Top Three Retirement Plan Audit Findings and How to Avoid Them


If you showed up to work tomorrow morning to find out that your retirement plan was being audited, how would that make you feel? Are you prepared for an audit? If the thought of an audit makes your heart sink, it’s time to be proactive. Here are three of the most common errors found in audits and what you can do to fix them.

Error #1: Late Remittance Of Employee Contributions

The Problem:

Most employers have at least one delinquent remittance each year. The problem with this is that late remittances are considered to be a loan to the employer and therefore a “prohibited transaction,” which could lead to plan disqualification.

The Rules:

Employee contributions must be remitted as soon as they can reasonably be segregated from sponsor assets. This needs to be no later than the 15th business day of the following month. There is a seven business day safe harbor for small plans of fewer than 100 participants. Larger plans are offered no safe harbor.

Best Practices:

It is important to remit participant contributions as quickly as payroll taxes are remitted. You should cross train employees so that remittances happen regardless of vacations or illnesses.  Or consider a payroll provider who integrates with your plan provider to automate the transfer of contributions. One of the most important things that you can do is to be consistent. If it is demonstrated that you can deposit employee contributions earlier even once, then that could be used as the new standard for your plan.

Corrections:

There are two options for correcting a late remittance of employee contributions. You can self-correct or use the Voluntary Fiduciary Correction Program (VFCP) provided by the Department of Labor (DOL).

If you self-correct, lost earnings will be calculated based on actual investment returns. You will need to file Form 5330 and pay an excise tax on the lost earnings. With the VFCP, lost earnings are based on a DOL interest rate calculator. You have to file an application with the DOL, but you will not have to pay an excise tax.

Error # 2: Usage of Incorrect Definition of Compensation

The Problem:

Most plan contribution amounts are calculated based on compensation. However, there are various ways that “compensation” can be defined, and often plan sponsors are not aware of how it is defined in their particular plan. Using a wrong definition of compensation will likely lead to incorrect deferral amounts and employer contributions.

The Rules:

Compensation must be defined by the plan document. There is an annual limit to the amount of compensation that can be considered when calculating permitted contribution amounts. In 2018, up to $275,000 of annual compensation may be considered for each employee.

Best Practices:

First and foremost, be aware of how compensation is defined in the plan document! Payroll codes should be audited at least annually to ensure that they agree with the definition of compensation found in the plan document. You should also establish a procedure for adding pay codes that ensures they are configured correctly. You may find that your plan documents define compensation differently than originally intended. If that is the case, you may need to amend the plan to conform to your desired definition of compensation.

Corrections:

Using the wrong definition of compensation can lead to two kinds of errors: excess contributions and under-contributions. In the case of excess contributions, excess deferrals need to be distributed along with their earnings. Excess employer contributions are automatically forfeited. For under-contributions, the employer must pay 50% of the missed deferral and 100% of any missed match or profit sharing. All amounts must be adjusted for lost earnings, as well.

Error #3: Eligibility Issues

The Problem:

There are several problems that can arise around eligibility to participate in a retirement plan. One common problem is a simple misunderstanding of eligibility requirements. Also, some plans end up with multiple eligibility requirements for different plan contributions. It is easy to misapply entry dates or incorrectly deny participation to certain classes of employees. All of these can lead to difficulty in implementing automatic enrollment.

The Rules:

The plan document is what drives plan eligibility. The government has set limits to restrict how long an employee can be prohibited from participating in a plan. Certainly plan sponsors can provide for much earlier eligibility if they so choose. The longest a plan can require someone to wait for eligibility is until they reach age 21 or have worked for the employer for one year consisting of at least 1,000 hours. If your plan requires a one year wait, then you are required to offer semi-annual entry dates, at a minimum.

Best Practices:

Once again, it is vital to read the plan document to fully understand eligibility requirements. It is also helpful to offer a robust employee orientation with a clear discussion of eligibility. The fewer entry dates you offer, the easier it will be to handle. If you don’t offer immediate entry, you should perform an employee audit at each entry date that you do offer.  Auto-enrollment and auto-escalation help prevent errors due to eligibility. Your advisor and third-party administrator should be able to handle plan design and implementation of both auto-enrollment and auto-escalation for you.

Corrections:

If one of your plan participants missed a deferral opportunity because of an eligibility error that you made, you have to make up for it. You must pay 50% of the missed deferral based on Actual Deferral Percentage for the employee’s group (whether a highly-compensated employee or not). This payment must be adjusted for lost earnings and immediately 100% vested. Any employer contribution missed must also be paid and adjusted for lost earnings.

Don’t wait for a government audit to catch and correct these common errors. Send me an email at [email protected] or call my office at (855) 530-0500 to see how I can help.

About Bob

Bob Herdoiza started his career as a CPA auditing retirement plans and is a Partner at Stonebridge Financial Group, a registered investment advisory firm. Stonebridge seeks to help clients build and manage highly effective, successful retirement plans. Bob also served as President of CEBOS for more than 15 years where he managed his company’s retirement plan before joining Stonebridge Financial Group. He takes pride in his firm’s 98% client satisfaction rate (according to a 2016 client survey) and individualized implementation approach. Learn more by connecting with Bob on LinkedIn or visiting www.stonebridgefinancialgroup.com.