November 1, 2019
By Jeffrey K. Mock
Having just passed the final filing deadline for employee benefit plan audits, it is an appropriate time for manufacturers to consider how to improve processes to avoid the same headaches again next year.
Consider who’s eligible. The audit requirement is driven by the number of employees eligible to participate, not how many are participating. You can find this number on page 2, line 5, of form 5500. Not uncommonly, plans are designed to sweep up far more employees than are actually participating. This can trigger an unintended audit requirement. Talk to your third-party administrator (TPA) about whether changes in the plan design can eliminate the audit requirement, including cashing out small account balances of former employees.
Consider your custodian. Not all custodians (the organization that holds the plan’s assets) can issue what’s referred to as a “complete and accurate” letter certifying the plan’s assets. Auditors can rely on these letters to reduce audit procedures related to the plan’s investments (which can in turn reduce audit costs), but not all custodians can issue such a letter. Generally only banks, trust companies, and insurance companies can. Brokerage firms generally cannot.
Consider your service providers. Can they provide a service organization control (SOC) report? Not all TPA’s or custodians spend the money to obtain a SOC report. Others don’t receive unmodified, or “clean” reports. Since most plans operate on an online platform provided by a service provider, the functioning of that platform in accordance with its goals of safeguarding the participant’s retirement information and access to investments is key.
Consider your participant’s deferral contributions. The funds withheld from the employees are still the employees’ funds. The Department of Labor (DOL) looks harshly at plan sponsors that don’t transmit those funds “as soon as administratively possible” to the custodian. This is subject to interpretation, but one rule of thumb is that those funds should be transmitted as quickly as payroll taxes withheld would be. Late payment of funds withheld from employees exposes the plan sponsor to regulatory risk.
Consider the definition of plan compensation. Your plan document defines what qualifies as compensation. Employers and employees can be confused about whether bonuses are eligible for deferral or not. Plans differ on how they are treated. Be sure that you know how plan compensation is computed and it is as clear as possible as mistakes can be costly.
Consider your policy for matching. There are many philosophies about how the employer’s match should be computed. Some are easy to calculate, and some are difficult to calculate. Those that are difficult to calculate, such as fixed amounts, are subject to more errors than those that are simple, like flat percentages across the board.
Consider the auditability of your payroll system. The sponsor’s payroll system calculates the amount of the employee deferral. If your payroll system is unable to perform the required calculations correctly and consistently, the amounts contributed will not be correct and will not be deposited timely which can be costly.
Consider your process for approving distributions (whether on paper forms or through your provider’s online portal). Documentation requirements for hardship withdrawals should be met and documentation retained. Other distributions require varying amounts of sponsor involvement depending on the platform used. Are your controls around approval clearly communicated to whomever is responsible for approval?
Consider the state of your personnel files. Demographic data such as hire dates, birth dates, termination dates, plan entry date, and so on should be accurately maintained. Inaccurate information can lead to incorrect amounts of distributions, participants that are not offered enrollment on a timely basis, participants that are incorrectly included or excluded from participation, and other operational errors. The sponsor has a duty to keep accurate records.
Consider plan expenses. Is there an approval process for expenses paid by the Plan, if any? Do the trustees consider the fees and document their consideration of them? Are fees reviewed and compared to industry metrics on a regular basis?
Consider the results of your compliance testing. TPA’s run complicated tests required by IRS rules to determine if plans are top heavy and if there are excess contributions. If you consistently fail your testing and make corrective distributions every year, work with your TPA to see if this can be avoided through changes in contribution amounts or plan design.
Consider your responsibilities as sponsor. Employee benefit plans and the regulatory requirements surrounding them are complicated and most sponsor personnel encounter them once per year. Using your TPA, advisors and auditor as a resource is appropriate. Not doing basic due diligence as outlined above will only lead to problems as the sponsor is ultimately responsible for the plan and its operations.
Taking the time to consider these issues now while this year’s audit is fresh may help avoid similar issues in 2020.
Jeffrey K. Mock is the Partner-in-Charge of BPM LLP’s Seattle regional office. He has nearly 40 years of public accounting experience working with clients to understand the financial dynamics of their companies; creating business value through business structuring, strategic and succession planning; and minimizing taxes through planning. He can be reached at email@example.com.