10 issues that can land you in hot water during an employee benefit plan audit

As you are administering your benefits plan throughout the year, watch out for these common mistakes

As more employers continue to turn to brokers and consultants to deliver benefits solutions, these professionals, too, can do their parts to help their clients stay compliant when it comes to employee benefit plan audits. (Photo: Getty)

If you’re like most plan sponsors, an audit of your employee benefit plan is never something you look forward to. However, it’s important to both your company and your plan participants. To ensure a smoother audit, you need to be aware of―and rectify―errors. As you are administering your plan throughout the year, watch out for these common mistakes that can potentially land you in hot water.

  1. Definition of compensation: This continues to be one of the largest issues in benefit plan audits. Plan sponsors should carefully review the plan document to make sure they understand how compensation is defined under their plan and that payroll codes are set up properly to either include or exclude various types of compensation.
  2. Timely remittance of employee deferrals: Plan sponsors should ensure consistency when it comes to remitting employee deferrals. There is no safe-harbor rule for large plan filers when it comes to remittance. Keeping a schedule throughout the year that tracks when contributions are remitted is a great tool.
  3. Eligibility: Eligibility is defined differently among plans and sometimes differently depending on the type of contributions. As a plan sponsor, you should make sure that employees have met the eligibility requirements before being enrolled into the plan and contributions begin.
  4. Administrative matters: As a best practice, plans should have a designated committee that meets regularly to discuss the plan. In these meetings, minutes should also be taken to document what was discussed, and any actions taken for the plan.
  5. Vesting: Errors in this area result in either too much or too little being forfeited. Plan sponsors may rely on the recordkeeper to track vesting percentages. Plan sponsors should understand that they are ultimately responsible for the plan and should also review vesting for participants even if it is being calculated by a third-party service provider.
  6. Forfeitures: Often plans are not using these funds timely or are using them incorrectly. Be sure that your plan forfeitures are being used timely and in accordance with the plan document.
  7. Distributions: Distributions need to be made in accordance with the plan document and to the correct, eligible participant in the plan. If the plan sponsor is responsible for approving any type of distribution out of the plan, processes need to be in place and monitored to ensure that these distributions are being reviewed accordingly.
  8. Manual employer contribution calculation: This is becoming less common in plans. However, some plans still perform their own matching calculation in a spreadsheet. A simple error in the spreadsheet can cause the entire calculation to be wrong. Having review procedures in place to ensure the accuracy of this information can help prevent costly errors to the plan.
  9. Participant elections: When a participant elects to change their deferral amount, the plan sponsor should ensure that these changes are made as soon as administratively possible, usually by the next payroll cycle. Checks should be performed throughout the year to ensure that any deferral changes are going through the proper channels and being implemented timely and correctly.
  10. Understanding service provider contracts: More tasks are being outsourced to third-party service providers. Plan sponsors should review contracts with all service providers to make sure they know what responsibilities still fall onto the sponsor. It is also important to review these contracts to understand investment offerings and any fees that may be charged.

Benefits brokers play a role, too

As more employers continue to turn to brokers and consultants to deliver benefits solutions, these professionals, too, can do their parts to help their clients stay compliant when it comes to employee benefit plan audits. As a benefits broker, you can help your clients significantly as they navigate the ins and outs of plan requirements throughout the year. Below are three ways you can help your clients remain on top of their plans that could help encourage participation, compliance, and smoother audits:

  1. Ensure clients understand plan documents: Compliance errors happen more frequently due to lack of understanding of the plan document or not following the plan document correctly. The plan document is the roadmap for running the plan. As an advisor, you should be reviewing with the plan sponsor frequently to make sure it is up to date with current legislation.
  2. Make sure clients understand fiduciary responsibility and liability: Often, the plan administrator at the plan sponsor is unaware that they are a fiduciary of the plan. Plan administrators should know this and seek advice from their advisor as to what this liability entails.
  3. Check on retirement readiness: Are plan participants ready to retire? How is the employer helping them stay informed of the 401(k) plan and what it has to offer? Plan sponsors should ensure that they are properly educating participants on the retirement plans their company offers.

Those benefits brokers who bring this type of value-added consultation to their clients are most likely to maintain those relationships and build new ones in the process.

Anne Morris, CPA, is principal and employee benefit plan practice leader at Windham Brannon, P.C.

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