The Department of Labor has made good on its promise to step up audits of workplace retirement plans after a report released in May 2015 showed that a high percentage of plan audits were not high quality.
A recent survey by Willis Towers Watson found that one in three employers had their retirement plans audited by the federal government over the past two years.
“The fact that one in three retirement plans have been audited should send a wake-up call to many plan sponsors,” says David Speier, senior retirement consultant at Willis Towers Watson. “Regulatory compliance is a top concern, and there is room for a fair number of employers to improve the management of this risk. Proactive reviews of plan operations and compliance processes, for example, should be given a much higher priority at organizations that do not have a structure in place to conduct proactive reviews.”
The DOL found that 39% of retirement plan audits submitted to the Department of Labor in 2011 had major deficiencies, which “put $653 billion and 22.5 million plan participants and beneficiaries at risk,” according to the Employee Benefit Security Administration.
The main objective of the EBSA’s review was to “assess the level and quality of [independent qualified public accountants’] audits of ERISA-covered employee benefit plans.”
Most retirement plans hire a CPA to review their plans, but many are not very experienced in this task.
Every retirement plan that has more than 100 eligible employees must attach an independent audit report to its Form 5500 tax filing. The DOL knows who should be filing an audit form with their Form 5500 and who hasn’t done it. Those are the companies most likely to end up being audited, says Linda Lauer, lead managing director at CBIZ MHM in Memphis, Tenn.
The DOL study found that if a CPA firm only audits two or three benefit plans a year, “they are probably not the best firm to be doing those audits in benefit plans,” she says. “Benefit plans are a different animal than a corporate audit.”
Benefit plan audits are more compliance-related rather than financial statement-related, she says. If a CPA doesn’t understand how a plan works, what makes an employee eligible for the plan and how employees go about electing their deferral into the plan or choosing investments, they “aren’t going to know what to audit,” she says.
The DOL sent letters to all ERISA plan sponsors telling them that they should seek a more experienced plan auditor if their CPA conducts only a handful of retirement plan audits a year.
Many small companies don’t want to spend a lot to meet this requirement.
“They don’t see the value of going out and getting someone really qualified and paying a lot of money. They are going through the motions,” Lauer says. “In reality, they should be paying more attention to it and be more willing to pay more money for a quality audit to make sure the plan is in compliance.”
The Willis Towers Watson survey found that 44% of plan sponsors had not conducted an operational compliance review of their defined benefit plans in the past two years and 42% had not conducted a review of their defined contribution plans. One-third of respondents said they have limited budgets and resources to conduct such a review.
The increase in plan audits is being driven by the Internal Revenue Service and the DOL who “expect plan sponsors to be doing regular self-checks, finding any gaps in compliance and fixing them,” says Lisa Canafax, senior retirement consultant at Willis Towers Watson.
The DOL has added staff to conduct these audits as a way of prompting plan sponsors to continually review the operational processes of the plan, not just plan documents and making sure the plan complies with industry regulations but making sure plan contributions are deferred in a timely manner and in line with regulatory requirements and plan documents, Canafax says.
Lee Topley, managing director of Unified Trust Company’s Retirement Plan Consulting Group, believes the increased number of audits are also a way for the IRS and DOL to take in additional revenue.
Steps toward improvement
The American Institute of CPAs (AICPA) came out with an Employee Benefit Plan Audit Quality Center to help CPAs perform quality audits by providing resources and guidance to help them navigate the increased complexity of employee benefit plan auditing. CPAs and firms that have a higher level of expertise can become members of that, he says.
He recommends that plan sponsors choose a qualified CPA rather than just going with the person they work with for their finances.
To help themselves, plan sponsors should also make sure they are not making late or erratic payments of the deferrals employees are making into their retirement accounts. These deferrals need to be made within seven days of the employees receiving compensation.
“If we have someone who doesn’t make deferrals on a timely basis, they may hit the list that needs to be audited,” Topley says.
Tracking an employee’s hours for vesting purposes can also trip up some plan sponsors.
“Make sure the employer is providing a list of the number of hours, vesting and eligibility requirements to the record keeper to make sure those are accurately tracked,” he says.
Calculating profit sharing contributions, how much and who gets what are also important. Plan sponsors need to make those calculations accurately and in accordance with what is in the plan document, he adds.
Auditors are also making sure that fee disclosure regulations are being followed to the letter. Prohibited transactions could take place if the disclosures are not appropriate.
“They could be up against a 15% excise tax by not understanding what the disclosures are and what their fees are,” Topley says.
Plan loans are another area plan sponsors need to be aware of. If a company allows loans from the retirement plan, there must be a loan policy and procedures in place, and they must be followed to the letter.
All of these things sound simple, “but with a 401(k) plan, there is a level of exactness and precision with regard to timing which can be difficult to execute on,” Canafax says.
One thing is clear, if plan sponsors work to find problems and enact a plan to fix them, the regulatory agencies will be more lenient on them.
“Penalties and fees will be lower if you the plan sponsor finds it before the IRS and DOL do,” she says. “They want you finding problems and they want you self-correcting. There is less penalty involved if you the plan sponsor come and say, ‘we found this and we’ve got to fix this’ than if the IRS or DOL bring it to you.”
Lauer adds that if the DOL decides to audit a company’s benefit plan and the company has no documentation, no controls in place and no committee that meets to discuss whether or not the retirement plan is operating properly, they will be “slapped with another penalty because they are not operating it right.”
“Most likely if a plan had problems in the past and if that auditor has been able to get financial compensation out of the plan, there is a stronger probability it will be audited again sooner than later for sure,” Topley says. “I think that any retirement plan out there needs to understand that their probability of audit has definitely increased.”
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