Large employee benefit plans are required by the Department of Labor (DOL) to have an annual audit performed to be used in filing the annual Form 5500. A large employee benefit plan is generally defined as having 100 or more participants at the beginning of the plan year. A small employee benefit plan is generally defined as having less than 100 participants at the beginning of the plan year and is not subject to the annual audit requirements.
The DOL also conducts its own audits of employee benefit plans as a result of an employee complaint or discrepancies on the Form 5500 report. These audits could result in fines for inaccuracies or issues if the plan is not in compliance with the plan document.
Common Errors There are numerous errors that could be uncovered during the audit of your employee benefit plan. However, what if you are a small plan not subject to the audit requirements? Would the errors be identified by plan management? As a plan sponsor of either a large or small plan, you should be aware of some common mistakes made in employee benefit plans.
Plan Compensation What is the definition of plan compensation according to your plan? This is an error that is commonly made when the definition in the plan document is not being followed. The definition of plan compensation in some plan documents can be very complicated, and if not followed can also be costly to the plan sponsor to correct.
What types of plan compensation are paid in your company? Many times there is base pay, bonuses, overtime, vacation, fringe benefits, etc. and the definition in the plan document may include and/or exclude different types of compensation paid. To further complicate the matter, plan compensation could have different meanings for employee deferrals, employer match contributions and profit sharing contributions. Your plan is not in compliance and should be corrected if the proper definition of plan compensation is not being used.
Plan Eligibility Have all of the employees eligible in your plan been given the opportunity to participate? Many times plan sponsors do not properly follow their plan’s eligibility requirements. For example, plan sponsors may assume that their plan document excludes certain types of employees, such as part-time employees, when in fact the provisions do allow for part-time employees to participate. It is important for plan sponsors to be familiar with their plan document’s eligibility provisions, and these provisions should be regularly monitored to ensure that all eligible participants are given the opportunity to participate in the plan. It is also important to have procedures in place to notify employees of the eligibility criteria and provide them with guidance as to how and when they may participate in the plan.
Late Deposits Have you deposited your employee deferrals and loan payments into the plan on time? The plan sponsor is responsible for remitting these contributions to the plan in a timely manner. The DOL requires that for large plans these contributions be deposited on the earliest date that the employer can reasonably segregate the amount from the employer’s general assets; however, in no event can the employer deposit the amount later than the 15th business day of the following month. This rule does NOT provide a safe harbor for depositing deferrals, but is a general guideline. For small plans, the DOL did establish a safe harbor for employee deferrals and loan payments which allows for these deposits to be made within seven business days following the receipt or withholding by employers. It is important to remember that plans are required to make these deposits as soon as it is administratively feasible to separate these deposits from the general assets of the company, and the DOL can always evoke penalties if they determine the deposits can be made in a timelier manner.
If a plan sponsor does not make deposits timely, the failure may be considered both an operational mistake and a prohibited transaction. The DOL has various correction methods available that may be able to help resolve the failure.
It is important to note that strictly adhering to the guidelines of both the DOL and the plan document are pertinent in effectively monitoring your employee benefit plan. Plan management needs to take the time to understand their plan document and should regularly review the plan operations to ensure they are compliant.
By: Kristin Metzger, CPA