With the Department of Labor (“DOL”)’s recent expansion of audits of employee benefit plans it’s important to consider the various factors that may trigger an audit and whether or not your organization is at risk. While some plans are chosen at random, factors that could contribute to the likelihood of being selected for audit include:
- Complaints to the DOL from employees or participants
- Delinquent or incomplete 5500 filing
- Excessive or improper administrative expenses
- Untimely remittances to the plan
- Improper contribution calculations
- Prohibited transactions
A DOL audit’s main purpose is to identify violations of the Employee Retirement Income Security Act of 1974 (“ERISA”). While the IRS has jurisdiction over the qualified status of a plan, ERISA guidelines dictate fiduciary responsibilities, reporting, and disclosure requirements and other rules that don’t affect the status of the qualified plan.
A plan sponsor has a fiduciary responsibility to act in the best possible interest of the plan participants for the purpose of providing benefits and paying expenses of the plan. Additionally, fiduciaries are responsible for reviewing the plan document and its compliance with ERISA. The DOL has prepared a Reporting and Disclosure Guide for employee benefit plans which details the required disclosures, and the parties to which disclosure should be made. Some examples of documents required to be disclosed to participants of the plan are the summary plan description, summary of material modification, summary annual report, notification of benefit determination, and plan document.
The best way to prepare for an audit is to build ERISA compliance into your internal controls systems and to periodically review and test the system. Examples of areas to test include:
Eligibility and participation:
Verifying eligibility, participation, and coverage to ensure that all employees are aware of the plan as they become eligible and either join the plan or document the declination to join the plan.
Check vesting requirements and ensure that contributions are vested as set forth in the plan document.
Plan benefits, rights, and compensation should not favor certain employees or groups and classes of employees.
Compensation and contribution calculations:
Contributions to the plan should be calculated using eligible contributions as detailed in the plan document.
Limitations on benefits:
Contributions shouldn’t exceed allowable limits.
Timeliness of remittances:
Contributions to the plan should be made on a consistent basis.
Additionally, the plan sponsor should maintain proper documentation, including the current plan document, including any amendments, policies, and summary plan description.
Should your internal controls testing identify any errors, we encourage you to use the DOL self-reporting tool. This allows you to notify the DOL of errors identified and rectified and significantly reduces any potential penalties associated with the error.
A DOL audit can be a time-consuming and stressful process. DOL auditors will request employee and other records, conduct onsite visits, and may interview employees. By implementing policies and procedures to oversee the plan’s compliance with ERISA you can minimize the risk that the audit will result in any findings. You can also expedite the audit process by having documentation readily available to be provided to the auditors as requested.
We can help you establish a strong system of controls over your employee benefit plan and should your plan be selected for audit, we can facilitate communication with the DOL to help it go as smoothly as possible.
Mahnaz Cavalluzzi, CPA
Mahnaz has been a member of Cerini & Associates’ audit and consulting practice area for over 8 years where she focuses on serving nonprofit organizations, education, and healthcare clientele. Mahnaz has experience in financial statement audits, financial statement reviews, tax return preparation, cost report filing, and other consulting. Mahnaz brings her expertise, diversified background, and helpful approach to all of her engagements.