Split plan to avoid audit?

[austin3515]

This has been discussed out here before, but I am curious to know if anyone has actually split 1 plan into to two for the purpose of avoiding an audit. Has anyone actually done this? Has it ever been scrutinized by the DOL.

I putlled this from TAGData, who pulled it from an ASPPA Q&A session.

the question was raised at the 2000 annual ASPPA meeting, in the general Q&A session. The questions at this session were answered by Joe Canary, Scott Albert, Lou Campagna and Mabel Capolongo of the Department of Labor:

Question 5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.

[movedon]

Yes, I've done it. No, I've never had it scrutinized.

I have mixed emotions about the whole thing, but in the end I think the rules are pretty clear that this can be done and that no one really has any authority to say otherwise. On the other hand, it obviously is about avoidance (although ostensibly for non-nefarious reasons, i.e., cost), so it's hard to argue that, at least conceptually, there isn't something a little wrong with it. I think if the DOL wants to stop this practice they need to change their interpretation of the law and the instructions to the 5500 or push for a change in the law.

[david rigby]

Seems like an expensive audit fee in the example cited.

Avoiding an audit fee should be balanced with any increase in other administative costs, both direct and indirect, due to having two plans.

I think there are a couple of earlier discussion threads about this.

[John Feldt ERPA CPC QPA]

We recently proposed this for a prospect to save them the audit fee. The increased cost for having 2 plans was minimal compared to the increased cost for having to do an audit. The prospect has about half of the employees in a 'home office' and everyone else works at varying other locations. All other features of the plan would be the same.

[PensionPro]

Some firms do this (splitting plans to avoid an audit) routinely. They checked with a big name ERISA attorney, and told him about the Tag Q&A. The attorney provided a written opinion stating that splitting plans is not considered avoiding the ERISA reporting rules. You may also want to look at the EOB, it talks about this issue.

[austin3515]

I could not find the site in the EOB. Any help would be appreciated...

[Kevin C]

We split our first one late last year. The audit fees have become so high it's actually significantly cheaper to operate two plans than it is to do an audit. We routinely see audit fees that are higher than what we charge for full service administration of daily plans, and we aren't cheap.

[austin3515]

There's no question it's a money saver if you only have to split into two plans. $10,000 is the low-end of what we're seeing for audit fees.

[PensionPro]

Typically, the only additional cost on the administration side is the annual base fee, and the infrequent document fees.

I will be able to look for the EOB cite next week, unless someone else is able to do it before then.

[david rigby]

Typically, the only additional cost on the administration side is the annual base fee, and the infrequent document fees.

Perhaps, but don't forget the possibilty of indirect costs: smaller asset base may mean larger percentage admin cost for each plan, and/or reduced access to certain investment options or services.

[austin3515]

Yeah but those increases are "hidden" so no one will ever know! (please read with the intended sarchasm which is a little hard to convery on a message board...)

[Mike Preston]

I think the DOL has it right. The idea of home office/other breakdown sounds like a good approach. If you take the DOL at its word, it is looking for a situation where the only potential reason for the plan being bifurcated is the audit fee. In such a situation, you would still find all the assets under, say, 1 contract with a provider, or in the case of pooled funds, a single investment fund with the investment advisor. Taken together, considering all facts, if you can't come up with something that administratively separates the plans then the DOL will probably prevail, if it ever bothers to go after somebody for doing this.

I suspect that the lawyer's opinion is a bit distilled and that their complete opinion includes homage to a more discerning differentiation.