Earlier this year, the Employee Benefits Security Administration at the U.S. Department of Labor, outlined initiatives to educate and protect 401(k) plan participants. Along with those initiatives comes an increased risk of a DOL audit for companies that dont take the necessary steps to ensure their benefit plans are compliant and being properly administered for their employees.
The EBSA is responsible for protecting the integrity of pensions, health and other employee benefits, and is charged with administering and enforcing ERISA. In fiscal 2013, the EBSA closed 3,677 civil investigations with 2,677 (72.8%) resulting in monetary penalties for plans or other corrective action, exhibiting its ability to effectively target ERISA violators in the employee benefit plan universe.
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There are several emerging issues that companies should be aware of that might affect their benefit plans, including:
Self-directed brokerage accounts. Most employers allow participants to choose among a limited set of specific investment options, which are selected and monitored by plan fiduciaries. However, some employers provide participants access to brokerage windows in addition to, or in place of, specific investment options under their 401(k) plans. These arrangements allow participants to choose from a broad range of investments beyond those specifically designated by the plan. Because they are becoming more popular, the DOL is looking closely at these plans because of the risk associated with unsophisticated plan participants who might not receive enough guidance to make sound investment choices.
Lost participants. Locating, communicating with and ensuring employees who have left a company receive their due benefits has been an increasingly difficult challenge for plan sponsors. Its not uncommon for plan sponsors to simply lose track of them. The DOL has just issued new guidance for tracking plan participants and distributing their assets that includes using free Internet search tools (i.e. search engines, public records, obituaries, social media, etc.) as well as commercial locator services (i.e. credit reporting agencies, information brokers, investigation databases, etc.) when circumstances deem it appropriate.
Uncashed benefit payment checks. Another common problem facing plan sponsors is what to do with uncashed distribution checks. The check may have been returned to the plan administrator as undeliverable by the U.S. Postal Service or the check simply may have been delivered but never cashed by the participant. It is the plan sponsors responsibility to keep up with and account for these funds. The participant account may need to be reinstated in the plan until such time as the plan sponsor can locate the participant in order to make the distribution.
ERISA-spending accounts. These accounts are funded through a portion of the revenue-sharing fees that 401(k) plan providers receive from the investments offered under the plans. As ERISA-spending accounts have become more popular as a means to help companies pay their plans reasonable administrative expenses, the DOL will be looking at some important recurring issues that have materialized. What is being paid? Are they paying proper expenses for the proper plan? Are they plan assets that should be recorded on the financial statements of the plan?
Reduce your risk
Knowing the DOL is going to be vigilant in these areas means that now is a good time to review benefit plan documentation and administrative practices to ensure compliance.
Here are some red-flag risk areas that often draw the DOLs attention:
1. Missteps with the plan's eligibility requirements. Some employees may be enrolled too early or too late ? or forgotten altogether, which can be the case with employees working at another corporate affiliate or division.
2. Misinterpretation of the vesting period. Each plan defines when employees reach one year of service. HR and other departments may calculate it differently.
3. Violation of break-in-service rules. Usually, plans state that when employees leave and are rehired within a certain time frame, that they're automatically eligible to participate in a 401(k) plan. This rule is sometimes overlooked.
4. Errors in calculating employee contributions. 401(k) contributions should be determined in accordance with the plan document (which should include the definition of compensation) and in accordance with employees instructions.
5. Miscalculations for profit-sharing contributions. Errors occur most often when annual calculations are performed manually versus being automatically tallied through payroll software.
6. Mismanagement of employee requests. When employee requests, such as changes in deferral percentages, are handled manually, they are sometimes coded incorrectly or simply not entered at all.
7. Late or inconsistent payment of employee deferrals. According to the DOL, contributions must be paid as soon as administratively feasible, but no later than the 15th business day of the following month (when deferrals are withheld). Employee contributions should be within this time frame, but also consistently remitted among all payrolls and pay periods.
8. Increasing forfeiture accounts. When employees leave and forfeit their 401(k) balances, those funds aren't always used as outlined in the plan, such as for paying employer-plan fees or in the time frame required by the Internal Revenue Service.
9. Improper tax witholdings when employees take distributions. People can take distributions from employer-sponsored plans prior to age 59 1/2, but these early-withdrawals must be made in accordance with IRS rules in terms of penalties and any income taxes due.
10. Confusion over service provider contracts. Sometimes, theres a disconnect between the company and its service provider. Responsibilities should be crystal clear, especially in the areas of hardship withdrawals and informing employees of eligibility.
ERISA can be a very complicated law to navigate, especially for companies that dont have access to internal resources who understand the inner workings of and compliance issues presented by their 401(k) plans. Benefit professionals, at a minimum, should take the time now to sit down with outside ERISA counsel and plan an internal audit to ensure that their plans are in compliance.
Heidi L. LaMarca, CPA, is a principal and practice leader forWindham Brannon, a provider of tax, audit, accounting and advisory services, where she oversees the firms practice area of employee benefit plan services, which includes employee benefit plan audits, Form 5500 filings and advisory services. She can be reached at
