and the workers are economically dependent on both employers) joint employer status would be evaluated with questions including:

  • Does the other employer direct, control or supervise the work?
  • Does the other employer have the power to hire or fire the employee, change employment conditions, or determine the rate and method of pay?
  • How permanent or lengthy is the relationship between the employee and the other employer?
  • Is the work performed on the other employer’s premises?
  • Does the other employer perform functions for the employee typically performed by employers, such as handling payroll or providing tools, equipment or Workers’ Compensation insurance, or, in the case of agriculture, providing housing or transportation?

There is, inevitably, some subjectivity in joint employer status determination. The DOL says the ultimate focus is on what it calls the “economic realities of the relationship.” But, thanks to the NLRB’s rejection of the broader “indirect control” standard, fewer companies are likely to be deemed as joint employers. When in doubt, however, consult with a qualified employment law attorney.