7 common issues plaguing employee benefit plans
Observations from the recent plan audit season
Bryan A. Ekern, CPA and Marjorie Heap, CPA | November 2020 Footnote
Editor's note: Updated October 30, 2020
An employee benefit plan audit is more than a regulatory obligation. It also serves as a valuable opportunity to uncover issues within the plan. Once an issue is identified, it’s important to take steps to correct it as soon as possible.
To help you better understand the issues that often plague employee benefit plans, here are the most common errors we encountered during this past audit season.
Using the incorrect base of compensation
Using the incorrect base of compensation is by far the most common issue we see. It often happens when the plan’s definition of compensation — specifically, what is included and excluded from eligible compensation — is not followed. When this happens, there are errors in withholding, matching and other areas of the plan that depend on payroll. Examples of error-prone areas include fringe benefits, gift cards, bonuses and post-employment compensation or severance.
Delinquent participant contributions
The timely remittance of participant contributions is a very key issue for the U.S. Department of Labor (DOL). The DOL requires that participant contributions be remitted to the plan as soon as can be reasonably segregated, but no later than the 15th business day of the following month.
It should be noted that the 15-day period is not a safe harbor. When determining timeliness, the DOL will consider the remittance of payroll taxes and the timing of past deposits. If an inconsistency is found, the contribution will generally be categorized as late.
Errors in this area often occur when an employee is on vacation or the company runs manual checks; sponsors should have procedures in place to handle these situations. Although there is not a safe harbor for large plans, small plans — i.e., those with fewer than 100 participants — are permitted to use a seven-day safe harbor.
Other contribution issues
Additional common errors resulting from issues with contributions include the following:
- Inconsistent timing of participant enrollment occurs when entry to the plan does not happen on the date required by the plan document. Typically, this is the result of improperly monitoring new employees as they meet the plan’s eligibility criteria. The errors are most often seen in situations that involve implementing automatic enrollment or bringing back rehired employees.
- Improper handling of participant elections, such as not implementing deferral rate changes in a timely manner or in accordance with plan requirements.
- Matching calculation errors caused by incomplete or incorrect information, particularly for plans doing true-up calculations.
- Poor loan servicing practices, which could include not starting or finishing the loan payments on time. The plan sponsor should regularly review the status of participant loans.
Inaccurate calculation of the vesting period
When the vesting period is not calculated correctly, it can often be traced back to incorrect dates in the payroll system or plan records, or misunderstanding the vesting requirements. The plan document will specify how a year of vesting is credited and whether that is based on the passage of time, the plan year or the fulfillment of certain hour requirements. To prevent these errors, it is important for plan personnel to review the vesting calculations when approving participant withdrawals.
Improper disposal of forfeitures
The plan document will dictate how and when forfeitures are to be used. All too often we see forfeitures that are not consumed by the plan in a timely manner or are not used for the purposes outlined in the plan document.
Incomplete fiduciary tasks
Fiduciary responsibility is another key issue for the DOL, which expects the plan to operate in the best interest of the participants and their beneficiaries. A lack of documentation in this area could leave plan fiduciaries open to personal liability, so it is important to take steps to mitigate this issue.
At a minimum, the plan’s management team should meet regularly and document each meeting. A failure to do so — or even a failure to produce meeting minutes — could indicate a lack of plan oversight. Furthermore, the plan’s management team should be regularly benchmarking the plan to make sure prudent choices are made regarding the plan’s investment lineup and fees. Finally, all plan decisions should be documented, including the selection of service providers and any discretionary employer contributions.
Missing a fidelity bond requirement
Plan assets must be covered by a qualified fidelity bond. A company’s general business or crime policy will generally not meet this requirement on its own. The company must have a separate policy or ERISA rider in place that covers the plan, does not have a deductible, meets the limit requirements and is obtained through a surety company approved by the U.S. Department of the Treasury.
What to do when issues are identified during the audit
As we mentioned, it’s important to correct any issues uncovered during the audit as quickly as possible. The plan should work with its service providers to make any necessary corrections in a timely manner and consider putting procedures in place to prevent errors in the future.
If the auditor has identified a significant deficiency or material weakness in internal control, these issues will be communicated in writing. The plan should refer to this communication when considering process improvements. Likewise, auditors should review this communication annually and be on alert for recurring issues in future audits.
Identifying issues within the plan also provides a blueprint for making plan improvements, which, for auditors, could lead to consulting opportunities. Sometimes, changing a plan provision or operational process can go a long way toward preventing the mistakes that create these common plan errors in the first place.
Bryan Ekern, CPA and Marjorie Heap, CPA are both directors at Peterson Whitaker & Bjork, LLC and members of the MNCPA Employee Benefit Plans Review Task Force. You may reach Bryan at bryan.ekern@pwbcpas.com or 763-557-2589. You may reach Marjorie at marjorie.heap@pwbcpas.com or 763-694-2522.
