Hot Topics to Consider when Auditing Human Resources. Sharon Whittle Carolinas Compensation and Benefit Consulting Practice Leader

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1 Hot Topics to Consider when Auditing Human Resources Sharon Whittle Carolinas Compensation and Benefit Consulting Practice Leader December 9, 2011 Grant Thornton LLP. All rights reserved.

2 Why Audit in the Human Resources Area? Big Spend = Compensation + Benefits + Vendor spend Risk what types? Comp/Benefits/HR 1

3 Why Audit in the Human Resources Area? Risk regulatory, compliance, employee litigation, breach of confidential information, reputation of company, financial exposure Comp/Benefits/HR 2

4 Who has performed Audits in the Human Resources Area? Areas audited? Experiences? Comp/Benefits/HR 3

5 What are some Audit indicator signs? Change in personnel No change in personnel Change in vendors Benefit Audit had disclosures/findings Change in systems Change in regulations Made an acquisition Major benefit plan design changes Multiple site administration Significant downsizing Others? Comp/Benefits/HR 4

6 What is the purpose of an Audit? Look for potentially serious issues (land mines) Document processes mergers and acquisitions regulatory audits identify additional or less staffing needs streamlines or delete duplicate processes Seek efficiencies Find areas that may need improvements Address compliance issues Identify Best Practices Others? Comp/Benefits/HR 5

7 Some Hot Topics Benefit Plan Compliance Retirement Plans IRS/DOL Types of plans? 401(k) 403(b) Money Purchase Profit Sharing Pension Non-qualified Deferred Compensation Roth IRA Comp/Benefits/HR 6

8 Some Hot Topics Benefit Plan Compliance Retirement Plans some areas of focus or concern? Comp/Benefits/HR 7

9 Some Hot Topics Benefit Plan Compliance Retirement Plans Compliance Plan Documents SPD SARs Form 5500s Participant notices Testing multiple requirements Plan Audit PBGC Comp/Benefits/HR 8

10 Some Hot Topics Benefit Plan Compliance Retirement Plans Comp/Benefits/HR 9 Governance Committees Interaction with Board, TPAs, investment managers and advisors, ERISA counsel Documentation Fiduciaries who are they? Plan Administrator? Reasonable fees and expenses Training Insurance

11 Some Hot Topics Benefit Plan Compliance Retirement Plans Internal Controls/Administration Adherence to Plan Document loans, forfeitures, calculation of employer contributions, definition of pay Trustee activity and timing of remittances Interfaces with systems and TPAs Who does what internally? Mix of insourced and oursourced responsibilities Is all of this documented? Comp/Benefits/HR 10

12 Some Hot Topics Benefit Plan Compliance Retirement Plans Insurance What do you have? Fiduciaries Comp/Benefits/HR 11

13 Some Hot Topics Benefit Plan Compliance Health and Welfare Plans Types of Plans Medical Pharmacy Dental Vision Short and Long term disability Salary continuation Life Insurance Accidental Death and Dismemberment Spending Accounts Business Travel Accident Severance Comp/Benefits/HR 12

14 Some Hot Topics Benefit Plan Compliance Comp/Benefits/HR 13 Health and Welfare Plans Types of Plans Supplemental or Voluntary Life Disability AD&D Long term Care Legal EAP QTEP Cell Phones Auto/Pet/Homeowners

15 Some Hot Topics Benefit Plan Compliance Health and Welfare Plans Compliance IRS/DOL Plan Documents SPD SARs Form 5500s Participant notices Testing really? Plan Audit? Contracts Insured, ASO, rebates, etc. COBRA HIPAA Health Care reform Comp/Benefits/HR 14

16 Some Hot Topics Benefit Plan Compliance Health and Welfare Plans Internal Controls/Administration Adherence to Plan Document does TPA claims processing system match the plan document and Summary Plan Description? Does the Call Center support function's script and responses match these? Interfaces with systems and TPAs Who does what internally? Mix of insourced and oursourced responsibilities Is all of this documented? Comp/Benefits/HR 15

17 Some Hot Topics Benefit Plan Compliance Comp/Benefits/HR 16 Health and Welfare Plans Governance Committees Interaction with Board, TPAs, insurance providers, ERISA counsel Documentation Wellness Fiduciaries who are they? Plan Administrator? Claims and Appeals Process Training Insurance

18 Some Hot Topics Benefit Plan Compliance Health and Welfare Plans Insurance What do you have? Fiduciaries Comp/Benefits/HR 17

19 More Hot Topics Self Funded Benefit Plans what types of plans? Claims Eligible dependents Leave of Absence Worker's Compensation vs. Disability Administration and Management Compliance and coordination with regulations ADA/FMLA/WC Compliance with internal policies Coordination with multiple department and locations Paying employees correctly while out Comp/Benefits/HR 18

20 Actually More Hot Topics Human Resources Technology Is technology up to date? Is the technology being optimized? Is the data clean? Do system coordination, duplicate, interface? HR operational reviews Are the same process used for all jobs? Are processes followed consistently? Decentralized or centralized? HR communication/employee Relations Consistent among all HR managers? Verbal versus written Is there a whistle blower policy in place? Comp/Benefits/HR 19

21 Believe it or not More Hot Topics Assessment of corporate culture/employee satisfaction Employee surveys Focus Groups Worker Classification Issues Exempt/non-exempt Independent contractors New IRS Worker Classification Settlement Program Comp/Benefits/HR 20

22 Believe it or not More Hot Topics Employee Policies and Procedures Golden Rule - Don't have them if you can't follow them! Policies required Policies best practices Policies unique to company Which policies carry more risk? Comp/Benefits/HR 21

23 Believe it or not More Hot Topics Employee Policies and Procedures Which policies carry more risk? Anything involving pay Regulatory Comp/Benefits/HR 22

24 More Hot Topics just for you Government Required Compliance EEO and Affirmation Action HIPAA COBRA ADA FMLA SOX FLSA USERRA OSHA/Worker's compensation State requirements Comp/Benefits/HR 23

25 More Hot Topics just for you Vendor Audits Payroll TPAs On-boarding Others Personnel File Audits Payroll File Benefit File I-9 binder Personnel File Medical File Comp/Benefits/HR 24

26 More Hot Topics for you Pay Practices Overtime Holiday Pay On-Call Pay Travel Time Posting of Notice Requirements Unpaid Interns/Volunteers State requirements Comp/Benefits/HR 25

27 Hotter Topics Payroll Administration Garnishments Child Support Fed, State and Local Requirements W-2 Foreign Persons Deductions pre and post tax Military Differential Pay Jury Duty PTO Pre and post tax deductions Comp/Benefits/HR 26

28 Red Hot Topics Stock Based Compensation What are the risk? Comp/Benefits/HR 27

29 Red Hot Topics Stock Based Compensation What are the risk? Upper Management participates Heightened Public awareness and scrutiny Issues with Disclosure requirements Can create accounting and tax compliance problems if not properly documented and administered correctly Key issues include back-dating of stock options, compliance with Code Sections 162(m), 409A and 83 and proper withholding for NQSO awards. Comp/Benefits/HR 28

30 Overview of stock-based compensation Description Form of Equity Accounting Impact (Bank) Tax Impact (Executive) Add l Factors Settled in stock at exercise where value is Fixed at grant date accounting based - Taxed on appreciation - Impacts fully diluted EPS; Incentive Stock Option based on increased stock price from grant upon grant date fair value and expensed - Capital gains eligible not eligible for additional NQ (ISO) date to settlement date. over vesting period. - Taxed at sale deferral Nonqualified Stock Option (NSO) Cash SAR Stock SAR Restricted Stock Restricted Stock Units Performance Shares Performance Units (Stock) Settled in stock at exercise where value is based on increased stock price from grant date to settlement date. Paid in cash based on increased value in stock price from grant date to settlement date. Settled in stock where value is based upon increase in stock price from the date of grant to the settlement date less the stock basis and taxes due. Settled in stock when vesting conditions are met; value based upon stock price at vesting date. Settled in stock when vesting conditions are met and value is based upon full value of stock plus appreciation from the date of grant to the vesting date. Settled in stock after performance conditions met; additional vesting may apply. Value delivered is full value shares with appreciation. Settled after performance conditions met; additional vesting conditions may apply. Value delivered in unit s times unit value. Paid in cash that increases in value based upon the full value of the stock plus any Phantom Stock appreciation from the date of grant to the settlement date. Grant Thornton. All rights reserved. Fixed at grant date accounting based upon grant date fair value and expensed over vesting period. SAR measured at fair value on grant date; SARs expensed vesting period and re-measured each reporting period at fair value until settled. Fixed at grant date accounting based upon grant date fair value and expensed over vesting period. Fixed at grant date accounting based upon grant date fair value and expensed over vesting period. Fixed at grant date accounting based upon grant date fair value and expensed over vesting period. Fixed at grant date accounting based upon grant date fair value expensed over vesting period. Fixed at grant date accounting based upon grant date fair value expensed over vesting period. Phantom Stock is measured at fair value on grant date; Phantom Stock is remeasured each reporting period at fair value until award is settled. - Taxed on appreciation - Ordinary income - Taxed at exercise - Taxed on appreciation - Ordinary income - Taxed at settlement - Taxed on appreciation - Ordinary income - Taxed at settlement - Taxed on full value - Ordinary income (or 83(b)) - Taxed at vesting (or grant) - Taxed on full value - Ordinary income - Taxed at payment - Taxed on full value - Ordinary income - Taxed at settlement - Taxed on full value - Ordinary income - Taxed at settlement - Taxed on full value - Ordinary income - Taxed at settlement - Impacts fully diluted EPS calculation - Non 409A treatment 1 - Earnings dilution - Non 409A treatment 1 - Impacts fully diluted EPS calculation - Non 409A treatment 1 - Earnings dilution - Non 409A treatment 1 - Earnings dilution - 409A treatment at substantial risk of forfeiture - Earnings dilution -409A treatment once substantial risk of forfeiture lapses - Earnings dilution - 409A treatment once substantial risk of forfeiture lapses - Earnings dilution - 409A treatment if deferred beyond vesting

31 Key points Public companies: Are all plans approved by shareholders? Does the company keep accurate share inventory records of approved, granted, and vested shares of participants? Are incentive stock option grants tracked to ensure that tax withholding and deductions are recorded for disqualified dispositions? Are Section 83(b) elections accurately recorded and tax withheld? Are accounting policies documented for stock-option expensing under ASC Topic 718 by applying rules for "plain vanilla" options? Do stock plans identify annual grant limits per individual to ensure compliance with Code Section 162(m)? Grant Thornton. All rights reserved.

32 Key Points Private companies: Have valuations of stock price been timely and appropriate to avoid Code Section 409A income recognition issues for discounted stock options? Are plans awards properly documented? Are accounting policies documented for stock-option expensing under ASC Topic 718 by applying rules for "plain vanilla" options? Do corporate records of board actions properly reflect grants of stock-based compensation? In M&A transactions, are amounts of compensation expense for accelerated vesting of stock-based compensation properly recorded and taxes withheld? Grant Thornton. All rights reserved.

33 What are the typical steps for the Audit? Meet with key stakeholders and develop areas of interest for review Determine which areas to prioritize for current cycle Determine scope of review and define parties involved in interviews Request documents and review. Develop list of questions from review. Interview with HR, payroll, finance and vendors Produce draft report of findings and discuss with those interviewed Produce final report with timetable for action Follow-up on timetable for action Comp/Benefits/HR 32

34 Potential Roadblocks? Are there obstacles in the way? Comp/Benefits/HR 33

35 Goals of the Audit Comp/Benefits/HR 34 Increased efficiency, effectiveness and overall functionality of the Human Resources Function Reduced cost of hiring, training and retaining quality personnel Compliance with applicable laws and regulations Increased consistency across decentralized functions Improved risk management, HR controls and governance processes Increased state of preparedness for HR audits by regulatory bodies

36 Goals of the Audit Help uncover administration and compliance issues Identifies appropriate best practices and any gaps Others? Comp/Benefits/HR 35

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