It’s All in What You Make It…
Often when we speak with organizations, they say that compliance audits (which are required by the Employee Benefit Security Administration (EBSA) annually for large plans which include over 100 participants) are a necessary evil and a nuisance. Our response to them is simple – be prepared. You may be surprised in the value you can obtain from an annual audit.
The following post covers the keys to a successful, painless, and value-added audit process – with the main driver of this process being preparation.
Processes and Documentation
To effectively plan and execute an audit, the auditor will ask an organization about their processes – how does the ship run on a day to day basis? Who is involved and responsible? A substantial part of a compliance audit is assessing the internal controls and processes in place in order to ensure the audit is scoped properly and positions the auditor to focus on the higher risk areas.
The goal of an audit is to ensure that the plan is functioning properly in accordance with IRS and EBSA/DOL regulations, and the plan documents are in order to protect participants’ retirement funds. It is a best practice for a plan sponsor to have these processes and controls documented in a narrative or flow chart format. Having this documentation ready will allow for an easier audit in the long run. The main areas in which an auditor will focus on are as follows:
- Enrollment – How are new employees educated on the plan? Have employees been given the opportunity to participate in a timely manner?
- Contributions – Are contributions withheld from employee paychecks in accordance with their elections? Have they been contributing to the plan and investments in a proper and timely manner?
- Participant Loans – How does the company approve loans and ensure that they are paid back in a timely manner in accordance with the loan agreement and amortization schedule?
- Distributions – How does the company ensure that distributions are only approved for participants eligible to take such a withdrawal from the plan?
Along with good processes comes the retention of good documentation. While many transactions, such as employee elections and distributions, requests may be paperless in today’s electronic world and handled by one of the company’s outsourced vendors, it important that for any manual transactions, the company can support the results of its processes. For example, validation of employment for a plan participant along with dates of birth, hire, and termination.
In addition, a company should have proper documentation of all governance actions taken by the plan committee for the auditor to review. This is imperative as documentation is the only way to prove the company’s due diligence process and that something was discussed, authorized, and properly executed.
Know the Plan Document
Good processes and controls are important but equally as important is understanding the plan document and all of its provisions. Often, we find that an organization does have processes in place which allow for transactions within the plan to be processed consistently however they are consistently done incorrectly as the organization is not operating in accordance with plan provisions. Common errors can include using the incorrect definition of compensation, incorrect entry dates for new participants, and incorrect calculations for the organization’s contributions to the plan. The organization should make sure that all parties involved with the operation of the plan have read and understand the plan document. If the plan is subject to an adoption agreement for a prototype or volume submitter plan, the parties should be familiar with this document as well.
Often times, issues can arise when a plan changes vendors (custodian, recordkeeper, trustee). If a new plan document is adopted as part of a vendor change, it is imperative that the plan document is reviewed to ensure that plan provisions are properly stated in the new plan document. Plan documents and adoption agreements can be crafted differently with varying results.
Value Add Audit
The plan sponsor should expect their auditor to discuss the internal controls and processes at the conclusion of the audit. If there are any control gaps or best practices to be gained, an experienced auditor will address these with the organization along with recommendations for improvement at the end of the audit in order to properly execute the plan in an effective and efficient manner while staying out of the cross hairs of the DOL and IRS.
As stated, the key to a successful, painless, value-added audit is to be prepared. If you have any questions about what it means to be prepared, when to start, etc. please contact SC&H Group’s Employee Benefit Plan Audit team.