Avoiding Common Mistakes in Your Employee Benefit Plan Audit
Act Now to Save Headaches – and Costs – Later
Common mistakes that many organizations make in administering their employee benefit plans (EBPs) can end up costing them in terms of time and money. But catching those mistakes early and correcting them is the best way to contain costs and ensure that your retirement plan is properly administered.
The U.S. Department of Labor (DOL) sets compliance requirements for EBPs and requires plans above a certain size to have annual plan audits conducted by independent auditors. A plan audit ensures that your plan meets the DOL’s compliance requirements and safeguards your employees and the retirement plan assets against financial fraud and abuse.
Administering your organization’s benefit plan is no easy task. With EBP administration comes the potential for making mistakes. Why are mistakes with EBPs such a big deal? It is because once a mistake is made, the plan must go through a corrections process that can be both costly and time-consuming. Some mistakes can be self-corrected, but at your expense as the plan administrator. The employer bears the burden of corrective contributions which includes missed earnings on investments. In extreme cases, fixing EBP errors requires going through the Department of Labor’s (DOL) Voluntary Fiduciary Correction Program (VFCP), which involves expensive user fees.
Following are the most common mistakes made in the course of administrating an EBP:
Issue #1: Failing to adhere to the EBP’s definition of compensation
This is the most frequent issue seen by Adams Brown’s EBP Audit team. Within the documentation of each EBP, the definition of eligible compensation is outlined in detail. It includes items such as W-2 wages, 3401(a) wages, 415 safe harbor wages, and more. The documentation also defines any adjustments that can be made to eligible compensation, such as pre-entry compensation, commissions, bonuses, and other fringe benefits. It is important that the EBP administrator have a thorough understanding of the plan’s definition of eligible compensation and work to adhere closely to it.
Failure to understand and adhere to compensation regulations as defined by your EBP plan can cost you both time and money. Plan sponsors who fail to correctly administer a plan, per its definition of eligible compensation, may be responsible for paying to cover any shortfalls resulting from their errors. Be sure to read your plan documentation carefully and take the time to ensure that you follow the definitions laid out there correctly.
Issue #2: Untimely remittance of employee contributions and failure to match correctly
This item is generally at the top of the DOL’s audit checklist. It occurs when employee contributions are not remitted to the plan trustee in a timely fashion. The DOL requires that employee deferral contributions be remitted to the plan trustee as soon as is administratively possible. When the plan is first established, the plan sponsor sets a precedent for when employee contributions will be remitted. The DOL then expects that all employee contributions will be remitted in the same timeframe for the duration of the plan administration.
When you as the plan sponsor fail to adhere to the precedent set, the DOL requires that you make up for any lost earnings that an employee missed out on due to the late remittance. Most often, this occurs when the staff member responsible for remittance is out of office for vacation or sick leave. You should consider having a second staff member cross-trained in the process to avoid this issue.
Issue #3: Failure to maintain thorough documentation
Plan administrators are required to maintain complete documentation of EBP records. Regardless of whether you keep physical employee files or use a paperless method, you must maintain detailed and organized records.
Document retention is a key factor during EBP audits. Make sure you know which documents you are required to keep on file. For example, required documentation includes meeting minutes from any meeting where the EBP was discussed. Consider consulting the Employee Retirement Income Security Act of 1974 (ERISA), which lays out specific requirements regarding the detailed records that need to be kept for an EBP.
Adherence to plan requirements and DOL rules is key to ensuring that your employees’ retirement plan assets are safe and properly documented. Contact your Adams Brown advisor with any questions you may have about your organization’s employee benefit plan.