Both the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) are actively auditing employer retirement plans to both protect workers and educate managers and fiduciaries as to their plan oversight responsibilities. What can you expect if you receive a notice from a federal agency saying your company’s 401(k) or 403(b) plan has been selected for audit?
The notice will introduce the auditor, set a deadline to respond, and provide an attachment listing the many documents you will need to produce. You may wonder, Why was our plan selected?” Most often, “random selection” is the answer from the agency. In reality, there are a few possible reasons for selection. The first reason is one of your employees or former employees who participated in your plan reported some discrepancy or concern about their benefit. A second common reason for selection is you filed your Form 5500 late in a prior year. Even though you probably followed the now fairly smooth process for filing a late Form 5500, the mere delay will often pull the plan into an audit pool. The third, and hopefully less common reason, is the audit was triggered by feedback from a different arm of one of the agencies about another area of your organization that was recently audited, for example, a payroll or tax audit, a wage/hour audit, or even a health-plan audit. Least common is the truly random selection of a plan for audit.
Upon receipt of the notice, the best advice is to schedule time to prepare yourself, your plans, your plan documents and financials, as well as your plan committee members (or board members) to present your plan in the best light possible.
- Notify your plan committee, provider, and plan counsel of the documents and reports needed.
- Respond to the agency as promptly and courteously as possible, even if it is just to make introductions.
- Request additional time if needed. Be prepared to explain the business reasons why you need more time. As examples, you may have to gather the documents from various sources, or perhaps key members of your committee have overseas business trips scheduled during the requested time frame.
- The agency typically asks you to schedule interviews with individual plan committee or board members. Their ability to demonstrate knowledge and commitment to their fiduciary responsibilities and accurate plan management will go a long way in making a favorable impression on the agent.
- Where monthly payroll records, deposit advices, plan activity statements, trustee reports, reconciliation reports, and the like are requested, it may be worth your time to hire a CPA to compile, review, format, and identify any key missing documents before the auditor arrives. Here the form and thoroughness of the presentation of documents also may reduce the amount of detail the auditor requests on follow up.
MSEC strongly suggests that you complete this preparation well before the agency notice ever hits your desk. Advance preparation begins when your organization decides to adopt or to sponsor a qualified retirement plan. Before adopting a plan, the organization should understand the serious responsibilities it is accepting, and answer key preparatory questions early on like:
- Why do you want to sponsor a plan?
- What are our real plan objectives?
- Who will be the responsible plan committee members?
- What sort of insurance and indemnification should the plan sponsor provide?
- Who will come to conduct fiduciary training for the appointed committee members?
- How will we communicate properly with employees?
- Should we individually design our plan document, or adopt a prototype/volume submitter plan document from one of the turnkey plan providers or insurance companies?
- Should we conduct a full request for proposal (RFP)?
- What are the advantages, risks, and costs of each type of plan?
- What will be our internal processes?
- How often will we conduct an internal or self-audit of the plan?
Another key consideration is the annual audit, by a public accountant, which all plans with more than 100 participants must conduct and file with the DOL. A thorough audit is vital to protect your plan and organization. It is in your best interest to maximize the results of your plan’s audit with a well-qualified auditor who will properly determine whether the plan assets covered by the audit have been valued fairly and whether the plan’s obligations are accurately stated and described. For smaller plans, best practice recommends an internal review or self-audit of plan operations, administration, and compliance. At a minimum, you will want to review whether:
- employee contributions to the plan were timely deposited and credited to participants;
- payments, such as loans, hardship withdrawals, rollovers or final distributions, were all made in accordance with plan terms;
- participant accounts are fairly stated;
- Summary Plan Descriptions (SPDs), Summary Material Modifications (SMMs), Summary Annual Reports (SARs), and other mandatory participant disclosures are current, consistent, and properly distributed;
- various required non-discrimination tests were accurately conducted and passed, or if not, timely corrections were made; the performance of plan partners, e.g. third party administrators (TPAs), investment managers, trustees, record keepers, auditors, attorneys and others met contractual agreements and plan sponsor expectations;
- any others issues were identified that may impact the plan’s tax status; and
- whether any transactions prohibited under ERISA were properly identified.
Future Bulletin articles on retirement plan compliance and operations will cover related topics, best practices, fiduciary education and pointers, and correction methods available to prepare your plan for audit well before you receive an agency notice.