A Look Ahead for Plan Sponsors

UPDATE – On February 3, 2017, President Trump signed a memorandum that delays the implementation of the Fiduciary Rule for an unspecified period of time. 

As we begin the new year, plan sponsors should be aware of proposed changes to employee benefit plan reporting, auditor reports, and the upcoming effective date of enacted changes to rules applicable to plan fiduciaries.

Proposed Changes to Annual Reporting by Employee Benefit Plans

In July 2016, the Department of Labor (DOL), Employee Benefits Security Administration, Internal Revenue Service, Treasury, and Pension Benefit Guaranty Corporation proposed several regulatory revisions that could significantly change annual employee benefit plan reporting. If adopted, most of the revisions are expected to take effect for plan years beginning on or after January 1, 2019. However, the sheer volume of the 800-page proposal has drawn concerns about implementation, which may delay some aspects of the proposed revisions. The following are selected highlights of the proposed changes.

Participant Count: Who’s in/out?

The total number of eligible participants is used to determine whether an audit of a qualified plan is required.  Eligible participants are currently defined as those actually participating in the plan as well as those who are eligible to participate but are not contributing to the plan. The DOL proposal redefines eligible participant for Form 5500 retirement plan audit purposes to prospectively include current and former participants with account balances. Employees who are eligible to participate in the plan, but have no current account balance, would be excluded when determining whether a plan audit is needed.

Limited Scope Exemption

In September 2014, the DOL Office of Inspector General (OIG) reported that limited scope audits do not provide adequate protection to retirement plan participants and recommended that the limited scope audit exemption be repealed. Previously, the Employee Retirement Income Security Act of 1974 (ERISA) Advisory Council, in evaluating the limited scope exemption, concluded the exemption should not be repealed but agreed the deficiencies caused by the exemption should be addressed. The proposed revisions to the annual reporting rules include a requirement that plan sponsors attach the limited scope certification to the Form 5500, along with changes to the required format of the certification. The required attachment of the proposed, updated certification would enable a more robust review of these audits by regulators than is possible with the current filling.

Employee Benefit Plan Audit Reports

At the DOL’s request, the American Institute of Certified Public Accountants Auditing Standards Board (ASB) Employee Benefit Plan Reporting Task Force (Task Force) has undertaken a project (the Project) to enhance the transparency of employee benefit plan audit reports. The Project is in response to the DOL’s audit quality study, which disclosed that nearly 40% of employee benefit plan audits fail to meet professional standards.

The Task Force discussed several proposals to improve the quality of employee benefit plan audits by providing certain information within the auditor?s report, including:

• Emphasizing management’s (plan sponsor) responsibility within the auditor’s report
• Providing information on compliance and internal control material weaknesses and significant deficiencies
• Reporting on compliance with the plan’s provisions including providing a list of findings from audit procedures

The ASB is expected to vote in early 2017 on whether to expose these proposals for comment.

DOL Fiduciary Rule

In 2016 the DOL issued a final rule that expands the definition of investment advice fiduciary under the ERISA and, by extension, the prohibited transaction exemptions for investment activities was modified. The DOL’s final rule is intended to protect investors by requiring those who provide investment advice to ERISA qualified plans and individual retirement accounts to abide by a consistent standard of operation. That standard requires investment advisors to put client interests ahead of their own profits.

The final rule is effective April 10, 2017. Plan sponsors should understand how plan vendors, including record-keepers, are changing their services to comply with the new rule. Plan sponsors should not assume that services selected prior to the effective date will actually be the ones provided on and after April 10, 2017.