Employee benefit plan audits require specific tests. Since plan sponsors are ultimately responsible for the audit, be sure that you get what you need to remain in compliance. Here are seven questions to confirm with your auditor that will keep you covered as long as the answers meet compliance standards:

1. Have the plan assets been fairly valued? What is the standard used to value the assets?
2. Are plan obligations properly stated and described?
3. Are contributions to the plan received in a timely manner?
4. Are benefit payments made in accordance with the plan terms?
5. Are participant accounts fairly stated?
6. Are there any issues with the plan that may impact the plan’s tax status?
7. Are there any identified transactions that are prohibited under ERISA?

Answers to the questions above will provide a dialogue with your auditor from which you can form a plan to make necessary corrections. Hiring an auditor with specific employee benefit plan experience makes it easier to prioritize the adjustments.  Your plan participants need the assurance that their benefit plan meets ERISA standards.

The formal name for setting auditor expectations is ‘written representations.’ Without a document of representations, the auditor is limited in his or her ability to provide a thorough opinion of the plan. The plan managers who are responsible for financial statements need to prepare a complete document for the auditor that includes the following:

-         Financial records and related transaction information

-         Minutes of meetings related to the plan such as plan committees, trustees or directors

-         Communications from regulatory agencies

In addition, the document must also include the following eight disclosures:

1. Acknowledgement of the fair representation of the financial statements of net assets available for plan benefits and  statement of benefit obligations
2. Statement that any uncorrected misstatements are immaterial to the financial statements as a whole
3. Internal control responsibility and procedures to prevent and detect fraud
4. Knowledge of any suspected fraud by management, employees former employees, regulators or others
5. Knowledge of violations or possible violations of regulations or unasserted claims
6. Intentions for the plan that may affect the classification of assets or liabilities
7. Verbal or written guarantees or gain/loss contingencies that affect the plan’s liabilities
8. Documentation of assets that are pledged as collateral

Your auditor will also want to know answers to these five questions: Read the rest of this entry »

401(k) plans require much maintenance to meet fiduciary requirements. There are many mistakes that can creep in over time that put you out of compliance. Here’s a list of potholes that can wreck your plan with the IRS:

-         Not updating your plan to reflect current laws

-         Not operating the plan in accordance with the plan document

-         Incorrect definitions of compensation for deferrals and allocations

-         Lack of consistency with employer matching contributions

-         Failing the 401(k) ADP and ACP nondiscrimination tests

-         Excluding eligible employees

-         Not making timely deposits of employee elective deferrals

-         Incorrectly administering participant loans or hardship distributions

-         Not making required minimum contributions

-         Delaying filing the Form 5500-series return

-         Not distributing a Summary Annual Report to all plan participants

Instead of losing sleep over the problems that come with non-compliance, the IRS provides a simple to understand 401(k) plan fix-it guide. The guide includes how to find, fix and avoid mistakes. Regular review of this list and making note of your compliance actions can save you time and work when it’s time for an audit.

Your 401(k) auditor has two essential and one optional step to take with regard to internal control deficiency findings. Before you hire your auditor, ask what you can expect with regard to communication and recommendations. By including your expectations in your engagement letter, you’ll get a better quality audit and can get information that will help you.

Two essential steps for your auditor

1. Evaluate the severity of deficiencies – Your auditor will determine if an individual or combination of deficiencies are material weaknesses or significant deficiencies. The measure used to determine severity is the:

• Magnitude of the potential misstatement
• Degree of possibility that the plan’s controls will fail to prevent, or detect and correct a misstatement of an account balance or disclosure.

2. Communicate the deficiencies in writing – Your auditor has no more than 60 days following the financial statement issuance date to communicate the deficiencies to you. For plans that file a Form 11-K with the SEC, the deadline is to communicate within 45 days. If no deficiencies are found, the auditor must also communicate a lack of deficiencies.

Note: Auditors are required to put the same deficiencies in writing repeatedly until the deficiency is corrected. And, the deficiencies found must be put in writing even if they were corrected after a verbal notice of the deficiency.

One optional step for your auditor

Recommend steps to take to improve internal controls – To me, this step separates an adequate auditor from a good auditor. Your organization can gain valuable insight from the recommendations prepared by your auditor. The recommendations give you fiduciary guidance that you can use to evaluate the costs and benefits for revising internal controls.

Such focused attention on internal controls gives plan fiduciaries a confirmation of governance, which is justification of a well-managed plan.

One of the most significant points of your benefit plan audit is determining the strength of internal controls with regard to reliable financial reporting. Here is a description of the three types of deficiencies that you want to avoid:

1. Material weakness – A deficiency, or combination of deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
2. Significant deficiency – A deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
3. Deficiencies in internal control – Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

Because internal controls are critical to good fiduciary management, I want to make sure that you have examples of issues that could cause a problem for you. Here are types of circumstances that may be material weaknesses or significant deficiencies: Read the rest of this entry »

It was discouraging to see the article in Forbes last week (August 16, 2011) titled, “Why 401(k) plans are doomed from the start.” From an auditor’s point of view, looking at hundreds of 401(k) plans, I think a better title would be, “The challenges facing 401(k) plans.” While responsibility lies in both courts, the participant and the sponsor, I will address a few of the issues that are put upon the sponsor to support my readers in optimal plan management.

1. Document the reasons for plan investment decisions. Financial brokers can bring you information that is helpful in making investment decisions. That doesn’t mean that you are relying on them as fiduciaries or that there is anything improper about the relationship. However, you need to protect yourself with having a range of resources and document all plan decisions.  Preferably, have a plan committee that includes non-biased fiduciaries.
2. Define your plan fiduciaries. Make sure that your plan document includes the credentials and relationships of all of the fiduciaries with input into your plan. See my previous post, Trustees vs. Fiduciaries, for more information.
3. Understand the relationship between plan costs and associated fees. As we have said before, much scrutiny is applied to plan fees by both disgruntled participants and the DOL. Be fully aware of the fees you pay and document committee decisions.
4. Keep your Investment Policy Statement up to date. The issues discussed above relate to your current Investment Policy Statement. Your Investment Policy Statement provides validation for the integrity of your decisions. It is also an important element to demonstrate compliance to ERISA and DOL rules and regulations.
5. Use your audit as a tool to improve your plan. Companies with 100 or more participants are required by law to have an annual audit. Your auditor can be a valuable resource for suggestions to improve operations and protect yourself from liability.

A common plan mistake that I see is plan sponsors not monitoring forfeiture accounts. Forfeiture accounts occur when monies are set aside to match employee contributions to retirement plans, but the employee terminates prior to fully vesting. The ‘forfeited’ money is supposed to be distributed within the terms of the plan. Generally, the balance held in the forfeiture account should be fully allocated at least once a year. Therefore, the balance of forfeiture accounts should be ‘zero’ at least sometime during the year. The IRS states those forfeitures may be used to:

-         Pay for a plan’s administrative expenses and/or

-         Reduce employer contributions

Here’s what you can to do make certain that your company is in compliance:

-         Put a provision in the plan document to detail the handling of forfeited monies.

-         Monitor forfeiture suspense accounts to be sure that monies are not carried into a subsequent plan year.

If you have already made the error, it’s possible to self-correct the mistake without penalty within a two-year period. See the Employee Plans Compliance Resolution System (EPCRS) for information about a Self-Correction Program and Voluntary Correction Program.

Thankfully, there are tangible actions you can take to manage a retirement plan well and reduce or hopefully eliminate liability issues. Here are five things a plan sponsor or individual fiduciary can do: 

1. Create an Investment Policy Statement that describes your investment guidelines for selecting and monitoring funds. Keep the statement current and make it available for all plan participants.
2. Administer the plan according to the plan document, making timely contributions and monitoring performance. Make adjustments as needed.
3. Make it a priority to understand all contracts and fees. Negotiate fees to get the best rates possible. Fees are your greatest source of liability. Understand and account for all expenses.
4. Engage others in the plan process by forming a committee to meet with regularly and document the meeting decisions and discussions.
5. Seek advice from retirement plan specialists. Such specialists provide an un-biased third party view and can assist you with the need to be a prudent expert for your plan.

In addition, your plan auditor is a good source of information regarding the management of your specific plan. A good auditor adds value to the audit process that helps you be proactive about addressing potential issues.

Once you’ve chosen the right auditor for your plan, you can reap benefits beyond just fulfilling your fiduciary responsibility. Here are a few things to consider prior to and during the auditor’s review.

1.       Improve your internal controls with the audit process

Your auditor is a great resource for information about improving internal controls. Sometimes making even a few small changes to the way you handle your plan can make a big difference in your role as plan fiduciary. And, having better internal controls can make the audit process smoother in the future.

2.       Learn the latest industry developments

A strong EBP auditor works on many plans. With the breadth of knowledge across a variety of industries, your auditor can share non-confidential information with you that can keep you current. Using the information you gain can improve your company’s plan and put you in a more valuable position for your company.

3.       Review contracts with third-party service providers and fee agreements

It’s hard to believe, but some auditors skip the step of contract and fee arrangement reviews. Go over these items with your auditor so that you understand if the contracts and fee arrangements you have are in the best interest of your plan. This is especially important with the DOL’s increasing attention to fees.

Another way you can add value to the audit is to schedule it for a time that is most convenient for you – a time when you can benefit from the big-picture items listed above. Call now to get priority scheduling for a summer audit.

Here are more questions from the IRS to ask yourself as you prepare your plan for an audit:

1)      Were employer matching contributions made to all appropriate employees under the terms of the plan?

Not as simple as it sounds, employers can unknowingly violate the terms of the plan with matching contributions.

• Check your plan for rules regarding deferred income.
• Properly identify plan entry dates and hours of service (if applicable).
• Be sure to calculate amounts on an annual instead of pay-period basis.
• Be aware of any changes made in the plan since the last audit to be sure to comply with the changes for all participating employees.

 2)      Has the plan satisfied the 401(k) nondiscrimination tests (ADP & ACP)?

ADP is Actual Deferral Percentage and ACP is Actual Contribution Percentage. Each year there must be a balance of the two (ADP and ACP). This has to do with the amount contributed by non-highly compensated employees (NHCEs) in relation to the amount contributed by highly compensated employees (HCEs). As the amount contributed by NHCEs grows, the amount that HCEs can defer increases. See the IRS document or talk with your auditor if you have questions in this area.

3)      Were all eligible employees identified and given the opportunity to make an elective deferral election?

It’s important for your plan to have a definition of eligible employees. Generally, this is all employees who receive a W-2.  You can reduce the risk of excluding employees from the election opportunity by keeping records of dates of birth, dates of hire, dates of termination, number of hours worked, compensation for the plan year, 401(k) election information and any other information necessary to properly administer the plan.

For more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.