192 Laurel Rd, Northport, NY 11721
(631) 262-9557
(Outline of a Speech Given Oct 1996 to National Conference of Unions and Employee Benefit Plans. )
IRS vs. DOL audits: IRS and DOL share responsibility for enforcement of ERISA provisions. IRS bears primary responsibility for matters relating to qualification matters, minimum participation, vesting, and funding standards; DOL bears primary responsibility for matters relating to fiduciary conduct, prohibited transactions, and reporting to participants.
Effective Dates: Handbook spends four pages on various effective dates and remedial amendment dates, which are later for multiemployer plans to reflect the CBA bargaining cycle, and usually based on the expiration of the last effective CBA;
For delayed dates to be effective, ERISA requires at least 25% of participants to be collectively bargained, and CBA must address benefits for all participants.
For TEFRA, DEFRA & REA, provisions had various effective dates: Oct 87, Jan 88, Jul88, Jun 86. TRA'86 provisions were effective in '87 year, 89 year, '94 year. If 50% of participants are employees of tax-exempt or govt. organization, later dates apply.
Background of multiemployer and/or collectively bargained plans
joint board: union and employer trustees in adversarial relationship
collective bargaining
administration structure
reciprocity agreements
75% of plans base benefits on length of service, not wages
unique problems in obtaining and verifying complete participant data
Examination Practices:
In most cases, agent will have no direct contact with employers.
Expect some delays, unlike single employer plans, multi's usually require action of board of trustees to bind plan, extend statute, execute power of attorney; no trustee can act on behalf of contribution employers.
Mandatory Comment Items: for the agent's first few multiemployer audits, the workpapers should contain comments on all questions. This addresses only issues that are unique, or more common to, multiemployer plans.
1. Tracking Participant Data
IRS very concerned that data be complete and accurate. Data affects qualification requirements: nondiscrimination, vesting, required minimum distributions, J&SA option, etc.
How is data gathered? Test sample of billing reports. Test weekly or monthly participant reports for inconsistencies. Crosscheck against union dues records; look at field auditors reports, correspondence files, trustee minutes. Test service credit, benefit calculations, J&SA options for a few new pensioners. If problems noted, ask administrator about plan's procedures for educating employers and insulating participants from the consequences of reporting errors. Contact employers if necessary.
2. Plan and Trust Documents
Were amendments to comply with law changes timely adopted?
Obtain latest determination letter; check adoption date of qualification amendments based on trustee signature pages, etc. Check minutes. Review expiration dates of CBA's that were in effect at enactment dates.
3. Eligibility, Participation and Coverage
a. Does the administrator have an adequate system for ensuring that employer-provided eligibility information is correct?
Walk through procedure for processing participant data, look for systemic weaknesses. Test as described at item 1 above.
b. Does the plan cover any individuals who are not members of collective bargaining unit, including professional employees?
Multiemployer plans are allowed to cover certain individuals who are not collectively bargained, such as employees of the plan, the sponsoring union & other union plans, and nonbargained units of sponsoring employers. Some former CBA participants, or part CBA/part nonCBA participants, can be deemed to be entirely CBA:
a. Part year- if more than 50% CBA
b. CBA cycle- if CBA for one year, keep CBA for entire cycle.
c. Alumni- keep CBA indefinitely if less than 5% are in alumni category. [Except- if more than 2% are "professional", no one under that CBA are treated as bargained. Professional are actuaries, medical profs., ]
c. If yes, do the employee groupings satisfy the special coverage tests?
This is question 26 of Form 5500, with multiple attachments. IRS calls it mandatory disaggregation: Each separate employer of nonCBA employees must meet requirements of 410, 401a4, 401a26. "Ask administrator for the employer certifications or other evidence of employer compliance with nondiscrimination requirements. If evidence seems questionable, secure employer records (including union and affiliated plans) and test coverage.
If any employer fails to meet requirements, the entire plan is disqualified."
4. Vesting and Service Credit
a. Does the administrator have and adequate system for ensuring that employer-provided vesting and accrual information is correct?
b. Does the administrator accurately credit service and accrued benefits based on employer-provided information?
Interview individual who processes benefit applications-- walk through one application. Did at least one other person review calculations before they became final? If minutes indicate disputes over benefits, did they result from inadequate administrative procedures or faulty benefit calculations? If systemic problems occur, were they corrected? Especially in industries where participants work for multiple employers, test a sample of participant files for consistency with employer provided information.
c. If there are reciprocity agreements, are service and accruals accurately credited?
Examine all reciprocity agreement. Test new-member reciprocity to source documentation. If there is no inquiry about reciprocity until retirement, check retiree files for evidence administrator explains what reciprocity service is, and explicitly asks all applicants if they have any.
d. Does the administrator accurately apply DOL rules on noncovered service?
Break in service/Vesting issue- contiguous noncovered service counts for vesting. Members of controlled group are treated as separate employers for this rule. [CHECK RULE OF PARITY AND DOL 2530.210]
e. Does the administrator credit service and accruals regardless of whether employer contributions were made?
A pension plan under which service or contributions are conditioned on an employer's making required contributions VIOLATES the definitely determinable benefit rule by allowing an employer's actions to determine an employee's benefit. Look at field auditors reports, minutes, and collection letters to determine if any employers failed to make contributions. Look at records of service and contributions during and before the delinquency period. In general the credit of service or contributions to participants should not decline or stop during the delinquency period solely because contributions were not made.
f. Have contributing employers made the contributions required for each participating employee?
Some employers neglect to list all participating employees on billing reports; nonunion employees in covered service may be most at risk. Review field audit reports, trustee minutes, benefit applications for evidence of this.
g. If benefits are suspended for reemployed retirees, do suspensions comply with IRC 411(a)(3)(B) and DOL Reg 2530.203-3?
A multiemployer plan can suspend benefits upon a retiree's reemployment ( at least 40hrs per month in same industry & trade or craft & geographic area covered by plan). Suspension can't begin until plan notifies employee benefits will be suspended, and can only last while he is reemployed. Suspended benefits are forfeited. A delay in benefit commencement, rather than a suspension, appears to violate "protected benefits" under 411(d)(6).
h. Has there been a partial termination under the conditions described in Regs 1.413-1(c)(3)?
Partial terminations measured as if all CBA participants under same benefit formula were employed by single employer. Partial termination in one group has no effect on other groups. [CHECK 411d3 rules]
i. Is the proper vesting schedule being applied to noncollectively bargained employees?
While 10 year cliff vesting was ok for CBA participants, nonCBA participants are subject to the shorter TRA 86 schedules. (Small Business Job Protection Act of '96 repeals 10 year vesting between 97-99. In future, only 5 year cliff or gradual 20% per year after 3 years will be allowed. Old rules will remain an audit issue for a few years.)
5. Deductible limits
Did the aggregate contributions for the year exceed the deductible limit for that year?
a. Deductible limits are determined by reference to minimum funding standard account, amortization periods for past service, normal cost, etc. Some non-multiemployer plans can increase the deductible limit based on unfunded current cost; IRS says to watch for multiemployer plans improperly using this method.
b. DC limits and combined plan DB/DC limits described under §415 are also applicable for deductible contribution limits. See below.
c. If limits are exceeded, plan can be amended to increase benefits retroactively, enough to cove contributions actually made.
6. Distribution Issues
a. Does any assignment of retirement benefits to pay for other benefits provided by the union exceed the 10% limit imposed by IRC 401(a)(13)(A) or regs. ?
Some health & welfare plans allow retirees to pay premiums for continued health coverage, funded by amounts withheld from their pension distributions. If "assignment" is no more than 10% of benefits, is voluntary and revocable, and does not defray plan administration costs, it will not violate antialienation of benefits rule.
b. Do plan distributions comply with IRC 401(a)(9)?
Multiemployer plans are especially vulnerable to violations of required minimum distribution rules: must begin at age 70-1/2, 5 year rule for nonretired decedents, etc. Ask about plan's method of ensuring that records contain participants' birthdays and last known address. Ask if administrators regularly use IRS/SSA locator service. If not, what other methods do they use? ('96 Act will allow deferral of benefits after age 70-1/2 for participants who are still working, effective in 1997).
c. Has administrator properly filed the SSA schedules?
Participants should be reported on Form SSA for the plan year in which participant completes second of two consecutive breaks in service. Can elect to file earlier.
7. IRC 415 Limits
a.. Does the multiemployer defined contribution plan (or plans) require contributions in excess of IRC 415(c) limits?
Read CBA to determine highest possible hourly contribution rate and lowest possible wage rate. Generally if (a) divided by (b) is 25% or less plan is ok.
b. Does the multiemployer defined benefit plan (or plans) provide benefits that exceed the IRC 415(b) limits?
In DB plans with generous benefit formulas unrelated to compensation, participants with long service and lower compensation my exceed DB limits. Also check benefits of highly compensated employees on early retirement.
c. Do aggregated plans provide benefits or contributions in excess of the limits in IRC 415 (b), (c), or (e)?
If the multiemployer plan covers union officials, ask if they are also covered under single-employer plans sponsored by the local or national union. Multiemployer plans are aggregated with all nonmultiemployer plans for 415 testing. If limits are exceeded, nonmultiemployer plans are the first to be disqualified.
8. Minimum Funding
a. Did the plan improperly use an additional funding charge under IRC 412(1)?
b. If the actuary estimated the numbers regarding participants, service, and benefits or contributions, are these estimates reasonable?
c. Are the actuarial assumptions reasonable?
d. If there is a funding deficiency, is the IRC 4971 tax allocated correctly?
IRC 4971 Tax is 5% of accumulated funding deficiency (10% for single employer plans). Tax is allocated first to employers who specifically caused the deficiency, then to all employers based on their proportional required contributions.
e. Do amortization periods for bases in the funding standard account comply with the multiemployer provisions of IRC 412?
f. If the plan obtained a funding waiver or used an extension of an amortization base under IRC 412(d) or (e), was the proper interest rate used?
g. If the plan obtained a funding waiver or used an extension of an amortization base under IRC 412(d) or (e), were the liabilities of the plan increased by reason of any increase in benefits, change in the rate of accrual of benefits, or change in vesting during the waiver or extension period?
h. Does the actuary treat the effects of known future increases in contributions/benefits consistently from year to year?
i. If the shortfall method is used, is it used correctly?
9. Prohibited Transactions
a. Has the plan extended credit to a contributing employer by not enforcing collection of required contributions?
If a reasonable effort is not made to collect delinquent contributions pursuant to established procedures, or failure to collect is the result of an arrangement, express or implied, between fiduciaries and the delinquent employer, failure to collect may be deemed to be a prohibited transaction. ( '96 Act increased first tier tax from 5% to 10%, effective now).
b. Has the plan engaged in office leases or sales, or sharing of administrative services, with the sponsoring union?
PTE 76-1 : leasing, sharing or sale of office space, administrative services and goods.
c. Have administrative expenses been properly incurred?
Look for evidence of abuse, e.g., spouses accompanying plan trustees on plan business at expense of plan, etc. Consider referral to DOL, as necessary.
d. Have any assets been transferred between the plan and any affiliated plans?
Ask to review the balance sheet of affiliated plans. Some plan trustees may believe that shifting assets among pension and welfare trusts is permitted, because CBA's often treat employer contributions as "one pot of money" to be used for a variety of purposes. However, shifting trust assets is a prohibited transaction, and Taft-Hartley specifically requires retirement amounts to be segregated in a separate trust.
10. Package examination
If the plan trust has employees, were employment tax returns properly filed?
| Home | Feedback | More Sites |
cpaSPAN ©2005 J.Cheek