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Review plans periodically to catch and correct red flags
Employee retirement plans are heavily governed by the Department of Labor (DOL)—no surprise there. But before benefit plan sponsors prepare for a plan audit, take a step back and consider what triggers an audit, such as the number of eligible plan participants and what the DOL will be looking for when reviewing
Form 5500 filings and audited financial statements, including deposit timeliness, compensation deferrals and employee education.
Why is a correct audit filing so important? The DOL relies on Form 5500 filings to ensure that plan reporting is in compliance with the Employee Retirement Income Security Act (ERISA). In addition, the DOL and the Department of Health and Human Services derive from Form 5500s data used to analyze retirement plan trends and benefits. Both agencies examine these filings closely and may ask companies numerous questions when reviewing them.
Required vs. Option
To prepare for an audit, the first thing plan sponsors should do is determine if they are required to get one. An audit is based in part on the number of employees who are eligible to participate in the plan at the beginning of the year. Generally, the magic number is 100. If an employer has at least that many eligible participants, including terminated employees with account balances still in a retirement plan, they should plan on an audit. If an audit is required, HR representatives should work with their independent accountant to file Form 5500. Late forms and those filed incorrectly are red flags for the DOL, though these are two of the easiest things to fix.
Addressing Red Flags
For employee benefit plans that require an audit, it’s important to know what the DOL requires of plan sponsors. First up is deposit timeliness. The agency wants all withholdings from employees (i.e., employee deferrals, participant loans, catch-up and Roth contributions) deposited with the trustee and into participant accounts as soon as possible. Why? The DOL is checking to see that workers are accumulating their owed earnings. Therefore, plan sponsors should:
In a similar vein as
deposit timeliness is compensation deferrals. Compensation can be challenging, especially when different types of bonuses are paid or when the organization has multiple pay codes. The DOL looks at whether contributions (both employee and employer) are being calculated on the correct base wage and whether the right components are eligible, as noted in the plan documents.
Incorrect calculations can lead to big costs. For example, if plan sponsors are missing income components and deferrals are understated, there is a risk of an understated employer match. If the worker is shorted, the employer has to make up the entire shortfall, contributions and earnings.
Some Fortune 500 and 1,000 companies have miscalculated compensation and now owe their plans millions of dollars for deferrals, earnings and underfunded matching contributions. To keep a handle on this, sponsors should:
In addition to plan details, the DOL is concerned with educating employees on saving for retirement. Employers have a fiduciary obligation to keep their plan participants informed about the general setup of their plan and investment options. Thus, the agency looks for evidence that HR representatives are continuing to think about how to (1) encourage employees to participate in the plan and (2) maximize their retirement savings. Plan sponsors need to ensure that participants understand how the plan works and that information is communicated in a timely and efficient manner.
One issue that has received a fair amount of coverage lately is fee disclosure. Because final regulations under ERISA
section 408(b)(2) disclosure rules were issued in 2012, the DOL offers no leniency on this. Sponsors should have agreements in place immediately and communicate this information to all plan participants. Establishing or continuing an employee education program around plan benefits is a good way to guarantee that information will be passed along promptly.
Six Best Practices to Consider
So how can plan sponsors prepare for an upcoming audit and fulfill DOL requirements? Here is a six-point checklist for HR representatives to consider when reviewing plans:
It’s never too early to begin preparing for an audit. Setting up a periodic-plan-review system can highlight potential red flags. By keeping a regular eye on withholdings, plan deposits and employee education and ensuring nothing is out of the ordinary, HR representatives can save themselves big headaches later on.
Bertha Minnihan has 15 years of experience in public accounting and serves as the national practice leader for the employee benefit plan group at accounting firm
Moss Adams LLP. She has extensive experience directing all phases of audits for a variety of benefit plans including 401(k), 403(b), pension, employee stock ownership, health and welfare benefit plans. She serves on the American Institute of CPA's Employee Benefit Plan Audit Quality Center’s executive committee, has chaired the annual national AICPA Benefit Plan conference for several years, and has served on the AICPA’s technical standards subcommittee, which assists with the Department of Labor’s review of ERISA audits and auditors.
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