Avoid These Two Employee Benefit Plan Audit Findings
Redpath and Company audits over 100 employee benefit plans per year, and in doing so we sometimes come across Employee Benefit Plans that have problems. Today, we want to highlight two of the biggest areas of concern that we come across. The core problem underlying both of these areas is usually that the Plan Sponsor is not following their Plan Document. Understanding these findings now will position your Company for less risk in the administration of your Plan and less stress during a required audit.
Definition of Compensation
The definition of compensation is often overlooked. Within your Plan Document, the definition of eligible compensation that should be used for calculation of deferrals will be defined. Many plans' documents start with W-2 wages, 3401(a) wages, or 415 safe harbor wages, and then have possible adjustments to those. Some of the adjustments to eligible compensation may include; pre-entry compensation, commissions, vacation payouts, bonuses and other certain fringe benefits—including reimbursements or other expenses allowances, deferred compensation, moving expenses, or welfare benefits.
- It is imperative for the Plan Sponsor to understand the definition of eligible compensation within their Plan and to have their payroll department and payroll service provider working together to ensure that the pay codes are set-up correctly. This is important in order to calculate both employee deferral contributions and Company contributions.
- If the incorrect eligible compensation is used, it can be very timely and costly to correct the errors that were made to employee’s accounts. Plan Sponsors may be responsible for making up employee contributions on behalf of the employee, plus lost earnings or missed Company contributions.
Late Remittance of Employee Deferral Contributions
Employee deferral contributions that are withheld from the employee’s pay must be remitted to the Plan as soon as administratively possible. The Department of Labor (DOL) expects timeliness and regularity when it comes to employee deferral contributions being segregated from Plan Sponsors’ assets and into the Plan. Plan Sponsors are expected to look at the earliest date at which the funds can be remitted to the Plan—which may often be on the same day as payroll. Once a precedent is set for how soon Plan Sponsors are able to remit those funds, Plan Sponsors should continue to follow this. For example, if Plan Sponsors are able to remit within 2 business days, the DOL will expect them to remit all employee deferral contributions no later than 2 days after each subsequent payroll.
If employee deferral contributions have not been remitted to the Plan, the Plan Sponsors needs to remit the late employee deferral contributions as well as lost earnings that the employee missed out on due to the delay in the remittances. The Plan Sponsor is also required to file IRS Form 5330 and pay excise tax.
If you have any questions regarding your employee benefit plan audits, avoiding findings, or want other constructive feedback on audited financial statements in order to improve the quality of financial reporting for employee benefit plans, please contact Karlie Johnson, Redpath’s Benefit Plan Audit Service Area Leader today.