From the annual hassle of engaging an accountant to review retirement plan financials to the ever-present threat of a Department of Labor investigation, “audit” is practically a four-letter word for plan sponsors, advisers and administrators. But they don’t have to be a bad thing.
In fact, regularly conducting “mini” plan audits allows compliance to be broken down into more manageable, bite-sized pieces. These voluntary reviews require minimal time and resources and can pay big dividends. Not only do they help ensure plans are running smoothly in advance of a required plan audit, they also may uncover issues that aren’t on an accountant or auditor’s watchlist.
Mini audits can be used to spot-check virtually any benefits-compliance topic. Whether poring over plans for big-ticket items that are the focus of DOL and IRS audits or hand-selecting an area for review, the key is to keep the audit small in scope, only focusing on those who are directly affected by the provisions in question. Here are just a few examples of compliance topics plan sponsors have successfully self-audited with the help of a particular line of inquiry:
- Reconciliation of recordkeeper system to the trust
What method is used to reconcile the recordkeeping system to the trust? Do the participant records match the trust statements? How often does the administrator perform a reconciliation and clear discrepancy items? - Defined contribution plan loans
Are delinquent loans properly tracked and defaulted after the requisite time period? Are employee status changes such as unpaid leaves or payroll frequency transfers causing missed loan payments? Could edits or process improvements be developed to minimize these? - Required minimum distributions (RMDs)
Has the plan updated its RMD protocols in accordance with changes introduced by the SECURE Act? How is the administrator ensuring that spouse and non-spouse beneficiaries of deceased defined benefit and DC plan participants are paid out at their RMD dates? - Plan transfers
What happens when participants move between job roles, divisions or classifications (such as hourly vs. salary or union vs. non-union) that have different plan eligibility? What procedures are in place to end contributions to the first plan and begin contributions to the next? - Missing participants
What does the administrator do with returned mail? How are uncashed checks treated? Do they ensure that all benefits due are paid to the appropriate recipients? Do they exert enough effort to get benefits paid to hard-to-find participants, beneficiaries of deceased participants and alternate payees from qualified domestic relations orders? - Pay definitions
When someone in payroll adds a new pay type definition (for example, a payroll code for jury duty, paid sabbaticals or volunteer days), is care taken to flag whether the new pay type is plan eligible? Overlooking this step is a common cause of missed or ineligible contributions.
Plan sponsors also may wish to consider more sweeping “operational audits” as a means of improving administrative efficiency and enhancing the participant experience. Examples include comparing plan documents against the configuration of the administration system and processes laid out in operations manuals; reviewing the flow of eligibility and other data from payroll to administration systems; sampling benefit calculations across different distribution types and scenarios; and reviewing check-handling, lump-sum payments, periodic death searches and address changes.
Because of their larger scope, these reviews are often more time-consuming than mini plan audits, requiring a significant commitment of internal resources or the help of an outside specialist. But on the bright side, they usually only have to be performed periodically to keep a plan running well.
By incorporating frequent mini audits – and perhaps the occasional operational audit – into ongoing plan management routines, plan sponsors can identify and address compliance issues on their own terms. Many minor plan failures can be corrected without having to contact the IRS or pay a fee. For more serious mistakes, plan sponsors may be able to preempt an IRS audit by taking advantage of the agency’s Voluntary Correction Program.
Above all, mini plan audits reveal to plan sponsors where they stand on critical compliance issues, alleviating the uncertainty that makes an unexpected IRS or DOL auditor so intimidating in the first place.