In its April 1, 2015, Employee Plans Newsletter Issue No. 2015-4, the IRS indicated that plan sponsors are still ultimately responsible for maintaining records for hardship distributions.  Failure to keep these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).  In particular the IRS noted that the following records should be maintained in paper or electronic format:

1. Documentation of the hardship request, review and approval;
2. Financial information and documentation that substantiates the employee's immediate and heavy financial need;
3. Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code; and
4. Proof of the actual distribution made and related Forms 1099-R.

This guidance, albeit informal, poses concern for plan sponsors who utilize third-party administrators to process hardship distributions via a self-certification process whereby participants self-certify that they meet the criteria to receive a hardship distribution.  As a result, plan sponsors will need to be more diligent in ensuring that their TPA is complying with the documentation requirements and retaining such documentation should the plan sponsor be required to present it for an examination. 

Although this informal guidance does merit the same authority as an IRS regulation or notice, it clearly shows how the IRS will act when auditing qualified plans.  The informal guidance is particularly concerning because it contradicts previous guidance provided by IRS in its published Frequently Asked Questions (FAQs) on hardship distributions, which stated, "An employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources."

Plan sponsors should keep in mind that a qualified plan is not required to offer hardship distributions to its participants, and existing plans can be amended to offer hardship distributions no longer.  In the meantime, several plan administrators and industry groups are challenging this newsletter article on the position that it is not supported by any formal regulations.

Author: Randy Juedes, CPA

715.748.1346

rjuedes@hawkinsashcpas.com

Are you thinking about retirement and are concerned you haven't been contributing enough to your employer sponsored retirement plan account?  If so, and you will be turning 50 years of age in 2015 or are 50 years of age, you can increase your elective deferral plan contributions over the current statutory limit if your employer sponsored plan account allows for catch-up contributions. 

For 2015, the maximum amount of elective contributions a participant is able to defer, the statutory limit, is $18,000. Employees that are over 50 years old can contribute an additional $6,000. These additional contributions are made through payroll deductions.  (Note that the amount of catch-up contributions an eligible participant is allowed to make changes on a yearly basis, and regular plan contributions must reach the plan's annual deferral limit before actual catch-up contributions can begin.)

Catch-up contributions are designed to help you make-up any retirement savings shortfall by bumping up the amount you can save in the years leading up to retirement. These extra contributions could make a significant difference in your retirement-age wealth. Talk to your retirement plan advisor or plan administrator today for more information.

Author: Jill Horman, CFAP

608.793.7737

jhorman@hawkinsashcpas.com

The U.S. Department of Labor (DOL) plans to substantially increase the number of ERISA compliance audits it conducts each year. If your plan were selected for an audit, would you be ready? Below we answer questions you and other plan sponsors might have about preparing for a DOL audit.

How does the DOL select a retirement plan for an audit?

Unlike the random audits conducted by the IRS, DOL audits are generally conducted for a reason. If you receive a notice from the DOL's Employee Benefits Security Administration (EBSA) that your plan has been selected for audit, the DOL is likely looking for something specific, although some audits are random. For example, the DOL may be acting on complaints from plan participants or in reference to something on your Form 5500.

What will we need to show the auditor?

Generally, the EBSA notice will list documents it wants you to have available at the audit. This list may include:

• The plan document and amendments
• IRS Form 5500 for the period being audited
• The summary plan description
• Distribution forms provided to participants
• The fidelity bond for the plan
• A list of the plan's investments
• The plan's investment policy
• Minutes of meetings of the trustee or investment committee showing how investment decisions are made
• Information about the plan's policies with respect to the voting of proxies

If there's anything on the list that is unclear to you, call and ask for clarification.

What else should we do to prepare?

You should review all the requested documents, gather supporting evidence, and organize plan records. This groundwork will prepare you to answer the EBSA's questions. Also, make the plan's legal advisor and independent auditors aware of the audit and have them review the requested documents before meeting with the DOL. You may want your advisor and auditor to attend the audit (or be available to answer questions).

What areas might the DOL target in an audit?

Some of the things an audit may focus on are:

• Timeliness of deposits of participant deferrals
• Employee compensation and eligibility for participation
• Distributions
• Payment of plan-related expenses
• Funding policy
• Investment process
• Prohibited transactions
• Accuracy of financial data reported on Form 5500
• Bonding
• Reporting and disclosure (including the new participant fee disclosures)

What happens if the audit uncovers an apparent violation?

The EBSA will issue a voluntary compliance request letter. The letter informs the employer of the results of the investigation, cites pension law provisions that the DOL considers to have been violated, and asks for correction of the violation(s) through full compliance. Depending on the violation, correction may include restoring losses of plan assets and lost investment earnings.

Are there steps we could take now to be ready for a possible audit?

Yes, regularly review the plan documents the DOL might request, along with plan investments and your investment policy, to make sure they comply with pension law (ERISA) and the tax law. In addition, you may want to periodically conduct - or have a benefits professional conduct - self-audits.

Contact: Erica Knerzer, CPA

608.793.3113

eknerzer@hawkinsashcpas.com

Situation

Our company currently picks up all the costs of operating our 401(k) plan. We are looking at using plan assets to pay for some of our plan's expenses.

Question

Which plan expenses can be paid from the assets of a retirement plan?

Answer

Only certain plan expenses can be paid using the plan's assets. The U.S. Department of Labor (DOL) applies strict standards in determining the types of expenses employers can pass on to the plan. You need to be very clear on what is permissible and what is not so that you do not inadvertently violate the pension law.

Discussion

Basically, plan assets can be used only for two purposes: to pay benefits to participants and beneficiaries and to pay the reasonable expenses of administering the plan. The administrative expenses of a 401(k) plan that are payable from plan assets include amounts paid for:

• Plan recordkeeping
• Routine nondiscrimination testing
• Trustee fees
• Preparation and distribution of benefit statements
• Plan accounting 
• Safekeeping of plan assets
• Annual compliance auditing
• Preparation of Form 5500 and other legally required reports
• Claims processing
• Legal fees for determining if a domestic relations order is qualified (disclose in the summary plan description)
• Participant communications 
• Third-party administrative expenses 

A variety of expenses related to plan investment services, including management fees (investment advisory or account maintenance fees) and sales charges, also may be paid from plan assets.

What expenses must the employer/sponsor pay? Referred to as "settlor" expenses, they include amounts related to the establishment, design, and termination of a plan, such as legal or consulting services. Because settlor functions are essentially business-related activities, the employer is responsible for paying the associated expenses.

If a plan says that the employer will pay the plan's administrative expenses, the plan can be amended to provide for the plan to pay those expenses on a prospective basis. You should talk with your plan advisor about potentially amending your plan before you make any changes in your expense payment policies.

Contact: Jeff Danen, CPA, CVA

920.337.4546

jdanen@hawkinsashcpas.com