Choosing an Auditor for your Retirement Plan

With summer upon us and fiscal deadlines approaching, you may be facing the daunting task of hiring an auditor. 

ERISA requires an annual audit on plans with more than 100 eligible participants. Choosing a qualified plan auditor helps insure that you meet your legal responsibility to file a complete and accurate annual report/return known as the Form 5500. This form must meet standards from both the Internal Revenue Service (IRS) and the Department of Labor (DOL).

The fees charged by CPAs for retirement plan audits can range from $5,000 to $20,000. It may be tempting to shop for auditing services on price alone, but this approach can have long term consequences.

If your Form 5500 is considered incorrect or incomplete, it is subject to rejection and Plan Sponsors could be charged substantial civil penalties. In some cases, the penalties could even double the initial cost of your audit.

• The IRS can charge you up to $250 per day, up to $150,000.

• The DOL can charge penalties of $300 per day until a complete Form 5500 is filed, up to $30,000 per year.

Full Scope Audits Are More Comprehensive Than Limited Scope Audits

The Limited Scope Audit option is available for retirement plans whose assets are prepared and certified by a bank or similar institution, or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as a custodian or trustee. The Limited Scope option relies on the trustee or custodian holding the assets to provide certification that the investment information is accurate and complete. In a Full Scope Audit, everything in the plan, including the investments, is subject to audit testing. The Limited Scope Audit limits the information that is audited.

The Limited Scope Audit composes 65% of retirement plan audits, but it does not protect the participants, according to the former  Assistant Secretary of Labor Phyllis C. Borzi. Speaking at a recent conference of Certified Public Accountants, Borzi called the Limited Scope Audit “practically useless.” She also told the attendees that the primary auditors who are most likely to produce substandard audits are those who think their rate of compensation is inadequate.

Choosing a Retirement Plan Auditor

Here is a list of things you should review before choosing an auditor for your plan:

• Your auditor must be licensed/certified – Federal law requires that the auditor you engage must be licensed or certified as a public accountant by a State regulatory authority.• Your auditor must be independent – The auditor you choose should not have any financial interests in the Plan or the Plan Sponsor. The auditor must be able provide an objective, unbiased opinion about the financial condition of the Plan.

• Your auditor should be experienced – According to the Department of Labor (DOL) one of the most common reasons for deficient accountant’s report is the failure of the auditor to perform test in areas unique to qualified plans. Hiring an auditor with training and experience in performing qualified plan audits will make it more likely the auditor is aware of the special auditing standards and rules that apply to qualified plans. 

Check References Before Engaging an Auditor

• Ask about their work with other qualified plans.

• See if they are a member of AICPA’s Employee Benefit Plan Audit Quality Center. The Employee Benefit Plan Audit Quality Center helps auditors meet the challenges of performing quality audits in the complex areas of qualified plans.

• You may also wish to verify with the correct State regulatory authority that the auditor’s holds a valid, up-to-date license or certificate to perform auditing services.

When a Less Experienced Auditor Is Assigned to Your Plan

There will be some instances when a less experienced auditor may be assigned to perform the audit of your plan to reduce audit costs. When this happens, make sure that a more experienced manager or partner will be reviewing their work.

The Engagement Letter

Once you have chosen an auditor, a contract also known as an “engagement letter” will be provided by the auditor for review and approval.

The letter of engagement from your auditor should include:

• The work to be performed.

• The timing of the audit.

• The responsibilities of both parties.

Review the letter carefully and resolve any questions prior to engaging the auditor for a smoother auditing process. Many of our clients at EJReynolds, Inc. undergo an annual audit and we work with several quality audit firms. If this process is new to you, or if you are interested in speaking with a new auditor, please feel free to ask your plan’s administrator for a list of referrals.

IRS Revenue Notice 2020-50 Provides Guidance On Coronavirus Related Distributions

As all should be aware of by now, on March 27, 2020, the President signed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act into law. This legislation provides relief for those suffering financially and physically from the COVID-19 pandemic. Friday, June 19, 2020, the IRS issued Notice 2020-50 (the “Notice”), which provides expanded guidance on Coronavirus-Related Distributions (“CRDs”) and the CARES participant loan rules.

In today’s EJReynolds Blog, we will focus on the guidance on CDR’s specifically. Loan provisions are beyond the scope of this article.

Expanded Definition of a Qualified Individual

The original language of the CARES Act defined Qualified Individuals (“QIs”), i.e., those that may take advantage of the liberalized distribution and loan rules, to be:

  • A participant who is diagnosed with the virus.
  • A participant whose spouse or dependent is diagnosed with the virus; or
  • A participant who has suffered financial loss from the pandemic because he or she:
    • Was laid off, furloughed, quarantined, or had reduced hours.
    • Cannot work due to the unavailability of childcare because of the pandemic; or
    • Owns or operates a business that has had to close its doors or reduce hours; and
  • An individual with other factors as determined by the Secretary of Treasury.

The last item allows the IRS to make changes as deemed necessary, and the Notice grants relief not only to these individuals, but adds the following categories to the definition of QI:

  • A participant whose pay or self-employment income is reduced, or who has had a job offer rescinded or a new job’s start date delayed due to the pandemic.
  • A participant whose spouse or a member of his/her household has suffered the following financial effects due to the pandemic:
    • Layoff, furlough, quarantine, reduced hours, or reduced pay or self-employment income.
    • Cannot work due to childcare unavailability; or
    • Has had a job offer rescinded or the start date of a new job delayed.
  • A business owned or operated by the participant’s spouse or a member of the participant’s household has closed or reduced hours.

For this purpose, a “member of the household” is someone who shares the QI’s principal residence. Presumably, this could include a significant other, roommate, other relative, or anyone else with whom the individual is sharing a home. This expanded definition grants the QI Status to many individuals who may not have been directly impacted by the virus, but still have suffered financially.

Guidance for Employer-Sponsored Retirement Plans

The Notice clarifies that the CRD and CARES Act loan provisions are optional. A Plan Sponsor may elect to implement the provisions in full, in part or not at all. Regardless of adoption, participant distributions of most types may be treated as CRDs on their personal tax return, if the participant meets the necessary requirements, and the participant may receive a refund if the mandatory 20% withholding was in excess of the actual amount owed.

Employer Reliance on Employee Certification

The Notice emphasizes that the Plan Sponsor can rely on the participant’s self-certification that he or she is a Qualified Individual, unless the Sponsor has actual knowledge to the contrary. The IRS notes that “actual knowledge” does not mean the Administrator must take additional steps to determine whether the participant meets the requirements. For this purpose, the IRS provided a sample self-certification that is deemed to be acceptable. The Certification simply provides “I certify that I meet one of the following conditions …” and then outlines the categories of QIs. There is no need for the participant to specify which category applies to him/her. The lack of the requirement to certify the specific reason why someone is qualified may also avoid any privacy concerns about asking about the QI’s health.

The Notice goes into significant detail about the tax reporting and payment rules relating to CRDs.

What Is considered a Coronavirus Related Distribution?

The Notice clarifies that a CRD is almost any distribution to a QI (not to exceed $100,000) made during 2020. It is possible that the employer and the participant may have different thoughts about whether a given distribution is a CRD. While a Plan Sponsor may choose not to amend its plan to provide for CRDs, the participant is not obligated on his or her tax reporting by the way in which the plan treated the distribution. If the participant meets the definition of a Qualified Individual, the QI can designate any distribution amount as a CRD for his or her taxes. These are discussed below.

From the Employer’s Perspective

A plan must report any CRD of Form 1099-R as taxable income and place the appropriate distribution code in Box 7 (even if the amount is recontributed). The distribution will either be reported as a Code 2 (early distribution, exception applies); or (2) Code 1 (early distribution, no known exception). The first option is more consistent with an employer that recognizes that the distribution is a CRD. If a plan acknowledges that the distribution is a CRD, it is not an eligible rollover distribution from the plan’s perspective (even though the participant can roll it over). This means that the amount is not subject to the 20% mandatory withholding (waivable 10% withholding applies), and the participant does not need to receive a “Special Tax Notice Regarding Plan Payments”.

Participant Designations of CRDs

A QI designates a distribution as a CRD by reporting the distribution on his or her 2020 tax return and filing Form 8915-E (which the IRS indicates will be available before the end of this year). A CRD reported on Form 8915-E qualifies for the waiver of the 10% premature distribution tax under Code section 72(t), the spreading of the income from the distribution over three years (if desired), and the ability to recontribute any portion of the distribution to an eligible retirement plan within three years and have it treated like a nontaxable trustee-to-trustee transfer of the funds. Form 8915-E is also used to report amounts includible in income or recontributed in years after 2020.

The Three-Year Spread of Income

The QI may choose to include the total income from the CRD in 2020 (i.e., when received) or ratably over 2020, 2021, and 2022. Once the QI timely files his or her 2020 taxes reflecting one of those two methods, it cannot later be changed. All CRDs received must be treated the same for this purpose.


Amounts recontributed prior to the tax return due date (including extensions) for a given year may be reflected on that return. For example, a participant who recontributes a CRD on or before his/her extended 2020 tax return due date of October 15, 2021, may reflect the reduction in taxable income from the recontribution on that return. IRA owners are normally permitted to make only one IRA rollover per calendar year. The recontribution of CRDs to an IRA, notwithstanding the fact that they are to be treated for tax purposes as rollovers, does not count against that one-per-year limitation.

Recontributions are treated as follows for tax purposes:

  1. 1-year income inclusion method, recontribution made by that year’s tax return due date: The entire CRD is shown as income in 2020; the entire repayment is shown on Form 8915-E for 2020. The QI recognizes no taxable income (or only that amount of CRD more than the recontribution) for 2020 from the CRD.
  2. 1-year income inclusion method, recontribution made in a later year: The entire CRD is shown as income in 2020. When the recontribution is made, the taxpayer must file an amended 2020 return with attached Form 8915-E, and the income from the CRD on the 2020 return will be adjusted accordingly.
  3. 3-year income inclusion method, recontribution of all or a portion before 2020 taxes are filed: The 2020 tax return will reflect taxable income equal to one-third of the CRD received during the year (up to the $100,000 maximum). Form 8915-E that is filed with the 2020 return will reflect any recontribution up to the tax return due date. If the recontribution equals or exceeds the amount of income for 2020, there will be no net taxable income from the CRD in 2020. If the recontribution exceeds the 2020 income, the offset to income will be applied in 2021 (or, if necessary, 2022).
  4. 3-year income inclusion method. Recontribution made in years after 2020 taxes are filed: If repayments occur after income from CRDs has been claimed (and appropriate taxes paid), the QI has a choice of carrying the income offset forward or backwards.

The Notice also included guidance on expanded loan features under the CARES Act, which we will dive into more in future writings. If you have specific questions related to Coronavirus Related Distributions, please reach out to your Plan Consultant at EJReynolds, and may you continue to keep healthy and safe.

SBA Payroll Protection Program – Forgiveness Update

Over the past months, EJReynolds have discussed the many different aspects of the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Small Business Administration, along with the Treasury Department, are tasked with the oversight of the PPP Loan and any operational forgiveness of the proceeds. On June 5, 2020, the Payroll Protection Program Flexibility Act was signed into law, making changes to the program and clarifying other aspects.

Highlights include:

Extension of coverage period. Under the CARES Act and subsequent guidance a borrower must use the funds within eight weeks after the loan origination. The PPP Flexibility Act extends this period to the earlier of 24 weeks after the origination date or December 31, 2020. Borrowers who received those funds prior to June 3rd have the option to keep the original eight-week period or extend the coverage period for 24 weeks.

Adjustment of non-payroll cost threshold. Previous regulations issued by the U.S. Treasury Department indicated that eligible non-payroll costs couldn’t exceed 25% of the total forgiveness amount for a borrower to qualify for 100% forgiveness. The PPP Flexibility Act raises this threshold to 40%. (At least 60% of the loan must still be spent on payroll costs.) An important caveat is that if the 60% threshold is not met, none of the loan is forgiven.

Lengthening of period to reestablish workforce. Under the original PPP, borrowers faced a June 30, 2020 deadline to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020. Failure to do so would mean a reduction in the forgivable amount. The PPP Flexibility Act extends this deadline to December 31, 2020.

Reassurance of access to payroll tax deferment. The new law reassures borrowers that delayed payment of employer payroll taxes, which is offered under a provision of the CARES Act, is still available to businesses that receive PPP loans. It won’t be considered impermissible double dipping.

Payback Period. New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.

Additional Exceptions. The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers leeway if they could not find qualified employees or were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions.

Important note: The SBA has announced that, to ensure PPP loans are issued only to eligible borrowers, all loans exceeding $2 million will be subject to an audit. The government may still audit smaller PPP loans, if there is suspicion that funds were misused.

To read our last blog on the Small Business Administration Paycheck Protection Program, click here

Read our past blogs for more information.

For the Coronavirus, Aid, Relief and Economic Security (CARES) Act, click here.

For FAQs on the CARES Act Coronavirus-related distributions, click here.

For the FAQs on the Changes to Participant Loans under the Act, click here.

For FAQs on Other Miscellaneous Items under the Act, click here.

We hope that you, your family and friends continue to be safe and healthy. As you can see, there are constant changes in the market. We anticipate the IRS and DOL will be issuing additional guidance in the coming months and we will be updating our blog section frequently as more information is made available. As always, we are here to help you and your plan participants navigate through these difficult times. If you have any questions, please contact us.