Common Findings in Employee Benefit Plan Audits and How to Prevent Them

By Jaime Onk

An employee benefit plan (EBP) is a written plan that provides benefits to employees such as retirement benefits, health insurance, life insurance, disability benefits, death benefits, and more. The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that protects the retirement and health benefits of American workers and it requires annual audits of employee benefit plans with over 100 participants at the beginning of the plan year.

As the plan administrator, it is your fiduciary responsibility to ensure your plan complies with all applicable laws and regulations covered under ERISA. To help you better understand the issues that often plague employee benefit plans, here are 8 common EBP audit findings and how to prevent them:

1. Insufficient Document Retention – Missing or outdated employee documentation is a common finding in EBP audits. It is critical to retain documentation such as I-9 Forms and enrollment and/or opt out forms to maintain compliance with DOL regulations.

• How to Prevent It: Regularly review employee files to ensure their information is complete, current, and accurate. If missing information is identified, take the necessary steps to complete this information.

2. Late Remittance of Participant Contributions – ERISA requires that employee 401(k) deferrals be deposited as soon as they can be reasonably segregated from the employer’s general assets.

• How to Prevent It: Establish a clear remittance policy with your payroll provider and determine the earliest date you can reasonably segregate the deferral deposits from general assets. Put procedures in place to ensure deposits are made by that date.

3. Compensation Definition Errors – Using the wrong definition of employee compensation to allocate plan contributions can lead to plan test failures and incorrect contribution calculations.

• How to Prevent It: Ensure a clear understanding of the definition of compensation per the plan document, specifically what is included and excluded from eligible compensation, by holding regular trainings for the HR and payroll teams. It is also important to provide your 401(k) provider with the compensation information they need to complete year-end compliance testing.

4. Inaccurate Calculation of the Vesting Period – Employers must maintain accurate service records for all employees. Failure to do so may result in participants receiving incorrect benefit amounts upon leaving the Plan. Vesting schedules often refer to “years of service” when assigning a vesting percentage; therefore, it is important for employees service records to be accurate and up to date.

• How to Prevent It: Carefully review plan documents and employee data to ensure that employees are correctly credited with vesting service. When approving participant withdrawals, a review of the participant’s vesting percentage can prevent an error before it occurs.

5. Failure to Address Discrimination Testing Failures – Discrimination testing aims to ensure that highly compensated employees do not disproportionately benefit from the Plan compared to non-highly compensated employees. Failure to take corrective actions on test failures will cause the the plan to not be in compliance.

• How to Prevent It: Consult with your third party service provider to make the necessary corrections. Regularly monitor employee participation rates and contribution levels to identify and address potential discrimination testing failures.

6. Inadequate Documentation of Fiduciary Duties – Employee benefit plans have a fiduciary responsibility to the participants of the Plan. The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Oversight and documentation of these responsibilities are often lacking.

• How to Prevent It: Plan management should meet regularly and meetings should be documented. Records of other meetings or board decisions, audit and investment performance reviews, and service organization controls reports should be maintained.

7. Inaccurate or Incomplete Employee Census Data – The employee census report is a listing of all employees during the Plan year and their relevant data and should include all wages and employee and employer contributions. The Census is typically the starting point for most audit procedures and is used by the Plan for compliance testing.

• How to Prevent It: Perform regular reconciliations and review of the census data to ensure employee information is current and accurate. It is import to reconcile employee wages and contributions to your payroll system prior to providing the Census report to your auditors, as well as third party administrators to perform the annual compliance testing.

8. Inadequate Plan Documents and Amendments – ERISA imposes strict record-keeping requirements such as Adoption Agreements, Summary Plan Descriptions (SPDs), Plan amendments, and other annual reports. Failure to maintain adequate and up-to-date plan documents can result in compliance violations.

• How to Prevent It: Conduct regular reviews of plan documents to ensure records are up to date and all plan amendments are adequately maintained.

In summary, it is important to put procedures in place to prevent errors from occurring in the future. When errors do occur, Plan management should work with its service providers to make any necessary corrections in a timely manner. If auditors identify errors that constitute a deficiency in internal control, these errors will be communicated in writing. Plan management should refer to this communication when considering the necessary corrections to be made as well as future process improvements.

Boyer & Ritter offers preventive help

Preventive measures can avert costly fines and payments. Employers that find themselves in these circumstances can also be on the hook for additional costs, such as paying the third-party administrator to calculate the corrective contributions and lost earnings and filing fees for IRS correction programs.

Remember, the fault – and penalties – always fall on the employer.

The first step in avoidance is hiring a reputable and reliable third-party administrator, but even then, active monitoring is a must.

Boyer & Ritter can help employers learn the rules and regulations, identify system weaknesses, implement safeguards that prevent costly errors, and give employees confidence that their employer is appropriately managing their hard-earned retirement dollars.

Jaime Onk is a Manager with Boyer & Ritter LLC. She is an integral part of the firm’s employee benefit plan group. Contact Jaime at 717-761-7210 or jonk@cpabr.com.