Many people (including many accountants) don’t know that DOL’s definition of independence is more strict than the accounting profession’s definition.
"So, what?," you say.
Well, it could be a big deal if the DOL decides your CPA is not independent under DOL rules. In that case, the 5500's you filed for all these years did not have an opinion from an independent qualified public accountant ("IQPA"), and could be rejected, leading to massive non-filer penalties. Then, DOL might make you hire another CPA to audit all those years again.
Under DOL regs. 2509.75-9, an accountant is not independent if he or a member of his firm had, or was committed to acquire, any "direct" or "material indirect" financial interest in the plan or the plan sponsor, or was connected as a promoter, underwriter, investment advisor, voting trustee, director, officer, or employee of the plan or plan sponsor. (An exception allows the CPA to hire former employee/officers of the plan or sponsor.) That much of the DOL rules is similar to the AICPA’s definitions of independence.
However, DOL also considers independence impaired if the accountant or a member of his firm "maintains financial records for the employee benefit plan."
There’s no guidance on what constitutes maintaining financial records. So, which of the following is enough to impair your accountant’s independence?
1. Your CPA posts the general ledger from a checkbook maintained by your staff.
2. Your staff posts the general ledger, but your CPA maintains the investment ledger.
3. Your CPA provides payroll service to the plan.
4. Your CPA has an actuary on staff, and he provides actuarial services to the plan.
DOL couldn’t rule on each example for me, because "each case depends on its own unique facts and circumstances." As a guide, however, DOL does not like to see someone "auditing his own work."
There is a little guidance: #4 does not impair independence, because this is specifically allowed under the regulations (but the regs. warn you this could be a prohibited transaction). Everything else needs to be reviewed carefully.
If DOL does challenge independence, it can reject your 5500 filings as "incomplete" , and propose nonfiling penalties of $1,000 per day (limited to $30,000 per year, or a total of $450,000 per fund if DOL rejects the last 5 years). Typically, DOL would allow you a short period to correct the nonfiling, by hiring another CPA to audit all those years, and file new 5500's. If you are able to file new audits that are acceptable, DOL might reduce the nonfiler penalty; in a best case scenario, maybe as low as 5% of the original proposed penalty..
If you want to address the problem before DOL gets involved, you face a serious dilemma. The "by the books" correction is difficult and expensive, but no other method of correction can protect you from those massive nonfiler penalties. If you want to discuss your options, call us.
What should you do? Have your fund’s attorney review any multiple services provided by your CPA for compliance with the DOL regs. Be especially alert for any appearance that your CPA is auditing his own work.
