a way to avoid a plan audit?

[betheeg]

My firm does the audit of a large 401(k) plan that is sponsored by a company that has several entities. We find several mistakes in the third party admin every year. The TPA has suggested to the plan sponsor that they should establish a plan for each entity seperately in order to avoid the large plan audit.

Can this be done?

Our initial thoughts are that 1)he wants to avoid anyone overseeing his work 2) he has found a way to switch the income paid to us for the audit to go into his pocket (how expensive it would be to set up plan docs, and annual admin for 5+ plans!)

Please give me any thoughts and suggestions. Thanks.

[E as in ERISA]

Remind the client that many employees feel better about having the plan audited -- and the concern it might give them if the client did this purely to avoid audit!

[betheeg]

Good point. I am also looking for ideas on how this will be done administratively. Would they have to term the existing plan? And will it avoid the audit?????

[Belgarath]

See DOL reg 2510.103-1. I interpret this as using the participant count for each PLAN that is filing. So, if the other problems of having separate plans can be overcome (coverage, testing, etc., etc., ) and the total cost to do all this hoohah is less than the audit cost, perhaps it is viable. I don't know the sizes of the employers, amounts of money involved, and plan audit cost so I can't even hazard a guess as to whether it is economical, if IF it turns out to be possible.

[Guest Boilerburm1]

Coverage is certainly the biggest concern. If each entity can pass coverage on its own, when considering the participants in other entities as eligible but not benefiting, they would be able to maintain the plan for that entity. Of course, the TPA would certainly have to run this coverage testing correctly!

They wouldn't necessarily have to terminate the existing plan. They could use that as the first of many others to be established, and could amend the eligible participant definition. They could spin out all of the other entities into their own plan.

Of course, I am talking conceptually, and, as pointed out by Belgarath, the economics may or may not make it a feasible option.

[Archimage]

I get the impression that this is a controlled group of companies so you are going to have to have an audit no matter what.

[Locust]

A 5500 has to be filed for each "plan," which is defined as each separate pool of plan assets. There's no aggregation of plans within an employer in determining the 100 participant limit - each plan stands on its own.

You could split the single plan into muliple plans by spinning off assets to new plans, but the whole situation would be much more complex. How expensive is it to audit this plan (rhetorical question)? Spinning the plans off is a lot of effort and additional expense to avoid an audit.

[Kirk Maldonado]

Locust:

Do you feel your position is consistent with that of the DOL contained in ERISA Opinion Letter 79-87A?

[Locust]

Kirk - I'm not familiar with that opinion. I took a quick look at it, and it appears consistent with the idea that each pool of assets is a separate plan. Here's language from the Opinion:

"Further, the Plan provides that if the profits of a Participating Employer should be insufficient to make a contribution which such Employer is required to make to the Plan, other Participating Employers may make such contribution.

Because the Plan provides for the pooling of all the assets in the Trust, and for allocation to each participant's account of a proportionate share of the gains and losses on such pooled assets

, the financial information with respect to which an accountant's opinion would be required under section 103(a)(3)(A) of ERISA is relevant to all the participants."

If the plans are set up so that each has its own trust, so that participants for a particular plan may look to only one of the trusts for payment of their benefits, that would be a separate pool of assets, and therefore a separate plan, and the audit requirements would apply to that "plan" independently of the company's other plans.

[Kirk Maldonado]

Locust:

That is a rather, ahem, "creative" way of reading the opinion.

I think that the operative language is the sentence that immediately follows the one that you provided:

Given the provisions of the Plan, which contemplate that the profit sharing programs of the Participating Employers and the Company were meant to be treated as a single entity for corporate purposes, it is our opinion that the participants of each of the profit sharing programs should be aggregated for purposes of §2520.104-46.

So that the rest of the readers can make their own decision as to which interpretation is correct, here is the entire opinion:

ERISA Opinion Letter 79-87A , 12/13/1979

Reference(s): ERISA §103 , ERISA §103(a) , ERISA §103(a)(3)

Mr. James F. Carey

Kindel & Anderson

Twenty-Sixty Floor

555 South Flower Street

Los Angeles, California 90071

Dear Mr. Carey:

This is in response to your request for an advisory opinion regarding the interpretation of 29 CFR 2520.104-46 , under which the requirement set forth in section 103(a)(3)(A) of the Employee Retirement Income Security Act of 1974 (ERISA) that an accountant's opinion be included in the annual report is waived for plans with less than 100 participants. We regret the delay in responding to your request.

The following is a summary of the representations contained in your letter and material provisions of the documents submitted therewith. A document encaptioned “1976 Amendment and Restatement of Metal Surfaces, Inc. Employee Profit Sharing Plan” (the Plan) was adopted by Metal Surfaces, Inc. (the Company) and one of four of its subsidiary corporations. The Plan provides that any corporation which is or may become an 80% or more owned subsidiary of the Company may become a “Participating Employer”. The other three subsidiaries of the Company thereafter adopted the Plan and became Participating Employers.

Contributions by Participating Employers and by employees are held in a trust maintained in connection with these profit sharing programs (the Trust). Under the Plan document, the board of directors of each Participating Employer determines the amount, if any, to be contributed by that Participating Employer on behalf of its employees. A separate account is maintained for each employee who is a participant in one of the profit sharing programs maintained pursuant to the Plan document, and the participant's share of Participating Employer contributions, forfeitures, and gains and losses on assets held in the Trust are credited to the participant's account. Contributions to the Trust by each Participating Employer are generally allocated only to the accounts of that Employer's employees. Under §5.01 of the Plan document, however, it appears that if the profits of one of the Participating Employers are not sufficient to enable that Employer to make contributions, other Participating Employers may make contributions on behalf of that Employer's employees. Forfeitures from the account of a former participant are allocated only among eligible participants employed by the Participating Employer who employed the former participant. For investment purposes, it appears that all the assets in the Trust are pooled. Gains and losses on the pooled assets are allocated among participants' accounts on the basis of the ratio of each participant's account balance to the sum of the account balances of all participants. Only the Company may terminate the Plan. A Participating Employer may withdraw from participation in the Plan only with the approval of the Company's board of directors. The Company may amend the Plan without approval of the Participating Employers.

Upon termination of the Plan, each participant becomes fully vested in his or her account. Thus, in the event of termination, the assets contributed by a Participating Employer for its employees will generally not be used to provide benefits for participants employed by another Participating Employer, except to the extent of contributions by a Participating Employer on behalf of the employees of a Participating Employer with insufficient profits, as described above.

On the basis of these facts, your letter raises the question whether, in determining the number of participants for purposes of 29 CFR §2520.104-46 , the profit sharing program maintained by each Participating Employer should be treated as a plan separate from the programs maintained by the other Participating Employers, or whether all the programs should be treated as a single plan.

In our view, under the circumstances described in your letter, and in the materials that accompanied it, the profit sharing programs maintained by the five Participating Employers under the Plan should be treated as a single plan in applying 29 CFR §2520.104-46 . The provisions of the Plan, taken as a whole, contemplate that the profit sharing programs of the Participating Employers would form part of a single plan for the purposes of the Company. The Company reserved to itself the sole right to amend and terminate the Plan, and to approve withdrawals of Participating Employers from the Plan. Further, the Plan provides that if the profits of a Participating Employer should be insufficient to make a contribution which such Employer is required to make to the Plan, other Participating Employers may make such contribution. Because the Plan provides for the pooling of all the assets in the Trust, and for allocation to each participant's account of a proportionate share of the gains and losses on such pooled assets, the financial information with respect to which an accountant's opinion would be required under section 103(a)(3)(A) of ERISA is relevant to all the participants. Given the provisions of the Plan, which contemplate that the profit sharing programs of the Participating Employers and the Company were meant to be treated as a single entity for corporate purposes, it is our opinion that the participants of each of the profit sharing programs should be aggregated for purposes of §2520.104-46.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 . Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 thereunder relating to the effect of advisory opinions. We have considered your request for a conference under section 8 of the procedure and have decided that a conference is not necessary in providing this advisory opinion.

Sincerely,

Ian D. Lanoff

Administrator of Pension and Welfare Benefit Programs

[Locust]

Kirk - The facts stated in the opinion are a little fuzzy, but it appears to me that the assets were held in a single trust and constituted a single pool of assets:

Contributions by Participating Employers and by employees are held in a trust maintained in connection with these profit sharing programs (the Trust).

The language that you quote does seem to emphasize the fact that the participating employers were related and benefits were provided under a single set of plan provisions, but I think that was to emphasize the point that the assets were available to provide benefits across company lines for all participants - another indicator besides the single trust that the assets were a single pool of assets.

To extend these facts to a situation where you would have separate trusts covering different sets of benefits is I think a stretch. This opinion might be relevant to the situation at hand if it covered several trusts, but it seems to be dealing with just one, so the point I take from this opinion is that a plan is a single pool of assets available to provide benefits to specified participants.

[Kevin C]

The Opinion letter addresses a single Plan with 5 Participating Employers.

The following is a summary of the representations contained in your letter and material provisions of the documents submitted therewith. A document encaptioned “1976 Amendment and Restatement of Metal Surfaces, Inc. Employee Profit Sharing Plan” (the Plan) was adopted by Metal Surfaces, Inc. (the Company) and one of four of its subsidiary corporations. The Plan provides that any corporation which is or may become an 80% or more owned subsidiary of the Company may become a “Participating Employer”. The other three subsidiaries of the Company thereafter adopted the Plan and became Participating Employers.

The reference to "profit sharing programs maintained pursuant to the Plan document" is a little strange, but it does repeat that this is a single plan. The phrase also seems to be referring to the allocation method for the PS contributions which is determined separately for each "Participating Employer."

The original question asked if separate plans among controlled group members are aggregated to determined if an audit is needed. That is a completely different situation than the one discussed in the Opinion Letter.

The DOL regulation specifies when a Plan is subject to the audit requirement, so I agree with Locust that each Plan stands on its own.

[RCK]

Going back to the original question, I am puzzled by the reference to the fact that this is for a large plan and the avoidance of the large plan audit.

I'm not convinced that the reference is to the 100 participant threshold for a plan audit instead of the 2,500 participant threshold for the IRS' Employee Plans Team Audit (EPTA) program.

So for betheeg: just how many participants are we talking about here?

[betheeg]

As of the last audit (2004), 222 participants.

[austin3515]

Kirk, I agree with Locust - that was one Plan, and the audit requirement for a single Plan is always there if there are more than 100 participants. If there is a requirement to aggregate participant counts under multiple plans, I have never seen it in the instructions to the 5500 (but for the commingled asset pools); I would find it odd that such a requirement exists and is not covered in the instructions. What are your thoughts? You are distinguished poster on these boards, so I'd love to hear your response!!

[Jim Norman]

Because the Plan provides for the pooling of all the assets in the Trust, and for allocation to each participant's account of a proportionate share of the gains and losses on such pooled assets, the financial information with respect to which an accountant's opinion would be required under section 103(a)(3)(A) of ERISA is relevant to all the participants. Given the provisions of the Plan, which contemplate that the profit sharing programs of the Participating Employers and the Company were meant to be treated as a single entity for corporate purposes, it is our opinion that the participants of each of the profit sharing programs should be aggregated for purposes of §2520.104-46.

Hi Kirk, long time since we've spoken.

This opinion seems to address multiple plans with a single pool of commingled assets. Let's assume a company with two locations and 70 employees at each location. Two separate but identical plans, one for each location, same employer contribution to each plan, and identical, but totally separate investment contracts such that the "financial information" of one plan would not be "relevant" to the participants of the other plan.

Do you think this situation would require an audit?

BTW I'm not crazy about this strategy, I actually prefer the larger plans have an auditor looking over our shoulder. Better for them to find a problem when it can be fixed. But client perception is the audit fee is 3 to 4 times the plan administration fee, so we get a lot of pushback from clients when we advise them of the audit requirement.

Jim

[Kirk Maldonado]

Jim:

I discovered your article on Roth 401(k)s just a few days after I advised our mutual client on that topic. Fortunately, our opinions were consistent. In fact, I sent your article to them.

The fact pattern described in that Advisory Opinion is unusual, so switching the discussion to a more common situation like the one you posit will make our discussion more relevant.

I wish that the test could be whether the two plans must be aggregated for qualification purposes. But you could have drastically different plans that could be aggregated, so that won't work.

Maybe the test should be whether you have one plan for purposes of section 414(l).

Is there any guidance in the instructions to the Form 5500?

[Jim Norman]

Jim:

I discovered your article on Roth 401(k)s just a few days after I advised our mutual client on that topic. Fortunately, our opinions were consistent. In fact, I sent your article to them.

The fact pattern described in that Advisory Opinion is unusual, so switching the discussion to a more common situation like the one you posit will make our discussion more relevant.

I wish that the test could be whether the two plans must be aggregated for qualification purposes. But you could have drastically different plans that could be aggregated, so that won't work.

Maybe the test should be whether you have one plan for purposes of section 414(l).

Is there any guidance in the instructions to the Form 5500?

Of course we agree on the Roth, ours is the only sensible position!<g>

Frankly, I think the 5500 instructions go the other way and would support looking at each plan separately even if the assets are combined in a single trust. The Sch H/I instructions clearly state that if two or more plans are maintained in one fund to report the allocable portion of the specific plan on the 5500. Of course we have the opinion you quote to the contrary, and which I agree makes sense given the relevance of the financial aspects to the participants of both plans.

I agree the plan aggregation for coverage and non-discrimination is a non-starter.

I'm comfortable with a 414(l) approach and think it would be consistent with the Advisory Opinion. In that case the assets were pooled and any part of the asset pool could be available to any participant of any plan in the pool. This would be consistent with 1.414(l)-1(b)(1). Of course this implies in the situation I describe where the plan assets are physically separate and held under separate trusts, the assets of plan A are not available to a participant in plan B, therefore the participant count would be just that of each separate plan, so no audit required.

[Kirk Maldonado]

However, it may be significant that the 414(l) regs were issued before the Advisory Opinion, yet they weren't cited in the Advisory Opinion. I'm not exactly sure what to make of that fact.

[betheeg]

Thank you all for your thoughts, very helpful!

~Beth