Top 5 Employee Benefit Plan Audit Issues, Episode 2

So for me, that was just kind of in my DNA when talking about retirement plans, but not all retirement plans run that way. So, I know this was another issue that we saw this year. Can you talk a little bit about what your team saw and the challenges that not having that information readily available presented?
BD:Definitely. For doing a 401K audit, when you speak with the client, one of the first things you ask to get the ball rolling is your census. And a census can mean something to different people. When we're asking for that type of report, what we're looking for as the auditor is the employee's name, their date of birth, their data hire, and unique identifiers, so that could be like their social security number or their employee ID, and then all of the different payroll details, your gross wages, your 401K eligible wages, your 401K deferral, any excluded earnings that would be not eligible for 401k deferral, and the like. So when we get that census report from our client, one of the first things that we look to see is does it reconcile. For your calendar, your plans, normally what we'll ask is to see the W-3, which is your total page that you file with the government, and that should agree in totality to your senses at the participant level when you add it all up.

If that doesn't reconcile, then we have an issue and we need to go back to the client and say, "Why don't these two agree? Because they should." Sometimes it's that there's been W-2cs. We know that all can happen after you issued the W-2s. There was a correction that's needed, so you have to go in and do a W-2c, and thus there you would have a difference of what was filed and given to the government in total, and now what your census says with that reflect it change. So, that could be an issue. Once we can get to the understanding of it reconciled, then we can use that as a complete source to pick from in order to do our sample selection and do a deeper dive at the participant level for the individuals we're going to be testing for the audit.

So, it's so very important to have that reconciled and have that all agreeing so that it can be utilized for the next step. I know a lot of my clients also utilize that type of census report for their non-discrimination testing. So, it can serve many purposes, so getting it locked down and agreeing is pivotal, so you can utilize that. Another thing that it helps with is when you get the total of what the deferrals were, to agree that to what your provider received in the trust of the plan. So, say if there was in the year, a hundred thousand employee deferrals, that's what you would expect to see your provider receiving on behalf of those employees that are participating in the plan. So, reconciling payroll is key, and I definitely hear what you're saying as far as the importance of it and how it can play a pivotal role in an audit, and even beyond the audit for other purposes.
MD:Okay, so a follow up to that one would be, let's say I have a client who is currently not having the best experience with their auditor and they said, "Mark, this was really an issue with us, was reconciling payroll data," what could they do to get ahead of it for this year? Any kind of top one or two suggestions of actionable items for them?
BD:Definitely. Starting sooner versus later is always a great way to give yourself enough room if there are discrepancies to try and track them down, and making sure you have the final run of your payroll. Sometimes there could have been a one-off run that needed to be done after the fact, and you're not knowing that you don't have that final bit of information. So, those are some things that I talk through with my clients to make sure, when there are differences, to troubleshoot what it could be, and just sort of pack your patience that it's numbers. And I always say it'll fall out of what's happening. It's just going to take a little bit of time. And also knowing the right people to ask. So, some of these organizations have very large payroll departments, and getting to the correct person to help you navigate of what was filed and what that final report was is key.
MD:Okay. So instead of just looking back, we want to make sure that we're ahead of this.
BD:And this timeframe right now, we're talking in the first quarter of 2023, is key to get those all identified, reconciled, and tied up in a nice pretty bow.
MD:Yeah. Great. Great. Okay, well, moving on to our third challenge of this year's audit season. Personally, I like this one a lot because this is where the gloves are off and we address the elephant in the room here. So, you've discussed several potential pitfalls and things that could come up and make an audit a bit more cumbersome than it would otherwise be. When we discover discrepancy, I know it's human nature to try to maybe round table it and say, how do we make this go away. What's your advice? What do we do when we find a discrepancy?
BD:So, I always say that it's like spilled milk. It's on the floor. Let's just grab a rag and clean it up. There's no judgment. Things happen. We're all trying to do the best we can. So, once we can move past and not do finger pointing, then I think it's really great to identify what has happened, why it happened, who's impacted, and then how do we resolve it. One of the biggest things that I see for discrepancies would be the definition of compensation. So in your plan document, it's going to say what elements of compensation are to be included for doing your 401k calculation, and what are excluded. So, sometimes I've seen where somebody left, and they knew all those details of what should be calculated for 401K and what shouldn't. And then a new person came in and said, "Oh, well, at my last job, bonuses were never included in the definition of compensation, so I guess we shouldn't be doing it here either," without looking back to your source document, which is your plan.

And things like that can go awry. And when that happens, like I said, you just dusted off, identify who's impacted, how long has it been going on. I always recommend to speak with an ERISA Council because they can really help guide you through the process, depending on how large of individuals are impacted and get you across the finish line for what necessary correction actions would be done. So, that's one of the things I see. Another one that I've seen is untimely remittances. The money comes out of the participants pay if it's a deferral or a loan repayment, and then it needs to get into the trust as soon as you can segregate it from the general assets of the company, but not to see the 15th business day of the following month. I always hear that, that, "Well, it got in before the 15th business day." And I tell the individual, we need to roll it back.

And what the code says is that the first part, as soon as administratively possible, to segregate those assets from the corporate assets, that's the measuring stick. How quick can you do that aspect? And then the second part of it says not to exceed the 15th business day. So, we got to stay in the front part of that sentence versus the latter. And when that happens, then we just need to identify, again, who's impacted, how long was it delayed in getting to the trust? Was there a significant reason why, like someone gone on vacation or was there IT issues? And be able to remedy that. And again, always good to speak with ERISA Council. If it's of a larger volume, you want to just make sure you've got the experts involved. And definitely leaning on your TPAs, that's huge as well.
MD:So, I think I know the answer to this question already, but based on what you said, any thoughts on how people can get a... It sounds like you're doing education after the fact. Any thoughts on how people can get ahead of some of these discrepancies?
BD:The best thing is to monitor. So, you know when your payroll is cut and when that number's identified for those deferrals and loan repayments. Track those dollars over to your provider, your trustee, of where the plan assets are, and make sure that you see those dollars going in and that they're timely. So, the best thing is to get in front of it and be timely with monitoring that process. And if something does happen where you're not seeing it get in, ask the questions, see what went wrong. Because the sooner you can stop the bleeding there and remedy it, the less exposure you'll have to lateness. That would be my wisdom there.
MD:Okay, great. Well, Brenda, more great information. Thank you. We appreciate you tuning into this episode. In our next and final episode, we'll address communication and expectations between plan management and third party administrators, and also key considerations when there are changes in a plan.

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