Podcast: Data Mining Form 5500
Dave Dacey, CPA, Withum Partner and Practice Leader of Employee Benefits Plan Services, interviews Mike Kulick, CPA, MBA, Withum Partner, and ERISA expert, to discuss a new regulatory development in the world of employee benefit plans that should cause plan sponsors to take notice – data mining Form 5500.
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Speaker 1:
[inaudible].
Speaker 2:
Thank you for joining us for this segment Withum sounding board, practical audio-based information for today’s on the go professional production of Withum Smith and Brown PC.
Speaker 3:
I’m Dave Dacey with Withum’s employee benefit plan services group and joining me today is Mike [inaudible], one of the leaders of Withum’s employee benefit plan services group. Thanks for joining me today, Mike. For today’s podcast we’re going to be discussing data mining form 5,500 a new regulatory development in the world of employee benefit plans that your cause plan sponsors to take notice. Thanks for having me today, David. I’m looking forward to walking through this topic with you. This is a topic affecting virtually all large retirement plans and it really hasn’t gotten a lot of press. What exactly is the data mining initiative for form 5,500 yeah, you’re right Dave. You know everyone’s heard about big data and analytics, but surprisingly there hasn’t been much talk about how it’s being applied by the DOL and particularly in use with form 5,500 so I think it makes it a little bit of sense.
Speaker 3:
At least get a little bit of background and how the DOL is doing this. It really started all back in 2009 where the DOL created an electronic database where all of the form 55 hundreds were filed. You know back in 2009 they created this EFS two database. And since then for all plan years, I think getting after a January 1st, 2010 they’ve been required to be filed on this electronic database. So all the information in your 5,500 is then included up here and it’s searchable by the DOL or you know anyone else who has access to that information. So we have one giant 5,500 database that’s been around since the beginning of 2010 and it easily accesses information for thousands and thousands of retirement plans. And there’s specific data mining techniques that the department of labor is utilizing. And that’s that for fingertips. Yeah, no, that’s exactly right. And you know really where this becomes a real benefit for the DOL is with large plant filers.
Speaker 3:
And when I say large plan sponsors, I’m talking about plans that have over 120 participants and they’re required to attach odor to financial statements to those form 5,500 filings. So really what that does, it gives the DOL the ability to cross reference the information in the audited financial statements with that that’s been filed in the 5,500 which is really a powerful tool if they’re looking for inconsistencies or certain items that they expect to be reported on the 5,500 cross-referenced that to make sure that it’s in the financial statements as well. So I guess a really important message point from this whole data mining initiative is plant fiduciaries, but better start watching out because the actions of what they put in their form 5,500 and in their order, the financial statements are really on public display for everybody to say, Oh yeah, absolutely. That’s exactly right.
Speaker 3:
And you know, when we talk about them stepping up these DOL initiatives, I mean it’s a real thing. I mean you go back to 2013 the at that point hired over a thousand new employees specifically tasked with this, uh, issue of enforcement. So, you know, they’re getting keyed up on how to use these data analytics. They’re out there and they’re taking a harder look at this right now. It’s interesting. You know, Mike, let’s, let’s talk about some of the DOL initiatives. What are you currently sitting out there? Um, you know what, there’s a number of them out there. An initial question because I can’t say for sure exactly what they’re doing, but we’ve had some conversations with people within the DOL. We are, we know they are data mining. Um, so a lot of it at this point is speculation, but it’s all within the realm of what they can certainly do.
Speaker 3:
So a couple of the areas where, you know, if I was sitting in that seat right now, which is really easy to do, and I’d be taking a look at order qualifications in licensing, I’d be looking at the schedule C for a few reasonableness plan, compliance issues and breaches of fiduciary duty. They can all be insights into all these areas can be gleaned from taking a look at various different components of the 5,500 you know, and you said some of the suspect violation but some of it’s not. There are actually initiatives that the DOL is currently doing and I, and I know some of those exists in the auditor qualification and licensing arena. Maybe you could talk for a second about what’s going on there. Yeah, no that’s a good point. When I, when I say some of it’s speculation because the DOL has come forward and they said that they are doing this and you know one area is with that order qualifications and where it’s interesting it’s not just the DOL alone doing this, they’re also working in conjunction with [inaudible] CPA.
Speaker 3:
So for example on the schedule H of the 5,500 plan sponsor has to list the plan auditor. Then in the financial statements that are attached to that form 5,500 the auditor is listed there along with their address and state of residence. So that ordered or who’s picking a look at the financial statements that are attached to 5,500 it needs to be licensed in the state where they’re performing that audit. So it’s a pretty easy thing with this stamp, that analytics for the DOL to go in, cross-reference that order’s name to their state and make sure that they’re licensed in that state. If they’re not licensed, they could drill back, throw up that audit, and then force that plan sponsor to go back and get the plan reordered it, you know, and that’s really interesting because we were actually the recipient of a new plan where the auditor wasn’t even licensed and that’s what they did.
Speaker 3:
They did a matching of the address on form 5,500 with the auditor who was ordering that plan and working with the national accountancy state board match back and forth, determine that that would affirm wasn’t licensed. And, and the DOL said you have to get another water. And we were honored as a result of that. And that’s it. I mean it’s real. They’re out there, they’re looking at it and luckily you know, we were of benefit to show you something like that. Let’s talk about something a little bit more basic. Maybe, maybe you can explain the 81 20 rule and how form 5,500 can identify that real quick. Yeah, sure. Well, Hey, you know as most people know, the 81 20 rule, what that means is that after a plan reaches 120 participants, you’re required to have an audit of the financial statements attached to the 5,500 and you know that that makes them one of those large plan sponsors that we were talking about a little bit earlier.
Speaker 3:
So if you take a look at form 5,500 right on page two you have to list the number of participants in a plan. So think about it this way. The DOL is now using these data mining techniques. They can go in, take a look at that form 5,500 throw right to the line on page two where it says participants at the beginning of the year, if that number is on over 120 the expectation is that they’re going to have audited financial statements attached. If they’re not there and that’s an automatic red flag that goes up and they can be taken a look at that particular plan sponsor. So essentially the department of labor has an algorithm, a routine that searches this out and comes up with a hundred percent exceptions. And those plans that don’t attach board or the financial side 100% that’s interesting. So we talked about that. We talked about licensing.
Speaker 3:
I know there’s some new initiatives in the world of peer review. Maybe you could talk about that for a second. Sure. As far as peer review goes, if you’re an audit firm and you’re doing audits of employee benefit plans, you’re required to be peer reviewed. So another area that the DOL is working with and they’re working with the AI CPA here, is to take a look and matching the auditor who is signed on digital age, the form 5,500 also the firm that signing the audit report that attached through the 5,500 and making sure that firm has been peer reviewed and they’re in fact qualified to be doing audits of employee benefit plans. And as we talked about, you know, DOL initiatives and enforcement, one of the areas that they’re really looking for is what they have term dabblers, which is firms that are just doing one or two, one off audit reports of these employee benefit plans.
Speaker 3:
And they’re really not qualified to be doing so. So they may not be doing a quality audit and that’s just another trigger, an area where the DOL can take a look. And I mean from doing this data money. Cool. You know, speaking of the world peer review, Mike, you mentioned the concept of a dabbler. You know, I think the AICP refers to it as, as low volume auditor’s of high risk engagements. And they do consider a Whistler engagements to be high risk because of their regulatory implications. Perhaps you can maybe talk about some of the AI CPA initiatives in that regard as it relates to these low volume orders on high risk engagements. Sure. So you know the ASP is taking a harder look at these Adler’s if you will. And the thing with the quality of their audits really are, so when they go in for the peer review process, they’re taking a look to make sure that all the required audit procedures are being performed.
Speaker 3:
Also that they’re using the proper audit report and really if they find some issues here, what they can do is engage a third party to perform a Prius issuance or a post issuance review of engagements in the future. They could have these firms periodic report to the report acceptance body and really just all do this. I was in a condition of accepting peer review because obviously all these firms needs to be peer reviewed if they want to continue ordering these plans because of some actual licensing requirement, they have to have a peer review to keep their license. So this does have some teeth. Oh yeah, absolutely it does. Okay, interesting. And let’s change gears for a second. Let’s, let’s talk about fees and maybe this is somewhat speculation, but what are the DLL doing with respect to form 5,500 and with respect to fees? Sure.
Speaker 3:
So you know with respect to fees, obviously they’re narrowing in down on schedule C of the form 5,500 you know, there’s a number of different questions that are asked within schedule C that you know, could trigger some additional followup or inquiries from the DOL. For example, on schedule C, there’s a question that asks if the plan sponsor is excluding a person because they received only indirect compensation, what that box is checked. Yes, no, there should be additional information that’s provided and the DOL could look into that person to see if they really received eligible compensation or not. So this is really a high level look from the DOL perspective, which they can reduce to an algorithm to identify whether a plan’s got appropriate processes. If, if they, if they checked yes to that question, there better be more information in subsequent sections of the schedule C. otherwise it speaks to whether they really have an appropriate process in place.
Speaker 3:
Right? Cause the controls could be folky there and they’re missing the, the appropriate response. And if the subsequent information is not attached, these algorithm, you know, they’ll, they’ll identify which box is checked and they’ll be searching for that additional information. What about prohibited transaction? I know there’s different questions that are asked on schedule C, maybe you could talk about that. Yeah, I think you’re probably referring to question two on schedule C, which asks if the person’s receiving direct or indirect compensation is an employee or an employer or another party and interest. So if that box is flags or chest, it could be indicative that there is a prohibitive transaction there because the plan is receiving compensation or giving compensation to an employer and employee, that is typically a sign. There’s a potential prohibited transaction. So going back to your point of these different algorithms that the DOL can run, they’ll search down onto that, you know, question on schedule C and see if that box is checked and do the appropriate followups.
Speaker 3:
And one that I really find interesting is there’s a question and schedule C for service providers who refuse to provide information. Maybe you can talk about that. I mean if that box is checked days, I mean that’s clearly a tremendous red flag there. I mean it raises a lot of questions. You know, why would the sponsor even want to be working with the service provider that’s not providing this type of information? And you know, if they are, then it really could infer, you know, a lack of fiduciary review or plan governance, which is a sticking point as you know right now. And something that all these plans sponsors should really take the responsibility for and take seriously. So our, our talk together starting to come to a close. Mike, maybe we can finish up with just a couple of examples of things that the department of labor can learn pretty quickly in the area of fiduciary compliance.
Speaker 3:
Yeah. Uh, absolutely. So when they’re looking at fiduciary compliance, a lot of the areas where the DOL is going to be focusing in on is really on schedule H and part four specifically of the schedule dates where they ask you a series of questions. And what this really so compelling is that the DOL has the ability to cross reference the information that’s in the financial statements to the responses that are on the questions and schedule H part four. So for example, if they wanted to take a look for timeliness, the contributions, they could run a scan through the financial statements to see if there’s a footnote in there that indicates late contributions. You know, if there was, there should be, those contributions should have been made up, interest should have been paid. And certainly that box on schedule, each of the 5,500 should have been checked indicating that there were late contributions to the same extent.
Speaker 3:
They could run a search through those audited financial statements that are attached and look for the word forfeitures. So if the plan has forfeitures, they should be used within one year. So if the deal ever did take the enforcement to the next level and really take a look at this, this isn’t the area where they’d have in the back of their mind to look down to further enhance their enforcement efforts. You know, this is really a very interesting topic and we could probably talk about this for hours because we’ve only kind of scratched the surface here. If you think about it, we’ve talked about it from the perspective of what the department of labor has in place, but there was other organizations out there too that can mind them 5,500 databases as easily as the DOL can as long as they have the initial yes, public information is exactly right.
Speaker 3:
So I guess I’m, I know we’re running out of time, but just one last question. How does our audience learn more about this? Is there anything available on [inaudible] dot com but you ask Dave because I’m actually in the process right now about drafting up an article on to, again, speaking about today, you know, it will be posted to [inaudible] dot com in the near future, so if anyone’s interested, they’d like to learn a little bit more. Please go to [inaudible] dot com well, I’m sure you’re going to get some hits in that regard, Mike, because this is truly a fascinating topic. You know, thanks for sharing your time with us today. It is greatly appreciated. Thanks Dave.
Speaker 2:
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