Annual nondiscrimination testing: recordkeeper vs. compliance only

[hunter001]

Our firm has been a full service provider. From recordkeeping to the trustee holding the plan assets to compliance documents, testing and reporting services. We recently acquired a TPA company where a majority of their services is documents, testing and Form 5500.

Prior to the acquisition the process to complete year end testing for this product included using allocated link to import recordkeeping data from the vendor but on a cash basis. This seems to be very time consuming as we are backing out prior year contributions and a lot of reconciling plan participants accounts as well as plan level, they believed by doing this they were finding payroll errors and such which after reviewing the service agreement we really are not getting paid for this service.

My question is does anyone else have this type of structure and how do you handle year ends? For 2014 year end we imported contributions provided by clients on the census but are having problems with not being able to utilize top heavy testing and corrections reports for ADPACP testing do not reflect earnings.

Any opinions on the most efficient way to handle these are appreciated.

[ETA Consulting LLC]

Some items are accrual sensitive (i.e. ADP/ACP testing) while others may clearly be done on a cash basis (i.e. Form 5500 reporting and top-heavy testing).

I'm not following your scenario. Are you saying the prior TPA was performing work on a cash basis; and now you're having to reformat it to an accrual basis in order to complete the year end processing on your system?

It helps to know the actual testing scenario in order to ensure your compliance software is performing the calculations correctly. In many instances, I would treat the balancing of payrolls to trust deposits as an entirely separate process, as trying to accomplish this through vendor software is difficult within itself.

Could you elaborate a little?

[hunter001]

The data collected from recordkeeping vendor is on a cash basis. When using the allocated link to import the data prior year contributions maybe included and depending when the last payroll for the year testing was processed may not be included. They were using receivable sources so the prior year end contributions posted in the prior year in relius needs to get moved from the receivable source so that its not double recorded in the system then any contributions attributable to the testing year are posted as a receivable as well as any year end contributions. They had been reporting the Form 5500 on an accrual basis but will be converting to a cash basis to be consistent with our reporting practice with our other plans - - we will do this by using the cash report from the recordkeeping vendor.

What we have done for this year end to avoid this work is post contributions attributable to the testing year reported on the year end census from the client by using a takeover transaction. This works but are unable to use the top heavy test in relius if not importing account balances and distribution activity with the allocated link. There is the option to do the top heavy testing outside the system but sometimes that requires work in regards to researching inservice distributions and other distributions, etc. Also, if we don't use the allocated link there is no earnings data in the system, therefore, corrections for adp testing do not include earnings.

[Mike Preston]

I'd be cautious about changing from cash to accrual on the 5500. I think that can only be done with IRS approval. Not to be blunt, but it seems like your company failed miserably when doing its due diligence before acquiring the TPA.

[Tom Poje]

we import the deferrals for the year

if plan fails testing, use allocated link to import assets (suppress contributions) and run the ADP test so gains are included in refund. top heavy could be run at this time. unless you are real close to 60%. T-39 of 1.416-1 clearly states that precise top-heavy ratios need not be calculated every year....may use computations that are not precisely in accordance with this section but can mathematically prove the plan is not top heavy...

after running the reports, these are saved. then reverse the deferrals /match and reimport the assets to include contributions and report everything on a cash basis

I have never seen anything that says you can't switch your reporting method on the 5500 nor that you have to have a note from mom informing the IRS of your intentions to do so... conventional wisdom would be that you don't flip flop every year, but if all other plans in the office are reported on a cash balance I don't see where the IRS would have a problem is you switched to a cash basis.

[Bird]

This seems to be very time consuming as we are backing out prior year contributions and a lot of reconciling plan participants accounts as well as plan level, they believed by doing this they were finding payroll errors and such which after reviewing the service agreement we really are not getting paid for this service.

My question is does anyone else have this type of structure and how do you handle year ends?

Yes, we have this structure. The reason we do is that we find payroll errors "and such" (deposit errors) - all the time. I'm not sure that we are getting paid (adequately) or not but can't/won't do it any other way.

[Mike Preston]

Tom, seriously?

[Tom Poje]

Mike:
yes

one such post from years ago

http://benefitslink.com/boards/index.php?/topic/10750-5500-on-accrual-basis/

as I recall there have been others, and I believe the question may have even come up at an ASPPA Q and A.

[Mike Preston]

I'd be interested in reading the Q&A. All of the other are conjecture or hearsay (the purported conversations with government employees) except the instructions to the 5500 which are crystal clear: you must be consistent from year to year.

I understand that there are no specific instructions on how to formally request permission to change. But I would hope that an organization that unilaterally forces a change on clients also takes responsibility for that change should the government come calling. How difficult could it be to write a letter to the DOL requesting specific guidance?

[Bill Presson]

I'd be interested in reading the Q&A. All of the other are conjecture or hearsay (the purported conversations with government employees) except the instructions to the 5500 which are crystal clear: you must be consistent from year to year.

I understand that there are no specific instructions on how to formally request permission to change. But I would hope that an organization that unilaterally forces a change on clients also takes responsibility for that change should the government come calling. How difficult could it be to write a letter to the DOL requesting specific guidance?

Every time we have a plan go from balance forward to daily, we change from accrual to cash. We document the reconciliation to show the change, but it just stays in our files. We've had several plans audited by the IRS or DOL over the years. They often look at multiple returns so they've looked at years where we've changed. We've never once been questioned or told to get approval or anything like that.

Frankly, it's been a non-issue.

[Tom Poje]

same with us, on large plans we have never had the independent auditors question the change.

Looking further at the specific instructions I do not even see where it says you have to be consistent from year to year, simply you have to be consistent when filling out the specific parts. In other words, don't use accrued gains on some parts and not on others, or I'm going to use accrued match but the accrued profit sharing is not included this year

5500 instructions:
Note. The cash, modified cash, or accrual basis may be used for recognition of transactions in Parts I and II, as long as you use one method consistently

[Mike Preston]

Well, the anecdotal evidence is piling up. Good to know.