Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
They say the squeaky wheel gets the most grease. Unfortunately, for today’s business owners, it’s been pretty noisy lately. You have a lot to worry about these days with tax reform, healthcare regulations and who knows what else, so when it comes to keeping tabs on your company’s retirement plan statistics, you might feel like your attention would be better spent elsewhere, like on the golf course. Not so fast. Before you know it, the number of participants in your company’s retirement plan could cause you to trigger a plan audit, which could have all kinds of ramifications.
Today’s guest is going to tell us how to identify retirement plan participants, what the retirement plan audit magic number is, and what to do once you hit that magic number. Kim Veal, a member of our retirement plan audit team here at Rea & Associates, is joining us to tackle this topic. Welcome back to unsuitable, Kim.
Kim Veal: Thanks Dave.
Dave: Yeah.
Kim: It’s good to be back.
Dave: You did such a great job first time through we have to have you back.
Kim: That’s what they said.
Dave: But one of the things we want to talk about today is a retirement plan, and what’s going on behind the scenes that a lot of our listeners may and may not know, so you’re going to help us out but let’s start with the Tax Cut and Jobs Act, Tax Reform Act. We’re hearing a lot of statistics there that markets are, stock markets, financial markets, are rocking. More participants, supposed to have more money in their pocket.
Kim: Yeah. That’s-
Dave: Businesses are supposed to have more money because of the tax cut.
Kim: Mm-hmm, yeah.
Dave: What do you think? How is this going to impact retirement plans going forward? Any thought?
Kim: Well, obviously there’s going to be more plan assets out there, if the stock market is raising. That’s what we always hope for. Every plan participant always hopes that their account is going to go up, so that’s always a positive. That’s what we hope for every year, but when that happens, there’s always a danger that in the event of some sort of fraud or something like that, that they’re going to lose it. So you’ve got to watch your coverage, your insurance coverage, and all of that. It could have an increase that you have to make sure meets the guidelines. Other than that, it’s good on our end.
Dave: It’s good for-
Kim: It’s a good forecast for us.
Dave: It’s a good … Okay. So in your opinion, it looks all signs are pointing forward.
Kim: Yes. The only thing is, is now because the stock market is going up, people are going to look to get into the plan if they haven’t before. That’s always great for people because they-
Dave: Good segue.
Kim: Yeah.
Dave: Good segue into our conversation. Rea & Associates over the years has been heavily involved in retirement plans, whether it’s in the third party administration process, retirement plan strategies, investment models and audits of the plan, and that’s where you’ve been living for a number of months and years on the audit side.
Kim: Yeah. I have done six audit seasons since starting at Rea on the employee benefit plan audit side, and I’ve been probably officially full-time in the employee benefit plan audit world for maybe a year now. We’re transitioning me out of our general audit world, but yeah, I-
Dave: Your specialty.
Kim: Yes, it’s my specialty now, but it was the very first audit I did out the gate when I started here, was I started in May and those ramp up all summer.
Dave: When I grow up and buy a company and have a retirement plan that needs audited, I’m going to hire you as my auditor.
Kim: I will take that.
Dave: I want an auditor with a personality.
Kim: Yeah. We’ll say that that’s a world that nobody expects, I guess, when we walk in. They look for the suits. Those are the scary people, but we try to make it fun, as much as possible. Obviously, you’re going to be pulling support and answering our questions, and that’s not always great fun, but we do like to talk to our clients and have some just normal conversations. If the weather is crappy outside, guess what? We’re going to talk about how crappy the weather is, and it’s not always business, business, business. We want to sit down, and we don’t want to just be one of the crowd.
Dave: Yeah. Well, and we’ve talked about that before, and that is your style, your audit style that you bring to the table that not only you’ve got to do the job as the auditor and make those calls that sometime are difficult, but you also bring fun, you bring suggestions, and you get people to relax around you that help benefit the plan, which moves the company forward, so congratulations on that.
Kim: Thanks.
Dave: You’ve done a nice job. Let’s talk about, and you’d mentioned that as the markets boom and there’s more money available, we may have more participants in a plan, so let’s talk about where we’re at today, or for having an audit of my retirement or benefit plan, how many participants do I need?
Kim: Participants is a very general term because participants for ERISA, the act that governs these plans, is actually not just somebody who actually is actively participating. It includes anybody who is eligible for the plan as well. So their count might not change too much because they could have a very large pool of eligible participants, even if they’re not actively contributing at that time, but in the future, they’re looking to change that role to make it just … are actually using the plan people.
So right now, you may have an audit requirement. In the future, that may go away, but with everybody joining, now you’re going to have a bunch more even actively participating people. You kind of have to watch that when it comes to your count, but if you’re doing it right, you should be encouraging your people to participate. That’s what it’s for.
Dave: Sure, sure.
Kim: But if it’s not, it doesn’t effect our audit count yet. It could, but that audit count is actually 100, so 100 people-
Dave: Okay, 100?
Kim: -is the key number here. Over 100, you require an audit. Under 100, you don’t. There’s a little bit of a caveat with that. There’s a specialty rule that says, “If you’re between 80 and 120, you can continue to file like you have in the past,” like the previous, the directly previous year, which means that say you had 95 and you filed as a small plan with no audit, and then you bump up to 105, they’ll let you continue to file as a small audit until you go over 120. Once you’re at 120, you’re really in the audit pool.
Dave: Okay. Let me see if I can quantify this a minute. Let me … There’s an example going around in my mind. Let me see if I can throw it at you and see if you can knock this one out of the park.
Kim: Okay.
Dave: Okay? Let’s say I have a plan that I have 52 participants in the plan, but overall I have 130 people who are eligible to participate. Now, from what you just said, I have an audit requirement.
Kim: Yes, you do.
Dave: So I have to look at the eligibility.
Kim: Yes. We’ve had a few clients that have been caught by that, where they have only … I’ve had one where they’ve only had about 30 people actively participating, so their plan asset level is very low, but in the end, they gave eligibility to almost every employee in their company, which was over 300. So because you granted them eligible access to the plan, you have an audit even though you only have 30 people in the plan at the time.
Dave: That’s an “uh-oh” then.
Kim: Yeah. They didn’t quite like that-
Dave: Well, sure.
Kim: But those are the current rules now.
Dave: Don’t shoot the messenger, right?
Kim: Yeah, don’t shoot the messenger when we’re trying to keep you compliant because if you’re not, there’s a lot of penalties with that too.
Dave: Sure. Let’s talk about those penalties for a minute. You had mentioned ERISA. We talk about the Internal Revenue Service and the DOL, or the Department Of Labor. It’s really the Department Of Labor that’s overseeing the retirement plans?
Kim: Yeah. The Department Of Labor is the main overseeing body for retirement plans. The IRS comes in because there is an annual form that you have to file, just like a tax form for any individual or business. There’s no tax due on that tax form, but the IRS kind of collects that. They review it too, but when it comes to governing these plans and determining whether or not you’ve met your base requirements, the Department Of Labor is the one that’s going to be checking you out and will determine whether or not you owe money of penalties.
Dave: You’re full of good news here.
Kim: I know right. Penalties, audits, all over the place.
Dave: As a trustee of the plan, I’ve got to worry not only about the Internal Revenue Service in my filing of the 5500, and I’ve got to worry about the Department Of Labor.
Kim: Yes, and because you are that trustee, you have that fiduciary responsibility, and if you haven’t pushed for those things, they can come after you too.
Dave: Oh no. I’m protected by the corporate veil. They can’t come after me, can they?
Kim: No. You are not protected by the corporate veil necessarily. That’s one of the reasons why you have to understand your responsibility when you take that role on of being some sort of trustee of the plan. You’re basically executing that role of protecting the plan, which includes filing on time and getting your audit when you have to, and all of those things. Not just, “Oh, I’ve made sure our participants have access,” and “Oh, I’ve made sure that we have the right insurance in place.” It’s all the other stuff as well.
Dave: If I find that I’m out of compliant to … Is it Department Of Labor pretty understanding? Can I make everything whole if I get my act together?
Kim: There are some compliance programs that are self-driven where you may pay quite a bit less than if the Department Of Labor finds you, so it’s always better that if you’re out of compliance and you discover that to bring it to them first. They will work with you as much as possible, but if you are aware and you just ignore that and then they find it and come for you, they can come for you pretty hard. They charge $11,000 a day for a deficient filing.
Dave: Let’s see, 365 times 11,000. That’s a large number.
Kim: That’s a large number. They do max it out currently at 50,000, but they might be able to get-
Dave: Per year? Could be.
Kim: I’m not sure if it’s per year or not. It could be a year, it could be-
Dave: 50K is a lot. I can hire a couple people-
Kim: For that amount of money.
Dave: -to make … Yeah.
Kim: To be working for you and producing product, yeah. Instead you’re going to pay the DOL.
Dave: So there might be an amnesty program maybe, kind of, sort of?
Kim: Yeah, to get you through that. It’s always best if you’ve noticed that to call, they do do anonymous inquiries, to be like, “Hey, this is my situation, maybe. Not really, but maybe this is my situation. What do I do?” They’ll give you some suggestions.
Dave: In my company, my employment range is they fluctuate on an annual basis, go up and down, so I’m in and out of the provisions or the regulations to file. Would I just be better off just having an audit every year?
Kim: They don’t preclude you from ever not having an audit. It’s always a good step. We encourage it. If you are actually considering it, most of the time most companies will just look at what they’re required to do and stick with that, but if you’re worried and you want to have that extra double check, and here we have an audit that came through, and at least look for any material misstatements or anything like that, and here we have a nice set of financial statements that you can review, it’s probably … You’re in a better position than you are without it. Yeah, definitely.
Dave: So with my plan, it’s a good idea just to sit down with you every year and see what we’ve got.
Kim: Mm-hmm (affirmative), always a good idea.
Dave: A little consulting there.
Kim: Yeah. Just as a note, that count that we discussed, I figured I’d throw this in there-
Dave: Oh goodness. Okay. You got-
Kim: That count-
Dave: I didn’t ask this question yet.
Kim: I know, right.
Dave: You’re just kind of-
Kim: I’m just going to take over.
Dave: You’re going to take over, okay.
Kim: I’m taking over. I just wanted to make sure that everybody was aware that that count is as of the first day of your plan year, so that’s why we kind of wanted to do this session here early in the year, to indicate, because many plans have a 12/31 filing deadline, so their plan year start on January 1st. January 1st, whatever your participant count is based on that formula will tell you for the 2018 year you’ve got an audit.
Dave: See, that fact was not in my notes. I think you hid that from me-
Kim: I may have hid it-
Dave: -so you could come out and act like you’re totally famous in this area.
Kim: Yeah, absolutely.
Dave: Let’s repeat that. It’s the count as of if you have a December 31 year-end, then on January 1st-
Kim: 1st, you will know whether or not you have an audit requirement-
Dave: You will know, and that would be the … Let’s say it was January 1, 2018, I would look at that number to determine if I need an audit for 2017?
Kim: No. It’s 2018.
Dave: It’s 2018, so it’s a look forward.
Kim: Yes.
Dave: You don’t look back.
Kim: Mm-hmm, so here’s the thing about that. We have a lot of plans that we actually have come to us over a year later. We’re talking for ’18, a general filing won’t be due on an extended basis until October 15th of 2019, and they’re coming to us on like October 1st of 2019 going, “Oops. We didn’t have the audit. We have an audit requirement.” There’s no reason to get to that point and not know. That could be a lack of communication between you and your record keeper, that could be just you as a trustee not watching, but you can know today.
Dave: Okay. So two facts, again we want to repeat, January 1, start of the plan year, and what is my magic number that I’m looking for?
Kim: 100.
Dave: 100, okay.
Kim: Very easy. January 1 and 100.
Dave: Okay. Well, we’ve got to make it easy for trustees. I think we have to talk a little bit about, a lot of the trustees are business owners, and they’re so involved in making money on the day-to-day basis and trying to navigate some of the business planning and some things that are going on in the business world. That’s probably tenth on their list to see if we have to have an audit of a retirement plan.
Kim: Yeah, it generally is not on the top of the list.
Dave: Because January 1, they’re watching football. They’re not counting payroll. They’re not calling HR.
Kim: No. That is why you get to the position where somebody has forgotten to arrange that lovely little audit, so the AICPA who governs us and the DOL, they’re always consistently saying, “Hey, you really, really need to focus on this, and you need to take time,” which may be why they originally set that requirement as of the first of the year to drive, giving you time to figure out if you have an audit requirement, and then finding the auditor that you need.
Dave: Let’s go back and talk a little bit about the Department Of Labor, the DOL. The DOL in recent years has been very, very critical of the public accounting profession and the audit quality of pension plan in employee benefit audits.
Kim: Yeah, it is one of their most criticized areas, I would think.
Dave: They are. In some cases, they’re correct.
Kim: Yes.
Dave: They’re correct.
Kim: And that’s one of the biggest things that they find when they find deficient audits is that the public accounting firm that performed the audit did not have the experience necessary to preform the audit under the guidelines because it is a specialty area where you need more than just your general audit experience.
Dave: How many retirement employee benefit plan audits will Rea & Associates do in 2018? Any feel for the number?
Kim: I believe it’s somewhere around 160 now.
Dave: 160?
Kim: After our merger with Walthall. Yeah.
Dave: That’s a pretty significant number. You’re involved in many, and you’re doing this full-time, so I’ve got to believe you know what’s going on. I think the DOL would just love to see your name on that audit report.
Kim: Yeah. My name doesn’t go on it, but Rea & Associates, we work pretty closely with the Department Of Labor. We have a couple of different contacts. They’re very aware of our firm, as well as we are part of the AICPA’s employee benefit plan audit quality center, which is a specific group that you have to meet certain requirements within your firm to be part of it, which includes educating the people who are doing these audits, having somebody on annual calls with the AICPA to make sure all updates are getting communicated. They keep a list of those firms that qualify, and Rea & Associates has been on that list as long as I know.
Dave: So not all firms are created equal when it comes to doing employee plan audits.
Kim: Yeah. In this world, no. Absolutely not.
Dave: In the few minutes we have left, let’s just, I want to pick off just a couple industry tidbits from what you’ve been doing, and again, you’re doing a great job of explaining the magic numbers, if you will. Are you finding, have you found any fraudulent situations in some of the audits that you’ve been involved in?
Kim: I have been lucky enough not to have a fraud situation on any of mine. I know our firm has faced that, but personally, we haven’t located anything like that.
Dave: But we see stories after stories of that going on.
Kim: Yep.
Dave: Again, I think it speaks to the quality of the audit procedures that may or may not be preformed. Again, an audit is not necessarily designed to find fraud, but if you see enough things as you’re going through, you may have to call a timeout and have some discussion.
Kim: Yeah. It’s not there, it’s not specific to the audits that were preformed, and we don’t say, “Hey, we’re looking for fraud,” but when you’re asking questions, you may note things. If we note it, we don’t just let it slide. We’re going to ask questions, we’re going to look further, and as soon as we know, we tell the appropriate level of management, “Hey, we have a suspicion here that something might be going on.” Luckily, at least on the employee benefit side, they hire a lot of external companies to help come in to do that record keeping and to hold your assets for you, so the risk is a little bit less, but it doesn’t mean it’s non-existent.
Dave: Thanks, Kim. Our guest today has been Kim Veal, audit specialist with a personality-
Kim: Yes.
Dave: -in Rea & Associates Lima, Ohio office. Thanks again for joining us on unsuitable today, Kim.
Kim: Thanks for having me.
Dave: And even though you’re located out of the Lima, Ohio office, you’ll travel all over the country because you have a great amount of passion for these employee benefit …
Kim: I’ll go wherever I’m welcome.
Dave: There you go. It’s nice to know that there are retirement plan audit experts out there who can take care of the company once an audit is triggered. Listeners, we’ve got some great resources on our website to help you along the way. As always, if you have any questions about retirement plan audits, you can always email us at podcast@reacpa.com. We will be sure to put you through to Kim or another member of the Rea team. If you haven’t already done so, don’t forget to subscribe to unsuitable on iTunes, or check out video from today’s episode on Rea’s YouTube channel. Thanks for listening. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.