As you look toward your upcoming employee benefit plan audit for the 2020 plan year, it will be critical to review the impact both recent legislation and the COVID-19 pandemic may have had on your company’s plan. While there are numerous areas your auditors will focus on as part of their procedures and testing, below outlines eight key areas to pay special attention to this year.

1. Eligible Compensation

Eligible compensation will be considered to ensure you used the proper wage rates to calculate contributions and that you followed the definition of compensation as stated in the plan document.  Pay particular attention to forms of compensation that may have been impacted by COVID-19 and whether or not those are considered eligible plan compensation under the definition in your plan document.

2. Breaks in Service

Breaks in service may also impact a participant’s eligibility in the plan. Pay attention to and document when an employee is no longer eligible to participate in the plan. Be sure to consider what happens to service time during a furlough/layoff.

3. Employee Terminations/Partial Plan Terminations

If more than 20% of employees were terminated during the year, the plan may have a partial plan termination. This would impact distribution amounts, as a partial plan termination requires 100% vesting for the affected participants. If the company laid off or furloughed a portion of employees, that group may not count toward determining if a plan was partially terminated, depending on the length of the furlough and if it impacted employees’ vesting. Additionally, the Consolidated Appropriations Act, 2021, enacted in December 2020, provides a temporary rule preventing certain partial plan terminations depending on specific dates relating to the pandemic. You will need to analyze the specific facts and circumstances related to your plan to determine whether a partial plan termination has occurred.

4. Contribution Timing

As contributions are always an area of consideration, the plan sponsor should be aware of the time it takes to submit contributions to the third-party administrator after withholding funds from employees’ wages. The Department of Labor requires participant contributions to be remitted to the plan as soon as administratively feasible. As a result of a disruption to operations, you may have delayed submitting plan contributions to the third-party administrator; however, that could result in delinquent contributions being reported on your financial statements and Form 5500 filing. 

5. Suspension of Employer Contribution/Match

If you suspended your employer contribution or match due to the pandemic, be certain you documented the proper approvals to do so. If your plan has a fixed formula match, make sure you have completed, and maintained with the plan records, the related amendments to the plan document or adoption agreement so your auditors can review.

6. Participant Deferral Changes

Due to the pandemic, you may have noticed more frequent activity surrounding participant deferral changes. You must be able to provide supporting documentation for those changes and to demonstrate they were made properly and timely.

7. CARES Act Impact

Your plan may have been impacted by the CARES Act, as it included optional provisions for individual plan sponsors. As many of these changes did not require amendments to be made to the plan in the year they were implemented, you will need to discuss with your auditors which of these provisions your plan did in fact adopt and be able to demonstrate you were following CARES Act provisions:

• Through December 31, 2020, certain plan participants were allowed to take penalty free “coronavirus-related distributions” from eligible employee benefit plans up to $100,000 that met specific criteria. Formal documentation of the need was not required for these specific distributions; however, as the employer you should be prepared to answer inquiries in relation to employees taking these special distributions, if these are selected for audit testing. These distributions also provide the option for the participant to repay the amount to the plan over three years following the distribution as rollover contributions. Controls should be in place to determine that the plan document allows the repayments and can be treated as rollovers under the CARES Act.
• For plan participants who borrowed amounts from the plan between March 27, 2020, and September 23, 2020, the maximum threshold was increased to the lessor of $100,000 or 100% (up from $50,000 and up to 50%) of a participant’s vested account balance. Participants had the option to delay repayment for one year. Auditors will likely seek to determine if your plan allowed the new loans.
• For defined benefit plans, the CARES Act delayed the timing of the required minimum contributions until January 1, 2021. If you suspended these payments, discuss with your auditor the proper disclosures for your plan’s financial statements.

8. SECURE Act Impact

Your plan may have also been impacted by provisions of the SECURE Act. A couple of the most significant implications were changes to the required minimum distributions and the impact on long-term part-time workers and their eligibility to participate in 401(k) plans.

How Can Plan Sponsors and Administrators Best Prepare?

Reach out now to your third-party administrators, ERISA attorney, recordkeeper and other service providers to discuss these areas, how your benefit plan may be impacted and to ensure your plan is compliant — or determine the steps necessary to come into compliance — before your 2020 plan audit.

Contact Trinette Simon at tsimon@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.