What does a 401k plan do when they receive a notice of rejection from

[Guest Leonard]

I am an investment advisor that has a 401k client that had a plan before we began working together. Because the number of employees had increased, they were required to have an audit back in 1997. They hired a big accounting firm that ended up telling my client to ask that the accounting firm not perform any audit procedures w/ respect to the information prepared and certifed by the plan custodian, a large mutual fund company. The accounting firm even drafted the letter for the client and refernced DOL reg 2520.103-5. As a result, the accounting firm did not express an opinion on the financial statements and schedules taken as a whole.

The client has now received a notice of rejection from the DOL for plan year 1997.

1. What should the company do?

2. What kind of trouble are they in?

3. Is there any liability issues I should be concerned about even though I was not involved with the plan at that time.

Thanks in advance for any and all help.

[Jon Chambers]

The accounting firm issued a limited scope opinion, which should be fine. Why did the DOL reject the filing? And what do you mean by "reject"? Typically, they just ask for a correction.

You shouldn't be too worried about liability issues. First, it's probably not a big problem anyway. Second, it predates your involvement. Third, if the Investment Policy Statement or other document allocates responsibility for compliance functions, such as the Form 5500 filing, to the mutual fund company, then your liability is effectively zero (as investment advisors, we always include this language in the IPS we draft).

[Guest Leonard]

Thanks for your help.

From what I can see they are rejecting the filing of the 5500 form.Without writing a book, a brief discription of the reasons are:

1. The report of the independent qualified public accountant(IQPA) fails to disclose the financial information certified by the custodian pursuant to reg 29 CFR 2520.103-8.

2. The scope of the IQPA audit was inappropiately limited. They do not qualify for treatment pursuant to DOL 29 CFR 2520.103-8.

I think they need to send a new 5500 filing within 45 days. Should they go back to the big accounting firm that initially did the audit (they did not do the 5500 filing? The small TPA firm that did the 5500 filing at that time is no longer around.

Thanks in advance for any and all help.

[pjkoehler]

The DOL's notice challenges the auditor's conclusion that those financial statements and/or information about plan assets that are not covered in the scope of its opinion qualified for such exclusion from the general ERISA requirement that the plan engage an IQPA to conduct an annual examination and report described in the reg you cite. The basis for the Department's challenge is probably that the statements and information excluded from the audit were not prepared or certified by a bank, insurance company or similar regulated financial institution in accordance with 29 CFR Sec. 2520.103-5. So, assuming the Department's position is correct, it sounds like the financial institutions holding plan assets failed to satisfy the reporting requirements, which are a condition on the plan's eligibility for the limited scope audit. The accounting firm that performed the audit, should be able to explain why they took the position that the limited scope audit conditions were satisfied. It could be that the accounting firm reasonably relied on representations made by the financial institutions, or it could be that the accounting firm incorrectly analyzed the plan's eligibility for a limited scope audit. In either case, the plan needs a much more thorough auditor's report. Of course, you don't want to assume that the Department is correct on this point, but there may well be some technical deficiency regarding the financial statement and information prepared by the financial institutions.

[Jon Chambers]

As Phil noted, the DOL challenge goes to the appropriateness of the scope of the audit. As such, the inquiry is directed more to the audit, as an attachment to the 5500, than to the 5500 itself. Consequently, I'd suggest having the big audit firm generate the reply.

As an aside, having worked for a (then) Big 6 firm, if a full scope audit is required, there's no way it can be turned around in 45 days. So at a minimum, the audit firm will need to negotiate an extension with the DOL.

[Jon Chambers]

One other quick thought--it's possible that the small TPA checked a 5500 box representing that the audit was full scope, while the auditors legitimately conducted a limited scope audit. If this is the case, the plan sponsor would merely need to amend the 5500 filing to indicate that the attached audit opinion is limited scope, and the whole thing may be done.

[KIP KRAUS]

Just a suggestion. Have you talked to the person who sent the rejection notice? He/she should be able to explain exactely why the 5500 was rejected.

I'm also confused, not hard to do sometimes. 1997 5500's were filed with the IRS. How did the DOL get involved in rejecting the 5500 filing?