Construction Industry: What you Need to Know About Employee Benefit Plan Audits

Construction Industry: What you Need to Know About Employee Benefit Plan Audits

Is your construction company required to undergo an employee benefit plan audit? This audit is required under federal law to ensure the plan’s functions, operations and processes are in compliance with established regulations. Unfortunately, these audits do not always go smoothly because the plan sponsor does not always understand the documentation, information and financial statement requirements for the audit. To help construction companies streamline the employee benefit plan audit process, Smith Schafer has provided a list of steps below to help companies prepare.

WHY DO YOU NEED AN AUDIT?

In general, retirement plans with more than 100 participants as of the beginning of the plan year are classified as a large plan. Large plans must complete Schedule H with the Form 5500 Annual Report and are required to have an audit. Small plans must complete Schedule I with the Form 5500 and are not required to have an audit.

The participant count used to make these determinations includes all employees who are eligible to participate in the plan, regardless of participation. It also includes all participants who have separated employment but still have a balance within the plan.

IMPORTANT: There are exceptions to these general rules. Your construction company’s plan third party administrator (TPA) will often inform you when an audit is required. However, if you believe you are close to being considered a large plan, you should review your plan activity and contact your TPA sooner rather than later.

BEFORE THE AUDIT – SELECTING AN AUDITOR

Once it has been determined your construction company needs an audit, the first step is to select an independent CPA firm to perform the audit. It is important to select a firm with the necessary skills and retirement plan experience to provide the services your plan needs.

Here are a few simple ways to find an audit firm with retirement plan experience:

  • The American Institute of Certified Public Accountants website contains a list of firms by location that are members of the Employee Benefit Plan Audit Quality Center. These firms are required to meet additional quality control standards related to retirement plans.
  • Form 5500 Annual Reports are public documents that can be viewed on the Department of Labor website. These reports will include audited financial statements for all large plans.
  • Ask your current service providers if they can recommend a firm they have worked with in the past.

TIP: It may seem like an easy solution to use the CPA firm you use for your corporate accounting needs. However, that firm may not have the required skill or expertise to audit your retirement plan effectively and efficiently. It is worth the extra effort to find a firm that will provide the results your plan needs.

DURING THE AUDIT – PREPARING AND PROVIDING DOCUMENTATION

The purpose of a retirement plan audit is to test financial information, participant information and compliance with plan documents and regulations. During the audit, your auditors will review your plan’s records and transactions, and may ask for additional documentation to support any of the transactions. Some of the areas that are tested during the audit include:

  • Contributions – employee and employer, if applicable
  • Participant data and accounts
  • Distributions
  • Loans, if applicable

Significant audit areas for the construction industry are the definitions of eligible participants and eligible compensation. The plan documents will specify when an employee is considered eligible to participate in the retirement plan. In many construction company plans, employees who belong to a union, are not eligible. Your plan may have a length and/or hours of service requirement, which could impact seasonal or temporary employees. The plan documents will also define compensation for the purposes of the plan. Often times, there is compensation excluded from the definition, such as bonuses, overtime and certain expense reimbursements.

TIP: Before your first audit, be sure to gather and read your plan documents and determine if your plan is following all the various provisions. If something is unclear, inquire of your TPA or other plan service provider.

AFTER THE AUDIT – REVIEWING WITH THE AUDITOR

After the audit has been completed, your auditor will issue three documents related to the audit:

  • A report on the financial statements.
  • A letter commonly referred to as a “management letter.” This letter is an overall summary of the audit and discusses your plan’s accounting policies, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues that need to be brought to management’s attention.
  • A letter commonly referred to as an “internal control letter.” This letter is meant to identify and communicate areas of operations or procedures where your plan can strengthen or redesign internal controls.

The insights shared by the auditor in these documents should be reviewed and discussed with management prior to filing the Form 5500 and audit report.

TIP: Ask questions!  If you do not understand something, ask. If you think something is wrong, say something. The audit is a reflection of your retirement plan and you are ultimately responsible for it.

The best way to ready your construction company for an employee benefit plan audit is to prepare throughout the year by keeping detailed records and conducting self-audits at regular intervals. If you would like more information or if you are seeking an experienced team that specializes in employee benefit audits, Smith Schafer wants to help! We can take a second look at your current plan and fees at any time. Click here to contact our Employee Benefit Services Group for additional information.

2018 Health Savings Account Contribution Limit Change

In October 2017, the Internal Revenue Service (IRS) released the 2018 contribution and benefit limits for retirement and other benefit plans types. The IRS recently announced revisions to the Health Savings Account (HSA) contribution limit for individuals with family coverage. This change is a result of the tax reform law. Keep in mind, for HSA purposes, family coverage is any coverage other than self-only coverage. Below are a few HSA contribution highlights:

  • The new 2018 HSA contribution limit for individuals with family coverage is $6,850, which is $50 less than the previously announced limit of $6,900. This change will only affect you, if you had intended to “max out” your 2018 HSA contributions.

Example: If you intended to contribute $6,900 to your HSA for 2018, you will now be able to contribute only $6,850. If you have already contributed more than $6,850 to your HSA for 2018, to avoid adverse tax consequences, you will need to take a withdrawal of the excess contribution before April 15, 2019 or before you file your 2018 personal income tax return. If you find yourself in this situation, contact the HSA custodian for information about the paperwork you will need to complete for the excess contribution withdrawal.

  • This change does not affect you if you are enrolled in self-only coverage for all of 2018. In this case, your annual contribution limit for 2018 will remain $3,450.
  • If you are age 55 or older as of December 31, 2018, you may still contribute an additional $1,000 in catch-up contributions to your HSA for 2018.
  • If you are not eligible to make HSA contributions for all of 2018 because, for example, you enroll in Medicare during the year or cease being covered by a high deductible health plan, your HSA contribution limit will be pro-rated.

Contact Us 

It is important to update plan documents and benefit plan materials to reflect the recent changes. It is also important to consider any individual participant notification requirements that are necessary to remain in compliance with plan rules. If you have questions about the changes or their impact on your benefit plans, please contact Smith Schafer for assistance. We are also available for benefit plan consulting, plan audit and third-party retirement plan administration needs. For additional information, click here to contact us. We look forward to speaking with you soon. 

Save Taxes While Controlling Employee Health Costs

If rising health care costs have sent your company searching for ways to reduce expenses, you should know there are alternatives to standard medical insurance plans. Your choices are not limited to either paying the higher costs yourself or transferring the burden to your employees. Tax-advantaged strategies are available which can mitigate the effect of rising costs for you and your staff members. Here are three ideas to consider:

1. Establish a Health Insurance Premium-Only Plan (POP)

This super-simple option is often a good choice for small employers. With a POP, your employees are charged via payroll withholding for their share of health premiums. These withholdings are considered salary reductions for federal income tax, Social Security tax, and Medicare tax purposes. In other words, the POP allows your employees to pay their share of health insurance premiums with pretax dollars, which can save them a substantial amount of taxes over the course of a year.

At the same time, your company’s taxes are also reduced. Reason: the salary reduction amounts are exempt from the employer’s share of Social Security tax and Medicare tax. For 2017, the employer’s share of these taxes is 7.65% of the first $127,200 of each employee’s salary, including bonuses, plus 1.45% of compensation above $127,200 (up from $118,500 for 2016). Individuals with earned income above $200,000 or married couples with earned income above $250,000 must also pay an additional 0.9% in Medicare tax (no limit). 

Because a POP is considered a “cafeteria benefit plan,” it’s governed by Section 125 of the Internal Revenue Code. This means your business will need to install a written plan and employee enrollment procedures when setting up the program. The POP cannot discriminate in favor of highly compensated employees or key employees. Despite these restrictions, it’s generally easy and inexpensive to establish a POP with professional help.

Basic cost-reduction strategy: First, shift a higher percentage of premiums for employee health coverage to your employees. This reduces your company’s costs. Then set up a POP to give your employees an offsetting benefit in the form of reduced income tax, Social Security tax, and Medicare tax. The same strategy also cuts the company’s tab for Social Security and Medicare taxes.

2. Set Up a Flexible Spending Account Plan

Setting up and operating a Flexible Spending Account (FSA) is more complicated than the POP option. Therefore, these plans are probably best suited to businesses with a larger number of employees.

Here’s how FSAs work: Your company sets up a health care flexible spending account for each participating employee. Then, the employee makes an annual election to contribute a specified dollar amount of his or her salary to the FSA and these contributions are withheld from the employee’s paychecks. To be reimbursed, the employee submits a claim for his or her share of health insurance premiums and uninsured medical expenses (up to the annual amount contributed to the FSA). The reimbursements are tax-free to the employee.

Employee FSA contributions are considered salary reductions, which means they are exempt from federal income tax, Social Security tax, and Medicare tax. So they allow your employees to pay out-of-pocket medical expenses (including their share of health premiums) with pretax dollars. Your company’s taxes are also reduced, because the salary reduction amounts are exempt from the employer’s share of Social Security and Medicare taxes.

Like POPs, FSA plans are considered “cafeteria benefit plans” under Section 125 of the Internal Revenue Code. Therefore, your business will need to install a written plan and employee enrollment procedures. The plan cannot discriminate in favor of highly compensated employees or key employees. An FSA plan also requires significant administrative effort to enroll employees, handle the necessary payroll withholding, and process reimbursement claims. Many companies find it cost-effective to hire a third-party plan administrator to take care of all the details.

Finally, The Affordable Care Act (as well as many companies) place an annual lid on the amount an employee can contribute to the health care FSA. This is important, because employees can request reimbursement for expenses up to their annual contribution long before the contributions have actually been collected through the payroll withholding. For 2017, the limit is $2,600. This limit will be adjusted for inflation in subsequent years.

Basic cost-reduction strategy: First, shift a higher percentage of employee health premiums to your employees, or increase the insurance plan deductibles. Or take both actions. Your company’s costs will be reduced. Then, set up an FSA plan to give your employees an offsetting benefit in the form of reduced income, Social Security, and Medicare taxes. The FSA also cuts the company’s Social Security and Medicare tax bills.

3. Install a Health Reimbursement Arrangement (HRA)

The option to set up an HRA can be attractive to larger employers. Here is how it works: Every year, the company agrees to contribute a fixed amount to each eligible employee’s account. Employee contributions are not allowed. The company deducts the HRA pay-ins. However, the contributions are tax-free to employees (no federal income tax, Social Security tax, or Medicare tax). Your employees can then submit claims to be reimbursed for uninsured medical expenses, including their share of health insurance premiums, if applicable. Reimbursements are tax-free. In effect, the employee is able to pay for out-of-pocket medical expenses with pretax dollars, up to the amount contributed to the employee’s HRA account.

Since your company must pay for all HRA contributions, this arrangement only saves money when it’s combined with a much-less-generous employee health insurance program. The idea is that your company’s health insurance costs will be drastically reduced, which allows you to return some of the cost savings to employees in the form of HRA contributions.

Basic cost-reduction strategy: First, switch your health insurance plan to one which greatly reduces your company’s premium costs, which of course, means it provides less benefits to employees. Then, return a portion of the savings to employees via the tax-favored HRA arrangement.

Employers will face a wide array of responsibilities and requirements under the ACA. Smith Schafer can guide you through every facet of structuring and managing the right employee benefit plan program for your business. We work closely with numerous retirement plan service providers, including local financial advisors and reputable asset trustees/custodians. We can take a second look at your current plan and fees at any time. Click to contact our Employee Benefit Services Group for additional information.

IRS Announces 2018 Contribution Limits

In mid-October, the IRS released the 2018 contribution and benefit limits for retirement and other benefit plans types. Each year a review is conducted to determine if changes need to be made to the contribution limits based on the cost of living index and other economic indicators. For 2018, most of the limits will remain the same however there were a few key increases to be aware of. For example, the IRS increased the employee’s contribution limit for 401(k) plan participants from $18,000 per year to $18,500 per year. Also, the defined contribution plan annual contribution limit increased from $54,000 to $55,000. These changes will need to be reflected in your company’s plan administration and payroll processes. To assist clients, prospects and others, Smith Schafer has compiled a summary table reflecting some of the key benefit plan limits below. 

RETIREMENT PLAN LIMITS20172018
Annual compensation limit$270,000$275,000
401(k), 403(b) & 457(b)  employee contributions$18,000$18,500
Catch-up contributions (if age 50 or older)$6,000$6,000
Highly compensated employee threshold$120,000$120,000
Key employee officer compensation threshold$175,000$175,000
Defined benefit plan annual benefit and accrual limit$215,000$220,000
Defined contribution plan annual contribution limit$54,000$55,000
Employee stock ownership plan (ESOP) limit for determining the length of the general five-year distribution plan$215,000$220,000
ESOP limit for determining the maximum account balance subject to the general five-year distribution period$1,080,000$1,105,000
Roth IRA and traditional IRA$5,500$5,500
Roth IRA and IRA catch-up contributions$1,000$1,000
SIMPLE salary deferral$12,500$12,500
SIMPLE catch-up limit$3,000$3,000
HEALTH AND WELFARE PLAN LIMITS  
Health Flexible Spending Accounts maximum salary reduction limit $2,600 $2,650
High Deductible Health Plans (HDHP) – maximum annual out-of-pocket limit (excluding premiums):  
Self-only coverage$6,550$6,650
Family coverage$13,100$13,300
HDHP – minimum annual deductible:  
Self-only coverage$1,300$1,350
Family coverage$2,600$2,700
Health Savings Accounts (HSA) – annual contribution limit:  
Self-only coverage$3,400$3,450
Family coverage$6,750$6,900
Catch-up contributions (age 55 or older)$1,000$1,000
SOCIAL SECURITY WAGE BASE  
Social Security Maximum Taxable Earnings (dollars)$127,200$128,700

Contact Us

It is important to update plan documents and benefit plan materials to reflect the recent changes. It is also important to consider any individual participant notification requirements that are necessary to remain in compliance with plan rules. If you have questions about the changes or their impact on your benefit plans, please contact Smith Schafer for assistance. We are also available for benefit plan consulting, plan audit and third-party retirement plan administration needs. For additional information, click here to contact us. We look forward to speaking with you soon. 

Mandatory Timely Remittances to Qualified Retirement Plans

The Department of Labor (DOL) requires employee remittances to qualified plans to be made as soon as administratively feasible. The Plan Sponsor has a fiduciary and legal responsibility to remit employee pre-tax, ROTH and participant loan repayments in a timely fashion or face possible fines, penalties or sanctions.

If the DOL considers the qualified plan a small plan (generally less than 100 plan participants), the plan sponsor is allowed a 7-day safe harbor from the date the funds are withheld from employee paychecks to remit employee contributions to the plan. Under the 7-day safe harbor, if the plan sponsor pays in all employee remittances within seven days, they are considered to be remitting timely. If the plan sponsor remits employee contributions more than seven days from the date the money is withheld from employees’ pay checks, the plan sponsor loses the right to use the 7-day safe harbor and may be required to calculate and remit additional earnings for each participant and file an excise tax return along with a 10 percent excise tax penalty for any contributions remitted after seven days. We strongly recommend all small plans take advantage of the DOL’s 7-day safe harbor allowance.

If the DOL considers the qualified plan a large plan (generally more than 100 plan participants), the plan sponsor must justify their definition of “administratively feasible” and should develop and follow a timely remittance process. The plan sponsor should also be prepared to defend their definition of “administratively feasible” and their timely remittance policy.

We recommend the large Plan Sponsor consider the following procedures related to timely remittances:

  • Determine what constitutes “administratively feasible” employee contribution remittance practices under typical payroll processing conditions.
  • Develop a Remittance Practices Policy.
  • Document the Policy, including how you arrived at key decisions.
  • Periodically evaluate the Policy to ensure it still represents the plan sponsor’s normal payroll processing procedures. If not, modify the Policy accordingly.
  • If employee remittances are paid outside of the Policy’s administratively feasible guidelines, record each occurrence and retain supporting documentation to explain what transpired.
  • Challenge staff to constantly strive to improve employee remittance practices in an effort to improve efficiency.

While adopting some or all of these suggestions does not guarantee protection from a Department of Labor or Internal Revenue Service examination, they may provide additional fiduciary protection for the Plan Sponsor and better long-term earnings potential for plan participants.

Retirement plan compliance is complex, requiring help from trusted professionals who understand the complexities, challenges, rewards and opportunities associated with effective retirement planning. Contact Smith Schaferfor further discussion and guidance.

Click for more information on our Employee Benefit Plan services.

Indicators of Benefit Plan Fraud

Fraud is an area most business owners and executives do not think about until something bad happens. What’s worse is by the time the misfortune has been discovered, the damage has already been inflicted. While most commonly think of fraud in the framework of the company, there is another avenue of fraud to consider – the employee benefit plan. A plan sponsor (generally the employer or company) should know there is a possibility of fraud occurring with plan administration. For this reason, it is important to understand the warning signs that something inappropriate is occurring. To help clients, prospects and others understand the key indicators of fraud; Smith Schafer has provided summary information below.

Common Warning Signs of Plan Fraud 

  • Account Statements. Often when fraud or other illegal behavior is occurring, account statements are not sent to participants on a regular schedule. In fact, it’s quite common for the statements to arrive at irregular times or not at all. Be aware of sudden or unexpected changes that happen without cause.
  • Account Balance Changes. Another sign of wrongful activity is that a participant’s account balance may seem inaccurate or experience fluctuations beyond what would be expected in real time market conditions. Unexpected changes in these balances are a sure sign that investigation is needed. While it is possible a clerical or reporting error was made, a continued pattern of inconsistency in account balances will reveal that it’s more than just a onetime error.
  • Inaccurate Investments. Sometimes when improper behavior is occurring participants will notice that their plan investments change or are simply inaccurate. When fraud is occurring, it’s common for participant money to be placed in unauthorized investments. As a result, it is essential to ensure that investment selection choices are confirmed with participants.
  • Unusual Transactions. A telltale sign of fraud is when unusual or unexpected transactions start to happen. Unrequested loans to the employer, participants, or to the plan trustee are certainly signs of fraud, not to mention a poor plan and internal controls.
  • Benefit Payout. Over time when fraud is prevalent in a plan it becomes more and more difficult for existing and former employees to have their benefits paid. A variation of this scenario is when a benefit is paid but for the wrong amount. Consistency is key. If a wrongful payout is a one-time occurrence, it’s most likely an error; if it’s a consistent issue, it is apparent something more serious is happening.

Maintaining Oversight

Most companies today outsource plan administration tasks to various organizations such as third party administrators (TPAs), payroll providers, etc. Leveraging outside experts provides not only relief from duties, but also allows the plan sponsor to benefit from best practices. These relationships are characterized by limited communication, generally when an issue, problem or update is needed. Given the limited level of communication it’s essential to have a method for monitoring outsourced service providers. This will go a long way to ensure the chance for fraud or other issues is significantly reduced.

SEE ALSO: SMITH SCHAFER EMPLOYEE BENEFIT PLANS SERVICES

Contact Us

Fraud is never welcome especially when it concerns a person’s long-term and/or retirement savings. Although there is no process for preventing fraud, it is essential to take reasonable steps to protect plan participants. If you are interested in learning more about fraud prevention or for assistance with your benefit plan audit, Smith Schafer wants to help. Click here to schedule a FREE 30 minute consultation. We look forward to speaking with you soon.