Marcia S. Wagner, Esq.
Heightened regulatory requirements and a
shifting fiduciary landscape require those
serving employee benefit plans, including
accounting the profession, to respond with
additional services that will ensure the
viability of their clients’ plans.
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DOL and IRS in “Gotcha” mode seeking revenue
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DOL monetary enforcement up 41%
DOL maintains full-time enforcement staff of 875
Plan restorations, fines and penalties for 2013: $1.69 billion
IRS is comparing Form 1120 deductions and Form 5500
Penalties for incomplete or untimely filing of Form 5500
◦ DOL - up to $1,100 per day
◦ IRS - $25 per day up to $15,000
• Documents that must be delivered to plan participants
and beneficiaries:
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(1) summary annual report;
(2) summary plan description;
(3) summary of material modifications to the plan;
(4) statement of benefits to terminated vested employees; and
(5) notice of failure to meet minimum funding standards in a
defined benefit plan.
• $110 per day potential penalty for failure to
provide notice after participant request
• Sponsors of employee benefit plans are subject to ERISA
fiduciary duties of loyalty, prudence, asset diversification and
must follow plan documents
• In recent years employers have become subject to
increased regulatory duties relating to:
- Selection of plan investments and service providers; the
reasonableness of plan fees; disclosures to participants; and
selecting annuity providers
- Many sponsors seek relief from these and other responsibilities
• Consequences of breaching fiduciary duties are expensive:
- Making plan whole for plan losses or restoring lost profits
- Settlements against large employers in private class action litigation
over investment fees have ranged from $15 million to $35 million
• Enhanced fiduciary services are in demand to relieve
employers of the new duties as well as burdens of day-to day
plan operation
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Civil Actions Under ERISA
◦ May be brought by DOL, participants or cofiduciaries
◦ Fiduciary is personally liable for losses
caused by breach
DOL Civil Penalty
◦ Penalty amount is 20% of applicable recovery
amount
Excise Taxes
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Potential Co-Fiduciary Liability
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Employer error resulted in $1.69 billion of
recoveries through DOL enforcement in 2013
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Plan Disqualification
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Consequences of Disqualification
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Penalties reduced or eliminated if failure identified and
corrected before IRS discovery
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Document failure
Operational failure
Demographic failure
Employer eligibility failure
◦ Plan trust pays taxes on earnings
◦ Employees taxed on vested plan interest
◦ Loss of employer deductions
◦ TPA or consultant review can prevent the failure by
providing updated documents
◦ Failures identified in plan audits can also be timely
corrected
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Typical cause of plan document failures
◦ New law or regulation goes into effect and plan is not timely amended
◦ Plan not amended during 5-year amendment cycle for good faith or
interim amendments
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Language change is frequently minor and may have no
actual impact on participants
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Minor change can still jeopardize tax-qualification or result in
compliance fees payable to IRS
TPA, working with counsel, can more efficiently identify
and implement needed amendments than brokers and
financial institutions
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One size does not fit all
Requirements of DC v. DB plans
Broad coverage v. one-man plans
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Core Service Provided by 3(21) fiduciary
◦ Assisting Plan Sponsor in selection and
monitoring of Plan’s investment menu
options
◦ Advice is non-discretionary (i.e., consists of
recommendations)
Related Services
◦ Assisting with IPS document where Plan
Sponsor is responsible for reviewing and
adopting IPS
◦ Providing quarterly reports and meeting with
Plan Sponsor annually
◦ May also offer non-fiduciary services
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Financial adviser provides IPS document, subject
to plan sponsor direction as to contents
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IPS provides critical guidelines form managing
plan investments
◦ Sets investment objectives
◦ Identifies who is responsible for investment decisions
◦ Provides criteria and process for monitoring/changing
investments
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As a plan document, IPS must be followed; it is
important that it be consistent with the plan’s
investment needs and should be amended if not
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Duty to Ensure Fees are Reasonable
◦ New plan Sponsor and participant-level disclosure rules
◦ Class action lawsuits claiming fiduciary breaches due to
excessive fees.
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Fee Policy Statement is recommended best practice
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FPS offers procedural discipline for fiduciary’s review of fees.
Review under FPS should be coordinated with IPS.
FPS itself can help demonstrate prudence
Assistance of financial adviser is critical
General Guidelines
◦ Need to gather all relevant information.
◦ Evaluate fees in light of services provided.
◦ Never look for provider with cheapest fees
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Plan sponsors have a fiduciary duty to ensure the
reasonableness of plan fees but typically do not have
the necessary expertise or resources to make this
determination
Benchmarking services are potential remedy
◦ Assist the employer in its efforts to identify all plan fees,
including “hidden” indirect compensation.
◦ Equip the employer with tool to be used as part of a prudent
review process to monitor the plan’s services and fees.
◦ Provide the employer with competitive pricing information that
a Prudent Expert might have, to help assess reasonableness
◦ Role of financial advisor
 Selection of benchmarking service provider
 Provide benchmarking service with in-house staff
TOP THREE ERISA
COMPLIANCE MISTAKES
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2.
3.
Compensation Done Incorrectly
Controlled Group Issues
Automatic Enrollment Failures
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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
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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%
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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
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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
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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
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Minimum Participation Example
◦ Failure: Company A maintains a qualified plan with a one year
service requirement only for its employees. A 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.
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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 2014
is $115,000 and Employee Y’s aggregate compensation is $120,000
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Discrimination Testing Example
◦ Failure: Company E maintains a 401(k) plan for its employees that
has never been extended to its wholly-owned subsidiary, Company F.
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
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Applies to any plan allowing auto salary deferrals
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Employees automatically enrolled in plan at default
percent unless elect otherwise
◦ Plan document specifies percent
◦ Employees can opt out or elect different percent
◦ Default percentage must be uniformly applied
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Notice Requirements
◦ Written explanation of right to opt out or elect to defer a percent of
pay other than default percentage
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Failure 1
• Plan sponsor fails to implement plan’s auto enrollment provisions
by not deferring salary of an employee who failed to make election
Correction 1
• Nonelective employer contribution under IRS VCP procedure
• Corrective contribution is employee’s compensation multiplied by
50% of plan’s auto enrollment deferral percentage
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Failure 2
• Employee never receives enrollment materials and is, therefore
treated as an excluded participant rather than a participant whose
election has not been implemented
Correction 2
• Nonelective employer contribution under VCP
Corrective contribution is employee’s compensation multiplied by
• 50% average deferral percentage for the employee’s group
(NHCE or HCE)
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 threeyear 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.
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
marcia@wagnerlawgroup.com
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