Multiple Employer Plan to avoid 100+ audit

[Craig Schiller]

Employer has 401k plan that is for a staffing agency and doesn't get a lot of participation. Nevertheless it crossed over the 120 participant level. They will be stuck one year at least with a CPA audit.

Can they avoid further need by having the plan merged into one from one of the payroll companies that have those type of multiple employer plans? Assume its a PEO type plan where they are all still employees of the same employer.

Would the mega-audit on the CPA level meet the audit requirement or does this Employer who is an adopting employer still have to have a separate CPA audit?

Thanks,

Craig Schiller

[austin3515]

Take a look at these Q&A's by Derrin Watson who is the guru on all this stuff. HE literally wrote the book... (Who's the Employer)

http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer#.UsmJ36Qo4eF

especially #323:

http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=323#.UsmKC6Qo4eE

[Flyboyjohn]

IMHO a MEP is not the right answer (large single plan still needs to be audited but the audit fee is spread over a larger base of plan sponsors).

I would recommend taking steps to reduce "participants" below 100 by 1/1/2015, including excluding a group of low paid employees who aren't contributing (watching out for 410b)or possibly splitting into 2plans (both below 100).

[Tom Poje]

as a side bar, from a few years ago...(so if the DOL was in a nasty mood...)

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.

.............

that being said, it is apparent people have created 2 plans. I haven't heard of any cases of the DOL putting the above into practice, but that doesn't mean they haven't...

[Flyboyjohn]

What about this argument:

1. Plan audit fees can (and sometimes are) paid from plan assets and can directly or indirectly be "paid" by participants

2. Plan fiduciaries have an affirmative duty to review reasonableness of all plan expenses and if possible reduce such expenses

3. Therefore plan fiduciaries have a duty to at least consider ways to avoid plan audit fees

[ESOP Guy]

What about this argument:

1. Plan audit fees can (and sometimes are) paid from plan assets and can directly or indirectly be "paid" by participants

2. Plan fiduciaries have an affirmative duty to review reasonableness of all plan expenses and if possible reduce such expenses

3. Therefore plan fiduciaries have a duty to at least consider ways to avoid plan audit fees

While you might have a point my guess the counter argument is the fiduciaries also have a duty to safe guard the assets. One way to do that is have an external audit. That is why the requirement exists in the first place. There is a presumption with the regulators an audited plan is a more secure plan for the people it benefits. So which duty is more important? My guess is it depends on why the fiduciaries are in court. Is for fees that are too high or because someone ran off with most of the assets or didn't report the accruals correctly? Now it seems like auditors are asking more questions about if the plan is really qualified or not.

[Craig Schiller]

Take a look at these Q&A's by Derrin Watson who is the guru on all this stuff. HE literally wrote the book... (Who's the Employer)

http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer#.UsmJ36Qo4eF

especially #323:

http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=323#.UsmKC6Qo4eE

I checked in to my surprise to find this and other comments that are very helpful to the topic. I'm going to read these links tonight.

Thanks,

Craig Schiller

[austin3515]

I don't think the DOL will buy the argument that paying for an audit is a fiduciary breach under any circumstance. Certainly if plan assets are not adequate it would be a breach to use plan assets to pay the fees, but the DOL would say the sponsor has to pay. What I'm saying is, if you're going to do this, have a good reason other than "we're trying to avoid the audit."

[Belgarath]

In a recent conversation with someone fairly high up at the DOL, this question of splitting into two plans came up as a tangent to the question actually being discussed, and they indicated that they would look at this "very hard." Stopped short of saying definitively one way or the other what their position would be.

Personally, I wouldn't recommend it, and would tell a client to seek the advice of ERISA counsel before doing it. I'm not saying it isn't legitimate, just potentially a risk.

[Flyboyjohn]

Not to get off on another tangent but shouldn't the audit requirement be based on assets and risk rather than some arbitrary number of "participants"? I've seen start up plans with over 100 eligible where the audit fee is more than the total plan assets. The DOL took some baby steps in this regard with respect to the need to have bonding equal to funky assets in small plans to avoid audit. I heard one time that if they raised the audit threshold to 500 participants it would eliminate about 3/4 of the roughly 80,000 plan audits done every year.

[Tom Poje]

dag nabbit.

don't go throwing logic into it.

next you will want number of participants with balances

or it has been 100 for a large plan years and years ago.

it should be 200 now.

[david rigby]

or it has been 100 for a large plan years and years ago.

it should be 200 now.

Tom has a great idea. Since Congress thinks the solution to everything is indexing, let's index this "trigger point".

[jpod]

In my judgment DOL is blowing smoke if it thinks it can aggregate two plans that satisfy the separate plan criteria as outlined in the Section 414(l) regs, regardless of the motivation for splitting a single plan into two plans. On the other hand, I think it would be a very rare case where it would make sense to split a 100+ plan into 2 plans solely for the purpose of saving a $10,000 audit fee or even a $15,000 audit fee.

[austin3515]

Not rare at all. The only additional expense for splitting is a base fee of $2,000 (and that's being generous to my industry!). So by my calculation the savings is $8,000 not counting the internal burden on the client.

[KJohnson]

Compare the 2000 Answer with DOL's 2009 Answer at the ABA JCEB

Question 14: An employer has about 200 employees, and 160 of them are eligible for one of the employer’s two retirement plans. Except for a provision on which employees are eligible, the two retirement plans have identical provisions. Further, each plan provides that a participant directs investment among mutual funds of the same network. Each plan uses the same prototype document, and the two adoption agreements are identical except for the eligibility provision. The different eligibility provisions do not relate to different business lines or locations. Further, nothing in the terms of the eligibility provisions suggests any business purpose at all. Rather, all of the documents and other facts seem to suggest that the employer designed the two eligibility provisions so that each plan will have fewer than 100 participants. Under both plans, the employer is the administrator and the only named fiduciary.

Proposed

Answer 14: A fiduciary may not rely on a plan’s documents if doing so is inconsistent with ERISA. See ERISA § 404(a)(1)(D). In deciding whether ERISA requires a fiduciary not to rely on a plan’s documents, an administrator must act according to ERISA’s standard of care. ERISA § 404(a)(1)(B).

If a person acting “with the care, skill, prudence, and diligence” that ERISA requires would believe that the two plans really are one plan, the administrator must engage an independent qualified public accountant.

DoL

Answer 14: Under Title I of ERISA, employers have substantial discretion in designing the benefit plans they will offer to their employees, including decisions on whether to offer the benefits as a single plan or as separate plans. Whether an employer has established one or more than one ERISA plan depends on the facts and circumstances. In the staff’s view, in the absence of contrary annual reporting rule or requirement and assuming the structure of the arrangements is otherwise lawful (e.g., under the Internal Revenue Code), it would be reasonable for a fiduciary to look to the instruments governing the arrangement or arrangements to determine whether the benefits are being provided under separate plans and to treat the arrangement or arrangements for annual reporting purposes as separate plans to the extent the instruments establish them as separate plans and they are operated consistent with the terms of such