As auditors, we are always busy performing different types of testing, especially controls and compliance-based test work. While there is a common stigma about auditors and audits in general, and they have a “gotcha” sort of mentality, there is a tremendous benefit that a company can derive from the work they perform. The truth is, our goal is to ensure that companies and organizations are complying with rules and regulations so that they can avoid costly errors, especially when it comes to defined contribution pension plans.
One test that we perform is called the participant test. This is an overall test of plan participants to ensure that eligibility requirements are met per the plan document, contributions are properly calculated and allocated to employees based upon their eligibility and withholding requests, and demographic information transmitted to the plan’s custodian is complete and accurate. While most of these processes are handled electronically, we want to ensure that they are still handled properly and that investment selections and allocations are correct.
Another compliance-based test we perform considers the timely remittance of contributions by the Plan Sponsor to the custodian of the funds. This is important because the Department of Labor (DOL) requires the employer to deposit deferrals to the custodian as soon as the employer can. Deposits can never be later than the 15th business day of the following month, which is a rule set as the maximum deadline. This however, is not a safe harbor. Having the contributions remitted timely ensures that the employer is following DOL regulations while reducing the potential for lost earnings to participants due to a time lag incurred by the employer. If contributions aren’t timely remitted, the employer has to contribute to the Plan the amount that each employee had in lost earnings due to the late remittance.
We also review general compliance test results performed for standard defined contribution plans. These include nondiscrimination tests in elective deferrals, employer contributions, availability of benefits, top-heavy tests, and limits on the maximum elective deferrals allowed by the Internal Revenue Service (IRS) each year. Top-heavy tests ensure that participants who are key employees do not receive a disproportionate amount of benefits compared to non-key employee participants. All of these compliance-based tests provide assurance that the plan is following IRS regulations so that it can remain as a qualified plan for participants.
We perform all of these tests, and more, annually to make sure that employers are in line with guidance and compliance matters as set by authoritative bodies such as the DOL and IRS. After all, if the plan is out of compliance, you would rather hear from us, your auditors, when you can self-correct, as opposed to from a governmental agency.