A Whitepaper for Qualified Plan Sponsors
By Lona L. Ebert, CPA, Bronfman E.L. Rothschild
As a Plan Sponsor, at some point you may receive a letter from the Department of Labor (DOL) notifying you that your qualified plan will be audited. The DOL is responsible for the administration and enforcement of Title 1 of the Employee Retirement Income Security Act of 1974 (ERISA), the law governing all qualified retirement plans. The law vests investigative authority in the Labor Secretary. Specifically, “The Secretary shall have the power, in order to determine whether any person has violated or is about to violate any provision of this title or any regulation or order thereunder to make an investigation and in connection therewith, to require the submission of reports, books and records, and the filing of data in support of any information required…”
In our experience, most plans receive a letter via email addressed to the Plan Administrator* with the official notification of the audit. This letter includes the detailed list of documents and information you will need to prepare and submit or have on hand for the DOL to review.
- Department of Labor – The government agency responsible for the administration and enforcement of the Employee Retirement Income Security Act of 1974
- ERISA - The Employee Retirement Income Security Act of 1974 is the law that governs all qualified retirement plans.
- Plan Administrator – The individual named by each retirement plan to serve specific fiduciary responsibilities including the timely filing of forms with the federal government, disclosure of information to plan participants, the hiring of plan service providers, and any other responsibility defined by the plan.
- Form 5500 – The annual report filing that details information about an employee benefit plan.
- Large Plan – welfare or retirement plan with more than 100 participants on the first day of the Plan year
- Small Plan – welfare or retirement plan with less than 100 participants on the first day of the Plan year
- Fiduciary – any person who (a) exercises any discretionary authority or control over the management of the Plan or disposition of Plan assets, (b) renders investment advice for a fee or other indirect or direct compensation or (c) has discretionary authority or responsibility for the administration of the Plan.
Why Is Our Plan Being Audited?
While the DOL doesn’t discuss how many plans are audited each year or why, DOL audits are not uncommon. Generally there are four main reasons your plan comes to the attention of the DOL resulting in an audit:
i. Errors on Form 5500 – The DOL may initiate an audit if something on the Form 5500, the annual report of the employee benefit plan, stands out during their review. Generally, incorrect or incomplete financial information on the Form 5500 can lead to further scrutiny. For example, a plan may receive additional scrutiny if the Form 5500 lists non-traditional assets like company stock, real estate, limited partnership units or any other asset that doesn’t have a readily determinable value on an established market. These assets must be independently valued at least once a year. Failure to report these assets at fair value is reported on the Form 5500. The additional cost to have an independent valuation each year on non-traditional assets far outweigh the potential consequences of not having one.
ii. Late deposits and deferrals - Employee deferrals must be remitted to the Plan’s trust at least 5 business days following the payroll date for a large plan or 7 business days for a small plan. Any employer contribution needs to be deposited by the due date of the business return, including extensions, but no later than the end of the year following the Plan’s year end. The DOL is most concerned about late deferral deposits as this is participant money.
iii. A participant complaint – It is not uncommon for an employee participant in a plan to make a complaint to the DOL about the plan. This may occur if they feel they have been wronged, whether justified or not, and notify the DOL. The DOL will always respond to a complaint from a participant. This is no surprise since the DOL’s job is to make sure retirement assets will be available for each participant when requested. While a participant complaint does not always lead to an audit, it may increase the audit risk if multiple complaints are received from plan participants from the same Plan sponsor.
iv. Random – The DOL sets criteria each year for issues they want to examine more closely. The DOL may not always share what criteria they will be focusing on however you may check the DOL website to see their current enforcement projects. http://www.dol.gov/ebsa/erisa_enforcement.html#6
The Information Request
As noted above, when the DOL notifies you that your plan will be audited, they include a list of information for you to prepare and submit to them for review. This list often runs two pages and can cover information going back as far as 3 or 4 years. For example, assuming a calendar year plan, a letter received in 2014 might request information going back to January 1, 2011 up to the date of the letter in 2014. To get a sense of the scope of this information request, in addition to all plan documents, you will likely be asked for all payroll records, enrollment forms, participant disclosures, and participant statements. For a large plan, the amount of information requested can be substantial. Generally, the DOL will give you 30 days to submit the requested information – not a lot of time for a large plan.
Never ignore the letter. Once you get the letter, if you need more time, call the agent listed and ask for more time. The DOL will almost always give it to you. It is better to ask for more time than to not give them everything they ask for.
If the DOL requests something your plan does not have, simply say so. For example, if the DOL requests minutes from an investment committee and your small plan does not have an investment committee, simply note that you don’t have one. An answer of “not applicable” is better than ignoring or not addressing the request.
If you are asked to submit participant or trust statements, a year to date statement as of the Plan’s year end is sufficient. You do not need to submit monthly statements since all the information will be reflected on the year-end document. The DOL wants to see all activity to make sure the deposits were made into the plan in a timely manner. They may also ask for payroll records to match up the deferrals with the deposits to assure that the deferrals are deposited within the specified time period.
Following is a full list of information that was requested in an actual DOL Audit in 2013:
Documents Creating and Describing the Plan:
- Documents establishing the Plan, including all amendments
- Trust Agreements, including all amendments
- Summary Plan Description (SDP)
- Summary of Material Modification (SMM ) reports
- IRS Determination Letter(s)
- Signed copies of all Forms 5500, including all attachments and schedules
- Summary Annual Reports (SARs)
- Copies of any IRS Forms 5330 filed for the Plan
- Names, home address, home phone numbers, email addresses and Social Security Numbers of all Plan Trustees, Plan Administrators and named fiduciaries
- Current fidelity bond with all applicable attachments or riders
- Current fiduciary liability insurance policy
- Information sufficient to show all persons and entities providing services to the Plan, or to the Plan’s sponsor as it relates to the Plan, directly or indirectly, including contracts, dates of service, addresses and amount of fees paid
- Statements from the Plan’s service providers detailing the services to be provided and all direct and indirect compensation to be received by the service provider, its affiliates, or subcontractors
- Source documents showing details of administrative expenses paid by the Plan
- Any existing schedule(s) of delinquent employee contributions, including amounts and dates of withholding from employee pay and/or dates contributions were received from participants
- Any existing schedule(s) of delinquent employer contributions, including dates contributions were owed and dates contributions were deposited into participant accounts
- Participant distribution records
- Schedule of participant loans
- Participant loan files
- Minutes of Plan Trustee meetings and minutes of the Board of Directors or any other committees of the Plan sponsor as they relate to the management of the Plan
- Any Black Out Notices
- All correspondence related to the administration of the Plan
Plan Participants, Assets and Accounting
- Year-end statements of Net Assets Available for Plan Benefits, and statements of Changes in Net Assets Available for Plan Benefits, with no items identified as “other”
- Trust company schedule of contributions received or other transactional reports showing each deposit received by the Plan trust, including date, amount and type of deposit
- Summary payroll reports that show the amount of employee elective deferral contributions withheld or collected during the pay period, and any adjustments made to reconcile those deductions to the amount deposited in the trust
- Payroll records for all employees, with sufficient detail to document the amounts withheld from pay for those employees making contributions to the Plan
- Schedules or account statements showing participants‘ annual account balances including vesting percentages
- Schedules of loans and all related supporting documentation for any loans, other than participant loans, to or from the plan, including promissory notes, amortization/repayment schedules, and current balances
- Records regarding any real property held, bought or sold by the Plan, including documentation to support the fair market value reported for this asset
Plan Sponsor Information
- Names, home addresses, home phone numbers, e-mail addresses, and Social Security Numbers of all corporate officers and directors of the Plan sponsor
- Listing of all organizations affiliated with the Plan Sponsor
- Listing of all other employee benefit plans maintained by the Plan sponsor and its affiliates
- Plan sponsor’s annual audited and unaudited financial statements including accountant’s opinion and notes to the financial statements
While the DOL will ask for most of this information to be submitted to them electronically, they may note that some of the information must be compiled and available for review upon request.
Preparing for the Interview and Audit
Once you have submitted the requested data, the DOL will give you a date and time for an interview. Depending on the company location and the timing, this interview may be on the phone or in person.
On the day of the interview, it is important that you have everyone in the room who is involved with the plan – the payroll person, the person who remits the contributions to the plan, the person who prepares the plan document, the person listed as the trustee who is ultimately responsible for the operation of the plan, the one person who has oversight of the trustee (generally a CFO).
Some plans will invite a third party administrator or an ERISA attorney to be there. If they can help you answer the agent’s questions, then they should by all means be there.
Managing the interview requires trying to give a direct answer to each question the agent asks, and only that question. By offering additional information the agent may not have asked for, you could inadvertently widen the scope of the audit and trigger additional information requests.
Whenever the agent asks a question, the person who is responsible should answer. Encourage each person to answer truthfully. If you have made a compliance or operational mistake with your plan, this is the time to let the DOL know. It is better to “come clean” right away, especially if you have already fixed the problem and can tell the DOL how you remedied it and that you have put steps in place to prevent future mistakes.
In our experience, the DOL will always ask questions about ownership. If you own one company, do you also own another? Are you covering everyone that you are supposed to? If a large plan is being audited, the agent will likely ask about other health and welfare plans (medical, dental, life insurance, etc.) offered to employees. They may then ask for the Form 5500 for the other plan(s). If you can’t produce the Form 5500 filings, they now have a reason to look at another plan maintained by your company.
While it may feel intrusive and daunting, the DOL has the right to do a thorough review of your plan and ask these questions. If you offer any other employee benefit plans, it is expected that you also operate those plans in compliance with certain regulation and fiduciary requirements.
After all the information is compiled and the initial interview occurs, the agent will schedule a time to come on site to do the audit. While this sometimes happens at the DOL office, more often the DOL comes to your facility. If they are onsite, employees talk and the DOL listens. The agent can pick up information onsite just by listening to conversations taking place around them.
To keep the DOL focused on the work at hand, it is best to keep the auditor/agent in a conference room. The objective is to get the audit done quickly and keep the DOL focused on what they initially requested. Your plan could be doing everything right, but if questions arise, you don’t want the DOL to expand the audit and request more information since this takes additional time and effort away from your regular work.
As in the interview, answer only the question at hand and do not expand on it. Answer every question. If they ask for more information, you find it. Try to keep it business-like and productive. While the additional requests may feel burdensome, you are required to comply and it is best to support them in their audit process.
In every step of this process, it is important to be truthful. The DOL has the power to press perjury charges.
Once the agent finishes the audit, he or she will discuss it with a supervisor. They may then come back with additional questions. Once again, whatever they ask for, you provide.
The DOL at this point will make you aware of any deficiencies discovered and discuss proposed remedies with you.
The Closing Letter
The DOL will write a closing letter summarizing what they found during their audit, any deficiencies in the operation of your plan, and what you did to fix it. They won’t issue the closing letter until you remedy all the deficiencies identified in the audit. This means the issuance of the closing letter can take 6 months to a year from when you started the process. During that time, there may be further discussions with the DOL to make sure all issues are discussed and resolution obtained.
Until the closing letter is received and the audit closed, it can feel like a distraction. You must keep all of the data requested available until the audit is closed. While you don’t want to pressure the agent to ”close the books” on the audit, it is fair to give the agent a call periodically to check on progress and see if they have questions.
While most audits are routine resulting in only a closing letter identifying minor deficiencies, some audits can uncover more serious issues. These issues often revolve around inappropriate use of plan funds which may result in a civil action that becomes part of your public record. Deficiencies may also result in fines and may lead to more frequent audits.
A plan with late deposits will be asked to make changes to current procedures. The plan will also have to do lost earnings calculation and remit these earnings to the plan and allocate to affected plan participants. The DOL may also require the plan to file a Form 5330 with the IRS which calculates an excise tax the company will have to pay.
The Employee Benefit Security Administration (EBSA), a sub-unit of the DOL responsible for overseeing plans, will publish any findings from DOL audits on their website. This is where they publicly identify plan sponsors sited for late deposits or other issues.
For truly egregious errors, the DOL may pursue criminal charges. Significant and/or recurring problems could result in Plan fiduciaries facing either civil or criminal charges which could even include jail penalties.
The DOL can also site the plan’s auditor. If the DOL believes the plan auditor was negligent, the DOL could report the auditor(s) to the American Institute of Certified Public Accountants (AICPA). The AICPA has the power to do their own investigation and could pull the auditor’s license. Everyone involved in the plan is potentially at risk.
As a side note, some plans balk at the cost of independent qualified plan audits and other service providers, but this is not an area to look for the lowest cost provider. A well-executed audit may prevent the kind of problems that could lead to serious consequences in a DOL audit. Don’t take this risk. As a fiduciary to the plan, you are responsible for making the right decision, including hiring an experienced qualified plan auditor and other service providers.
The DOL wants all qualified plans to be in compliance with ERISA laws and for the plan participants’ assets to be protected. It is important to take an audit very seriously. Audits are not uncommon. Plan sponsors subject to an audit who are in compliance with the rules will generally find the DOL only identifying minor deficiencies. While time consuming, a well-run plan will have the audit completed without a fine or civil complaint. Those plans identified with more serious deficiencies can improve the audit outcome by being truthful and taking immediate steps to remedy the issues identified by the DOL.