1. ERISA COMPLIANCE AND ERRORS Top Ten Mistakes
Marcia S. Wagner, Esq.

2. Introduction
Plan sponsors and financial advisors need to know on what to focus when they examine a plan.  They need to know the top ten errors, how they occur (usually people do not know the terms of the plan’s administration) and how they should be rectified.  For each of the “top 10” problems, we discuss:  (i) the issue, (ii) how it arises and (iii) how it can be fixed.

3. Top Ten Problems
1. Automatic Enrollment & Automatic Escalation (b) Plan Universal Availability 3. Problem Shared and Leased Employees 4. Compensation Done Incorrectly 5. Controlled Group Issues 6. Bad Plan Documentation 7. Prohibited Transactions A. Plan Services B. Bad 408(b)(2) Disclosure 8. Illiquid Plan Assets 9. Late Elective Deferrals 10. Bad Administration

4. 1. Automatic Enrollment & Automatic Escalation

5. Automatic Enrollment & Automatic Escalation
Applies to any plan allowing elective salary deferrals
Employees enrolled in plan unless elect otherwise
Plan document specifies percentage
Employees can opt out or elect different percent
Default percentage must be uniformly applied
Qualified Automatic Contribution Arrangement (QACA)
Exemption from nondiscrimination testing conditioned on :
Default deferral percentage:
Starts at 3% and increases to 6%; maximum 10%
Matching Contribution (100% match up to 1% of compensation plus 50% between 1% and 6% of compensation) or 3% Nonelective Contribution
100% vesting in matching or nonelective contribution after 2 YOS
No hardship distributions for required employer contributions

6. Automatic Enrollment & Automatic Escalation
Eligible Automatic Contribution Arrangement (EACA)
• Withdrawals allowed within 90 days of first auto contribution
Notice Requirements for QACA and EACA
• Written explanation of rights not to have auto contributions or to elect
deferral percentage other than default percentage
Timing: reasonable period before beginning of each plan year
Must give reasonable period of time after receipt to make alternative election and, in the case of a QACA, to make investment elections
Excess Deferrals
Participant must notify plan by April 15 of following year
Corrective distributions of excess deferrals to be reported on Form 1099
Potential double tax if excess not withdrawn by April 15

7. Automatic Enrollment & Automatic Escalation
Failure 1
Plan sponsor fails to implement plan’s auto enrollment provisions by not deferring salary of an employee who did not make an election
Corrected by providing nonelective employer contribution. Missed deferral is the plan’s auto enrollment deferral percentage multiplied by employee’s compensation. Required corrective contribution under IRS VCP is 50% of this missed deferral
Failure 2
• Employee never receives enrollment materials and is, therefore
treated as an excluded participant rather than a participant whose
deemed election has not been implemented
• Corrected by making nonelective employer contribution equal to 50% of missed deferral which is the ADP for the employee’s group (NHCE or HCE) multiplied by employee’s annual compensation

8. 2. 403(b) Plan Universal Availability Problem

9. 403(b) Plan Universal Availability Problem
Elective salary deferrals must be available to any employee
Exceptions
Employee who will contribute $200 or less annually
Employee eligible to make elective deferrals to 457(b) or 401(k) plan or another 403(b) plan
Nonresident aliens
Students performing certain services and certain employees not meeting minimum age and service requirements
Employees normally working fewer than 20 hours per week
Exception conditioned on working less than 1,000 hours in a 12-month period and subsequent 12-month periods
No part-time exception
Universal availability applies separately to each 501(c)(3) entity even if multiple entities participate in same plan

10. 403(b) Plan Universal Availability Problem
Universal availability standard met only if at least once each plan year plan lets employee make or change a cash or deferred election
Universal availability requires meaningful notice of right to defer
Rule only applies to elective deferrals, not employer match or discretionary or mandatory employer contributions
Some plans are drafted so that the eligibility standard for these nonelective contributions is the same as universal availability. In these cases, operational failure occurs if universal availability not applied to nonelective contributions.

11. 403(b) Plan Universal Availability Problem
Failure 1:
Excluding employees based on a job classification which is not one of the classes excepted from universal availability rule, such as part-time workers
Corrected by making employer contribution under IRS VCP program of missed deferral Rev Proc provides special rule for calculating 403(b) corrective contribution which will generally be 1.5% of employee’s compensation adjusted for lost earnings and any match. Mistake may be eligible for self correction if error was insignificant and sufficient compliance procedures were in place
Failure 2
Failure to properly notify a group of employees of their right to make deferrals
Corrected by making employer contribution under same methodology as Failure 1.

12. 3. Shared and Leased Employees

13. Shared and Leased Employees
Employee status controls application of plan rules
Control (over when, where and how to perform services) is key to determining whether worker is common law employee (1992 Supreme Court Darden case, Rev Rul 87-41
Shared employee definition: a person working for ( and under control of) more than one business at a time
Example: staff nurse working for several medical practices
Each practice is the employer simultaneously and credits all hours of service for purposes of plan eligibility
Pro rata share of shared employee’s compensation from each employer is allocated to the separate plans maintained by each employer
Failure:
Violation of qualified plan rules to exclude nurse from participation in any retirement plans maintained by medical practices if nurse has 1,000 hours of service overall
Correction: require each plan to include nurse as participant

14. Shared and Leased Employees
Leased employee definition: a person on the payroll of one company but working for another company
Example: employee on payroll of PEO who actually performs services for PEO’s client. If client controls the leased employee’s work, however, employee will be treated as employed by client, not as a shared employee (Rev. Proc )
For purposes of plan coverage, vesting, nondiscrimination and top heavy rules, a “leased employee” is treated as an employee of client organization, not PEO (Code §414(n))
Definition of leased employee
Full time – 1 year
Contract between client organization and PEO for employee services
“Primary” control by client organization

15. Shared and Leased Employees
Safe Harbor exception to treatment of leased employee as employee of client if employee is covered by PEO plan, subject to:
Leased employees no more than 20% of client’s NHCE workforce
Money purchase plan
Minimum contribution(nonintegrated) - 10% of compensation
Full vesting
Immediate participation by the leased employees
Failure
• IRS takes position that if leased employee is effectively a common law
employee of client, covering this employee under PEO plan violates
exclusive benefit rule
• Correction: Exclude employee from PEO plan. Also include leased
employees as participants in client plan unless client plan specifically
excludes them. If client maintains 401k) plan, inclusion of leased
employees may require making nonelective contributions that
compensate leased employee for missed deferral. Consider amending
plan to exclude leased employees

16. 4. Compensation Done Incorrectly

17. Compensation Done Incorrectly
Amount of plan benefits or contributions frequently expressed as percent of compensation
Code §401(a)(17) limits annual compensation that can be taken into account
Limit in 2014 will be $260,000
Plan definition of compensation must be nondiscriminatory under Code §414(s)
Designed based safe harbors
Include regular or base salary or wages and commissions, tips, overtime, premium pay and bonuses
Exclude reimbursements, expense allowances, fringe benefits, moving expenses and deferred compensation
Reasonable formula not favoring HCEs
Examples: Rate of pay vs. actual pay - Pay only while plan participant vs. pay for entire plan year
Plan that includes bonuses but excludes overtime might be treated as discriminatory
Test is whether average percentage of total compensation included under the definition for HCEs exceeds by more than de minimis amount the average percentage of total compensation included for NHCEs

18. Compensation Done Incorrectly
Failure 1: Plan allocation is based on compensation that exceeds the limit
Correction (two alternative methods)
Reduce account balance of affected employee by improperly allocated amount (adjusted for earnings); if excess amount would have been allocated to other employees in year of failure, it must be reallocated to those employees after adjusting it for earnings
Alternative fix: adopt plan amendment increasing maximum percentage of compensation and contribute additional amount for each other employee who received an allocation in failure year
Example: plan contribution rate equals 5% of compensation
5% applied to Employee X’s $300K comp. In 2012 when limit was $250,000 - reduce X’s account by $2,500 excess and reallocate
Alternatively, retroactively amend plan to raise rate to 6%

19. Compensation Done Incorrectly
Failure 2: improper exclusion of bonuses, overtime, commissions or another element of compensation from base on which employees may make elective deferrals
Correction: employer contribution equal to 50% of missed deferral opportunity which would be the employee’s elected percentage of compensation that would have been deferred from the excluded compensation element. Also contribute any applicable match and lost earnings
Failure 3: Improper deferral on items not included in plan definition of compensation
Correction: Distribute excess elective deferrals plus earnings to participant. Forfeit match related to excess deferrals and either reallocate or use to offset future employer contributions

20. 5. Controlled Group Issues

21. Controlled Group Issues
Rules apply as if all controlled group employees worked for employer adopting the plan
Applies to eligibility, vesting, minimum participation, determining contributions and benefits, nondiscrimination, compensation limits, top heavy rules and simplified employee pension and simple retirement accounts
Minimum Participation Example
Failure: Company A maintains a qualified plan with a one year service requirement only for its employees but is a member of a controlled group of corporations that includes Company B. Employee X completes 3 years of service with Company B and then transfers to Company A.
Correction: The plan must recognize X’s service with Company B and admit her as a participant immediately.
Highly Compensated Employee Example
Failure: Company C and Company D are controlled group members each of which pay Employee Y a salary of $60,000 for 2013.
Correction: For purposes of nondiscrimination testing, Employee Y will be considered highly compensated, since the HCE limit for 2013 is $115,000 and Employee Y’s aggregate compensation is $120,000.

22. Controlled Group Issues
Discrimination Testing Example
Failure: Company E maintains a 401(k) plan for its employees that has never been extended to its wholly-owned subsidiary F Company. When the minimum coverage test is run, including the employees of F Company, the 401(k) plan fails to satisfy Code §410(b) and, as a result ceases to be tax-qualified.
Correction: NHCEs of Company F must be included as participants on a retroactive basis and receive a QNEC sufficient to pass ADP/ACP test
SIMPLE IRA Example
Failure: SIMPLE IRAs can be established only by an employer which had no more than 100 employees who made at least $5,000 for the preceding year. Company G maintains a SIMPLE IRA for its 80 employees (all whom made more than $5,000 last year). Company G has a brother/sister affiliate, Company H, which is a member of the same controlled group as Company G and has 40 employees who made over $5,000. Because Companies G and H must be treated as a single employer, Company G is ineligible to maintain the SIMPLE plan.
Correction: Stop employer and employee contributions. File VCP application requesting that contributions made for previous years remain in the employees’ SIMPLE IRAs.

23. 6. Bad Plan Documentation

24. Bad Plan Documentation
IRS definition of “plan document failure”
A plan provision (or absence of a plan provision) that violates Code qualification requirements
Arises under 2 scenarios:
New law passes or regulations issued and plan not timely amended to meet new rules
Plan not timely amended during remedial amendment period for adopting good faith or interim amendments
Interim amendments are required to keep a plan up to date between remedial amendment cycles
Examples of recent law changes with expired deadline:
Conversion of 401(k) accounts to Roth without distribution
Allowing nonspouse beneficiary distributions via rollover
Allowing suspension of required distributions for 2009
Special benefits for participants w/qualified military service
Faster vesting of employer contributions under PPA 2006

25. Bad Plan Documentation
Correcting Amendment Failures
Adopt amendments for missed tax law changes
Look for IRS sample language in model amendments and List of Required Modifications
Effective date of amendment should be retroactive to conform plan terms to legislative requirement
File VCP submission with IRS
Submission is expected to include the executed amendments that will correct the failure
Issuance of compliance statement by IRS results in amendments being treated as if they had been adopted timely
Avoiding Future Failures
Do annual review of plan document
Designate person responsible for identifying time-sensitive amendments
Use annual cumulative list published by IRS (e.g., see Notice )

26. 7. Prohibited Transactions
A. Plan Services B. Bad 408(b)(2) Disclosure

27. Prohibited Transaction and Plan Services
Furnishing goods, services or facilities to plan is a prohibited transaction unless arrangement qualifies for exemption
Violation results in 15% excise tax and100% tax if not corrected
Four requirements for exemption
Service must be necessary to establish or operate plan
Necessary means appropriate or helpful
Service contract must be reasonable
Plan must be able to terminate contract without penalty on short notice
Plan should not be locked into an arrangement that becomes unfavorable
Long-term lease is acceptable only if it can be terminated before expiration
Minimal early termination fee to allow recoupment of start-up costs is acceptable
Plan should pay no more than reasonable compensation
Management Evaluates reasonableness of fees by market rate for comparable services
Disclosure by service provider

28. Bad 408(b)(2) Disclosure
Regulation effective in 2012 requires plan service provider to make written disclosures to plan:
Description of services
Whether services to be performed as fiduciary
Compensation to be received from plan and from third parties
Bad disclosure makes service arrangement a prohibited transaction by plan fiduciary and service provider
Failures can be cured
Plan must make written request for information and provider must respond within 90 days
Service provider refusal or inability to comply with request for information requires plan fiduciary to notify DOL
Plan fiduciary must decide whether to terminate services
Presumption is termination
Services to be continued only if prudent
Good faith mistakes must be corrected no more than 30 days after provider knows of error or omission

29. 8. Illiquid Plan Assets

30. Illiquid Assets
Holding illiquid assets is problematic for an ERISA plan if
Purchased in non-exempt prohibited transaction involving party in interest
Purchase was an imprudent decision or
It is imprudent for plan to continue to hold the asset
Examples of illiquid assets
Restricted and thinly traded stock
Limited partnership interest
Real estate
Collectibles
Plan fiduciary must determine that asset is illiquid because:
Asset failed to appreciate, provide reasonable rate of return or caused loss
Sale is in plan’s best interest
Asset cannot be sold for its original purchase price or FMV (if greater) to a person other than person who is a party in interest to the plan
May correct by selling to related party subject to conditions

31. Illiquid Assets
Conditions of correction by selling to party in interest
Purchase price on sale to party in interest must be greater of
FMV of asset at time of resale (unreduced by sale costs)
Original purchase price plus lost earnings under DOL calculator
Qualified independent appraiser must report on Asset’s FMV
Application to DOL
Documentation of original purchase price to be included in submission
DOL no action letter
Allows correction or asset’s original acquisition
Permits sale of asset in transaction that otherwise might be prohibited
Example
Plan buys real property from party in interest in 1999 for $60,000. Plan official makes illiquid asset determination in In 2004, appraiser values property at $20,000. Plan sponsor pays plan $60,000 plus lost earnings and plan transfers real estate to plan sponsor.

32. 9. Late Elective Deferrals

33. Late Elective Deferrals
When participant funds become plan assets
Amounts that a participant pays to an employer or amounts that a participant has withheld from wages must be paid to the plan trust on earliest date they can be segregated from employer’s general assets
Safe harbor for plans with fewer than 100 participants: deadline for remittance to trust is 7th business day following day on which the amount is received by the employer or would have been payable to the participant in cash
IRS Failure
Employer fails to remit participant elective deferrals by the earliest date employer can reasonably segregate deferral deposits from general assets. This will not be an operational failure for VCP purposes if plan does not have language relating to time contributions are deposited. If plan has timing language, there will be a qualification failure for failing to follow plan terms.
Correction: Employer makes contributions with earnings up to date of correction. VCP submission should describe new procedural safeguards adopted to ensure that deposits will be timely made.

34. Late Elective Deferrals
DOL Failure
Regardless of plan language, failure to make timely remittance will be a prohibited transaction for DOL purposes.
Correction: employer required to make delinquent contributions plus greater of:
Lost earnings or
Restoration of profits resulting from employer’s use of the delinquent funds prior to making contribution
DOL Voluntary Fiduciary Correction Program requires extensive documentation:
Narrative of remittance practices and certification by plan official of earliest date when remittance possible
Copy of payroll documents showing date / amount of each withholding
Relief from submission of documentary evidence if amount is below $50,000 or delinquency is less than 180 days

35. 10. Bad Administration

36. Bad Administration - Loans
Loans - In order for a plan loan to not be considered a taxable distribution, it must meet certain IRC requirements
Maximum amount of loan
Repayable within 5 years with exception for certain home loans
Level amortization and not less than quarterly payments
Failure 1 - Plan sponsor permits loan in excess of Code limit
Failure - Loan is more than lesser of (a) 50% of vested account balance (but not less than $10,000) or (b) $50,000 reduced by highest amount owed on other loans by the participant during prior one-year period
Correction – Participant repays excess amount to plan. Principal balance of loan reamortized over 5 years from date of original loan
Failure 2 – Loan repayment period more than 5 years
Failure – Loan provides 6-year term
Correction – Plan sponsor can avoid treating loan as taxable distribution by filing VCP application. Remaining balance of loan at time of submission would be reamortized so that loan is fully paid by end of 5 years measured from loan date.

37. Bad Administration – Loans & Hardship Withdrawals
Loan Failure 3 – Repayment Failure
Failure – Employee fails to make loan repayments according to repayment schedule (e.g., employee’s loan information not forwarded to payroll dept. which would have implemented repayment by payroll deductions.
Correction - Two alternatives under VCP provide relief from reporting loan as distribution:
Participant to repay missed payments plus accrued interest in lump sum and repay loan balance over remaining loan term or
Loan may be reamortized over remaining term
If plan provides that a loan does not become deemed distribution until end of calendar quarter following quarter in which payment was missed, the cure period may allow administrator to fix problem without VCP or other negative consequences
Failure 1 Due to Financial Hardship Withdrawal
Failure - Elective deferrals not suspended for 6-month period following financial hardship withdrawal, as required by the Code and plan terms
Correction – 6 months of improper deferrals treated as current taxable distribution. File VCP application and distribute deferrals plus earnings.

38. Bad Administration – Hardship Withdrawals & Eligibility
Failure 2 Due to Financial Hardship Withdrawal
Failure – Employer permits participant to take hardship withdrawal from a 401(k) plan that does not provide for such withdrawals
Correction – File VCP application requesting authorization to amend plan retroactively to permit hardship distributions
Eligibility Failures
In general, employees must be allowed to participate in a qualified plan if:
They have attained age 21 and
They have at least 1 year of service
Failure - Employer permits employees who have not met its 401(k) plan’s eligibility conditions to become participants
Correction – Two alternatives
If prematurely included employees are primarily NHCE, employer may file VCP submission requesting that plan be retroactively amended to permit their participation. Impact of amendment must not be discriminatory
Distribute improper employee deferrals and notify them of their taxability

39. Speaker Biography – Marcia S. Wagner
Marcia is a specialist in pension and employee benefits law, and she is the principal of The Wagner Law Group, one of the nation’s largest boutique law firms, specializing in ERISA, employee benefits and executive compensation, which she founded over 18 years ago. A summa cum laude and Phi Beta Kappa graduate of Cornell University and a graduate of Harvard Law School, she has practiced law for over twenty-seven years. Ms. Wagner was appointed to the IRS Tax Exempt & Government Entities Advisory Committee and ended her three-year term as the Chair of its Employee Plans subcommittee, and received the IRS’ Commissioner’s Award. Ms. Wagner has also been inducted as a Fellow of the American College of Employee Benefits Counsel. For the past six years, 401k Wire has listed Ms. Wagner as one of its 100 Most Influential Persons in the 401(k) industry, and she has received the Top Women of Law Award in Massachusetts and is listed among the Top 25 Attorneys in New England by Boston Business Journal.

40. ERISA COMPLIANCE AND ERRORS Top Ten Mistakes
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor Boston, MA Tel: (617) Fax: (617) Website:
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