EBP tax compliance testing tips

By Ken Tysiac

The necessity of a recent make-it-right payment of about $1 million illustrated the importance of establishing whether an employee benefit plan (EBP) client has any related parties.

For four years after an acquisition, two companies under common control had employee benefit plans that should have undergone compliance testing on a combined basis. Instead, the companies did testing on an individual company basis.

When the affiliation was discovered, it took a payment in the neighborhood of $1 million to one of the plans to erase inequities between the two plans, and a filing under the IRS employee plan correction program was needed to confirm the corrective procedures met federal requirements.

“It’s an example of what can happen when you have acquisitions and you’re buying companies and the right people are not aware,” said Toby Ruda, CPA, senior director, Washington National Tax, Compensation & Benefits for RSM US LLP.

Ruda will be part of a three-person, three-panel discussion on compliance testing at the AICPA & CIMA Employee Benefit Plans Conference scheduled for May 3–5. Ruda will be joined by Karen Field, J.D., a senior director with RSM US LLP, and Cindy Dwyer, CPA, president of MHM Retirement Plans Solutions LLC. Their sessions will address:

  • What auditors need to know about affiliated service groups and controlled groups;
  • Advanced coverage testing; and
  • Advanced compliance testing.

Controlled groups and coverage testing

Understanding who is in a client’s controlled group is a necessity, and the speakers said it’s more difficult than it would seem to figure out. The practitioner might deal mainly with a recordkeeper and human resources representatives who might not fully understand the question when a practitioner asks if the company is part of a controlled group.

“When you’re asking these controlled group questions, you have to get to the right people,” Field said. “The CFO should know who owns the company and what other companies they’re related to. Other contacts within the company might not be as aware of the ownership nuances.”

Coverage testing helps establish whether people at all levels of the company are benefiting appropriately from the plan. When a plan doesn’t cover all employees or a company maintains multiple plans covering different groups of employees, testing can get complicated.

A company may need to make a corrective contribution to a plan that is out of compliance with this or other rules established to make benefits equitable.

“But often there are different advanced testing techniques that can be used to make a plan that initially appeared to be failing to actually pass, so you don’t automatically end up going into one of the correction programs,” Dwyer said.

Part of the panelists’ message is: “Don’t panic too early,” Field said.

“There may be a way to fix this,” she said. “It may take an actuary. It may take some other calculations. We may be able to keep it from failure. But not always. Unfortunately, I think all of us have run across plans that had no way to fix them other than to take them into correction.”

Watching for the proper balance

Layoffs and other employee departures as a result of the coronavirus pandemic have made the top-heavy diagnosis particularly challenging, though, for employers. A plan is considered top-heavy under the Internal Revenue Code when key employees own more than 60% of the value of the plan assets.

Field cited one company’s defined contribution plan with a matching contribution that workers received only if they were employed on the last day of the year.

That company had job cuts among rank-and-file employees during 2020, but highly compensated employees stayed and received their matching contributions, which disrupted the plan’s balance.

“They ended up with the plan too heavily favoring the higher-compensated,” Field said.

These are the types of testing challenges EBP tax professionals need to keep a special eye out for this year.

While there are certain core compliance tests that apply to every plan, other tests may be appropriate for a particular plan.

“There often are tests that, depending on the plan, may not apply,” Dwyer said. “So, one [objective] is just understanding what tests you need to be concerned about and then presenting enough and accurate information to the recordkeeper or the person responsible.”

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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