Auditing Your Plan Before the IRS or DOL Does

By Debra Davis

Many companies are unaware that their plans have problems until the plan is audited by the IRS or investigated by the DOL. However, by self-auditing or hiring a professional to audit your plan, you can identify and correct your plan’s problems before the IRS or DOL initiates an investigation.

Plan sponsors and their key benefits personnel are concerned that the documentation or operation of their plans may have inadvertently fallen out of compliance with IRS and DOL standards.

Our reviews have found operational problems with the plans. For example, in a recent self-audit performed for a plan sponsor, we identified ten violations of the Code and ERISA and provided the client with recommendations for improving its plan. Some of the most common problems we have found in that audit include:

• Late Deposit of Deferrals. Many plans do not realize that deferrals must be deposited as soon as reasonably possible after the pay date. For most plans, the DOL would likely conclude it is within five days to one week after the pay date. For periods longer than one week, the deferrals are more likely to be considered late by the DOL, unless the company can provide a business reason for the delay. This violation is both a fiduciary breach and a prohibited transaction.

• ERISA §404(c). Many companies mistakenly believe that they will be afforded protection for participants’ investment decisions by ERISA §404(c). However, we have found that most plans do not comply with 404(c). The most common reasons include the failure to provide participants with: (1) the identity and contact information of the 404(c) fiduciary; (2) prospectuses immediately before or after their initial investments in particular options; and (3) a description of the additional information the participants may request under the regulation.

• Employees as Independent Contractors. Many companies improperly classify employees with non-traditional roles as independent contractors. As a result, employees may be impermissibly excluded from the plan and denied benefits to which they are entitled.

• Services Performed Through Employment Agency. Many companies fail to give employees vesting credit for the time they performed services for the company through an employment agency before becoming regular employees.

• Improper Correction Method. We have found that several large bundled providers improperly correct excess contributions and deferrals for participant- directed accounts by calculating the earnings based on the rate of return for a money market account, rather than the rate of return for the participants’ accounts.

• Default Account. Plans often specify a money market account or a GIC (guaranteed investment contract) as the plan’s default account. The fiduciaries for 401(k) plans must prudently invest non-directed participants’ accounts, even if the plan document provides for a “default” account. While money market accounts or GICs may be prudent for short-term use, they may not be appropriate for long-term investing for retirement.

Companies should consider self-auditing their plans or hiring a professional who is experienced in auditing plans to determine if there are any problems with their plans. Professionals, such as our firm, often provide this service for a fixed fee and will work with you to define the scope of the compliance review so that it conforms to your budget.

© 2003 Reish Luftman & Reicher. All rights reserved. The Business Advisor Report is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.

Learn more about R&R related practice areas:
Employee Benefits