Understanding the process of the plan audit can help a plan sponsor prepare, well ahead of time, for the process itself. An audit starts with that official initial notice, discussed above. As the DOL says, “if the items are well organized and complete we can conduct the examination more easily and in a shorter time.”
Planning for an audit sounds like rooting for a root canal, but unlike unwanted dentistry, planning for a plan audit can significantly lessen the pain involved. As we’ve written in other parts of our blog and newsletter, under sections §504 and §506 of ERISA, the Department of Labor (DOL) is empowered to conduct civil and criminal investigations of employee benefit plans, sometimes referred to as an audit. DOL can investigate anyone that falls into the category of a fiduciary under ERISA law, including, plan sponsors, service providers, advisors, and trustees. Unlike other governmental investigations and audits, which may happen periodically or randomly, EBSA investigations are almost always triggered by a complaint or report. Most triggers stem from items included in your Annual Report, such as those indicating insufficient bonding, excessive administrative expenses, or hard to value assets. Other triggers come from participant complaints. EBSA may also have specific areas or enforcement projects they are seeking to audit. Those specific areas of focus might include: abandoned plans, plans of companies in Chapter 11 or Chapter 7 of the Bankruptcy Code, and those with delinquent employee contributions. EBSA investigations, via an official initial notice, will state clearly the documents and data the auditors or investigators are seeking. Most of that data, usually going back three years, will focus on the plan and details surrounding it, such as investment policy statements and plan financial statements. Harder to find data could include plan correspondence, especially if it is by email. Later, as the investigation continues and key personnel are interviewed, EBSA may seek additional documents, including those addressing corporate governance, funding, investment selection and disclosure.
Keep in mind, of course, that the DOL isn’t the only one who can come knocking. The DOL examines the “fiduciary standards, reporting and disclosure requirements and other rules that do not affect the qualified status of 401(k) plans,” whereas the IRS examinesthe “qualified status of 401(k) plans.”
Understanding the process of the plan audit can help a plan sponsor prepare, well ahead of time, for the process itself. An audit starts with that official initial notice, discussed above. As the DOL says “If the items are well organized and complete we can conduct the examination more easily and in a shorter time.” After the official notice, an initial interview takes place so that the examiner can understand the plan and focus the review. After that, the agent or examiner will review and test information for compliance issues. That may then raise additional questions needing other information. After the information is reviewed, the examiner will conduct a closing interview, noting areas that need attention and where corrective action must be taken. That is followed by a closing letter which will state any issues that couldn’t be resolved by agreement. That letter also starts the clock for your time to appeal.
The DOL also pretty clearly identifies specific areas where it will focus its review. Those are: 1) eligibility; 2) vesting; 3) Discrimination; 4) top heavy requirements; 5) Contribution or benefit limits; 6) Funding and deductions; 7) Distributions; 8) trust activities; 9) plan and trust documents; and 10) Returns and reports.
If the plan is audited by the IRS, it recommends that plan sponsors have documents pulled and prepared ahead of time. Those include: plan terms, plan operations, eligibility test results, policies and internal controls, notes on plan errors and corrections, and any results of self-auditing. Records including service provider agreements, opinions and determination letters are also helpful.
The IRS created an audit process guide (called an examination process) and even has a handy flowchart available at: https://www.irs.gov/pub/irs-pdf/p4324.pdf. That process also starts with a notice of a plan audit, and proceeds in a similar manner to the DOL audit. Including an initial interview, an onsite audit, a document review, possible additional materials, notices of corrective action, and a closing letter.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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