A periodic self-audit of your company’s retirement plan is crucial to ensure compliance with rules and regulations set by governing bodies such as the Internal Revenue Service (“IRS”) and the United States Department of Labor (“DOL”). Selecting provisions for your retirement plan is one thing, but ensuring those provisions are consistently met is another. Self-auditing can prevent exorbitant penalties and interest. If there are any issues occurring within your plan’s operations, it’s significantly better to discover and correct those issues on your own than to have the IRS, DOL, or participant discover them for you.
The very first step in self-auditing any area of your plan is to read the plan document and any subsequent amendments. The provisions specific to your plan are identified and should be consistently complied with. It’s important to note that provisions governing employee contributions could be different than the provisions governing employer contributions. A few areas of self-audit are mentioned below, however a self-audit of your retirement plan should not be limited to these.
Eligibility Requirements
Eligibility to participate in a retirement plan could require a minimum age, a minimum number of hours worked per year, or it could even have no requirements to allow entry into the plan.
If your plan requires something along the lines of a minimum age or minimum number of hours worked per year, it can easily be checked by reviewing employees’ dates of birth on file or by reviewing total hours worked for the year to ensure that those who are eligible to participate are participating or have elected not to, and those that are not eligible to participate are not remitting to the plan.
When it comes to employer contributions, there could be additional eligibility requirements, such as requiring that the employee be employed on the last day of the plan year.
Definition of Compensation
The definition of compensation varies from plan to plan. Some may indicate that any taxable wages are considered eligible compensation for retirement plan contributions, while other plans may exclude certain types of compensation like bonus compensation.
To review eligible compensation with your payroll service provider, each payroll code or type of compensation per the payroll system should be reviewed to see what is being included or excluded in the calculation of employee retirement plan remittances. If any inconsistencies are found between the payroll service provider and the retirement plan document, then any compensation relating to the erroneously included or excluded payroll codes should be reviewed retroactively to see how that may have affected the employees’ deferrals and make whatever corrections are necessary.
If your plan provides employer contributions, it’s important to note that the definition of compensation as it relates to employer contributions could be different than that of employee contributions.
Eligible compensation should be reviewed regularly to ensure that the payroll service provider is consistent. This is also an area of higher risk when new payroll codes are added, existing payroll codes are revised, or when there is a change in the payroll service provider for your company.
Timely Implementation of Deferral Elections
With time comes technological advances and automated systems. While this can be advantageous in many ways, it can be negative by creating areas of oversight. Payroll service providers and plan administrators don’t always have software that are compatible with each other, therefore this requires the employer to be the director and ensure that whatever is happening with the retirement plan is being communicated to the payroll service provider and vice versa.
In many cases, the ability exists to allow paperless elections, declinations, and changes to elections. As a result, employees can easily log onto their retirement plan account with the plan administrator and make whatever changes they’d like with the click of a button. The issue is that the payroll service provider may have no way of knowing about those participant-directed changes unless the employer notifies them.
Timely implementation of elections can also be affected by auto-enrollment provisions, whereby employee’s may be automatically enrolled into the plan upon reaching minimum eligibility requirements unless the employee affirmatively elects against it. This is an additional provision to consider when self-auditing timely implementation of deferral elections if it exists within your plan.
It’s imperative that a step exists within your company’s internal controls that requires someone to review any elections, declinations, or changes every pay period to ensure appropriate timeliness of these changes are taking effect within the employee’s paychecks.
Timely Remittances
There are regulations that specifically govern when employee deferrals must be segregated from the general assets of the employer and transmitted to the plan. Those regulations, specifically with the DOL, requires amounts withheld from employees’ wages be transmitted to the plan as soon as they reasonably can be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month of withholding. This 15th business day is not a safe harbor. If remittances are transmitted late, lost earnings should be calculated and remitted to each participant’s account. Lost earnings are calculated from the time of error to the time of discovery to ensure that participants’ accounts are made whole.
To summarize, always start with the plan document to determine the provisions specific to your plan. If errors are found during your self-audit, it’s important to correct these issues as soon as possible. The longer the issue has been ongoing, the higher the potential penalties. Find errors that could be occurring within your company’s plan before anyone else does. There are voluntary correction programs in place that could help mitigate the penalties and interest that could’ve been imposed had those errors been found by the IRS or DOL. Consider reviewing the internal controls of your plan to ensure that there are checks and balances in place and that these self-audits are occurring regularly throughout the year.
Crystal Harvey
Supervisor
Crystal is a member of Cerini & Associates’ audit staff where she focuses on serving organizations across a wide spectrum of industries, including nonprofit, technology, and contractor clients. She has experience performing assurance work and outsourced accounting work, as well as preparing tax returns. Crystal has extensive knowledge surrounding the operations, controls, and environment of the sectors she focuses on. She brings her expertise, diversified background, and helpful approach to all of her engagements.
