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Payroll Deduction IRA vs. Employer-Sponsored IRA

Is there a difference between payroll deduction IRAs and employer-sponsored IRAs?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New Jersey is representative of a common inquiry related to workplace IRAs.

Highlights of the Discussion

Payroll deduction IRAs and employer-sponsored IRAs are similar, but they have important differences. A key difference is level of involvement by the employer.

The IRS views payroll deduction IRAs as arrangements that merely allow employees to make contributions to IRAs by having amounts deducted from their paychecks by their employers which are then directed to IRAs for deposit. There are no employer contributions. All the standard IRA rules apply. Further, if a payroll deduction IRA program follows the IRS’s safe harbor rules for structure, it is not considered an employer pension plan and, therefore, exempt from the rules of the Employee Retirement Income Security Act of 1974 (ERISA) (see DOL Reg. 2510.3-2(d) and Interpretive Bulletin 99-1).

Generally, a payroll deduction IRA is not considered an ERISA plan if

  1. it is voluntary;
  2. there are no employer contributions;
  3. the employer does not endorse a particular IRA provider (although limiting the number of IRA providers is permitted within limits); and
  4. the employer receives only reasonable compensation for administrative services.

In contrast, IRC Sec. 408(c) and IRC Sec. 219(f)(5) allow employers and employee associations to establish employer-sponsored IRA arrangements and make employer contributions to employees’ IRAs or a common trust fund that separately accounts for the employees’ contributions. Employers who want an IRS ruling on their employer-sponsored IRA plans may file IRS Form 5306, Application for Approval of Prototype or Employer-Sponsored Individual Retirement Arrangement. These are savings arrangements other than simplified employee pension (SEP) plans under IRC Sec. 408(k) or savings incentive match plans for employees (SIMPLE) IRA plans under IRC Sec. 408(p). Consequently, all the standard IRA rules apply.

Any amount contributed by an employer to an IRA that is employer sponsored under IRC Sec. 408(c) shall be treated as payment of compensation to the employee (other than for a self-employed individual), deductible by the employer and subject to Social Security and unemployment taxes. Employees may be able to deduct such contributions under the standard rules that apply for the deductibility of traditional IRA contributions [Treasury Regulation 1.219-1(c)(4)]. In this scenario, the employer-sponsored IRA arrangement is considered an ERISA plan for certain purposes, for example, they are subject to limited Form 5500 Reporting (See “IRA Plans” IRS Form 5500 instructions).

Conclusion

While payroll deduction IRAs and employer-sponsored IRAs have similarities, the DOL views them differently, depending on the level of involvement by the employer.

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Form 5500 Limited-Scope Audit

“What is a Form 5500 limited-scope audit, and how does a plan qualify for one?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related filing Form 5500, Annual Return/Report of Employee Benefit Plan.

Highlights of Discussion

Generally, ERISA requires administrators (the plan sponsors in most cases) of employee benefit plans  with 100 or more participants to have full scope audits of their plans, conducted by an independent qualified public accountant (IQPA), as part of their obligation to file an annual Form 5500 series of reports with the Department of Labor (DOL) and IRS. The IQPA is tasked with conducting an examination of all financial statements of the plan, and of other books and records of the plan as may be necessary, to enable him or her to form an opinion as to whether the financial statements and schedules conform to generally accepted accounting principles and standards.

Under ERISA Section 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the IQPA not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Brokerage firms and investment companies generally would not meet the eligibility requirements for a limited scope audit. However, if those types of firms have established separate trust companies, such trust companies, potentially, could meet the requirements to be a qualified institution for this purpose. A 2002 DOL information letter provides more insight into what constitutes a qualified institution. It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an IQPA’s examination have been satisfied, and only the plan sponsor can request the IQPA to limit the scope of the audit. The American Society of Certified Public Accounts has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

The DOL attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[1] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

Conclusion

While Form 5500 limited-scope audits may be less costly and time consuming up front, if inappropriately used or incorrectly done, they could result in a greater expenditure of money and time in the long run.

[1] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

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“Off Again” Form 5500 Compliance Questions

“For the past couple of years, the IRS has added some extra compliance questions to the Form 5500 and related schedules—but told plan sponsors not to answer them. What is the current status of these questions?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to Form 5500.

Highlights of Discussion

You are correct. For the 2015 and 2016 filings, the IRS added compliance questions to Forms 5500, 5500-SF, 5500-EZ and Schedules H, I and R. But, for each year, the IRS later instructed filers not to answer them. The IRS removed these additional questions from the 2017 version of Form 5500 and related schedules, which plan sponsors will file later in 2018 (see the 2017 Instructions to Form 5500).

“The IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the [2017] Form 5500 and Schedules, including preparer information, Schedules H and I, lines 4o, and 6a through 6d, regarding distribution during working retirement and trust information, and Schedule R, Part VII, regarding the IRS Compliance questions.”

Be aware, however, that the DOL/IRS/PBGC are working on a long-term project that would improve and modernize Form 5500 in the areas of financial and other annual reporting requirements, and make the investment and other information more data mineable. We expect more updates to come in 2018.

Conclusion

The on again, off again additional IRS compliance questions on Forms 5500 are officially off the 2017 version of the forms that plan sponsors will file in 2018. There is more to come regarding a long-term project to overhaul the forms.

 

 

 

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