Retirement Plan Audits: The Risk Continues to Rise

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January 26, 2017

If you are a retirement plan sponsor, you need to be aware of the increased focus from the Department of Labor (DOL) and the Internal Revenue Service (IRS) on uncovering your mistakes. As the DOL and IRS continue to dig deeper for plan violations, more and more businesses are fielding time-consuming requests from these organizations including detailed data on participant transactions. Let’s take a look at the plan mistakes that that pop up most frequently.

Look Out for These Most Common Plan Mistakes

Late or Inconsistent Remittance of Deferrals

While there is a host of violations that the DOL and IRS auditors look for, some red flags will prompt them to look more closely. The biggest of these is the timely remittance of employee deferrals. The impact of this violation can be huge for plan sponsors because they are not only required to pay lost earnings, but also an excise tax on all late deposits. The definition of “timely” is not open to much interpretation. Regulations require plans with less than 100 participants to make the deferrals within seven days. For plans with more than 100 participants, deferrals must be made as soon as administratively possible following each payroll.

However, the actual timing of deferrals must be consistent for all plan participants, even if made promptly. For instance, for a plan with 100 participants, if you make a deferral for half of the participants on day 2 and deferrals for the other half on day 3, this will alert the DOL and IRS that something may be amiss. You may have been doing it that way for years, but something that small can be the beginning of a timely and possibly expensive audit process that you would rather avoid.

Not Following Your Own Rules

Each plan should have a formal written plan document that outlines the terms and conditions regarding the administration of the plan. It is the responsibility of the plan administrator to make sure the plan document is followed. It just takes one participant to complain to the DOL/IRS that the administration of the plan has gone off course to trigger a full blown audit.

Another common mistake is not using the correct definition of compensation to calculate employee deferrals and employer contributions. There are several types of compensation that can be eligible for deferrals and employer contributions and can vary from plan to plan. If you are not withholding on compensation that is eligible as defined in your plan document, you are then liable for contributing a portion of the missed withholding into the participant’s account along with the employer contributions and lost earnings. This could prove to be a costly error.

Late Employee Enrollment

Does your organization have an accurate method for calculating when an employee becomes eligible to participate in the plan? Or when they become fully vested? What about the eligibility status of a former employee who has been rehired? Many companies don’t implement a tracking system which can quickly lead to an employee missing weeks or months of eligibility. If an employee in this situation submits a complaint to the DOL or IRS, or if it is discovered in an audit, everything in your plan becomes ripe for investigating.

Protecting Your Plan

It’s easy to become caught up in day-to-day projects and priorities and lose track of compliance issues that seem too small to be cause for concern. Don’t wait for an outside party to find your mistake. Plan administrators should regularly conduct self-assessments of their plan as a proactive measure against costly mistakes.

Most importantly, you want to address issues as soon as you identify a problem. Often the DOL and IRS will look favorably upon plan sponsors who take the initiative to self-correct and may enforce a minimum or reduced penalty if the company proactively approaches the problem instead of having them catch it first.

While these mistakes are common, they are also easily solved. Taking the time to evaluate your current processes surrounding the 401(k) administrative function to identify potential regulatory and processing concerns is the first step. Unfortunately, many plan administrators simply don’t have time to devote to this type of deep dive. For those plan administrators who need assistance, Stambaugh Ness developed a 401(k) Plan Process Assessment to simply and accurately walk through your plan and process to identify weak spots and provide solutions to improve efficiency while ensuring compliance. Contact us today to schedule your plan assessment.

Nikki Hoffman, CPA - Stambaugh Ness