Both the DOL and IRS Are Stepping Up Their Audits

Industry experts share red flags and focuses of DOL and IRS scrutiny of retirement plans.

By Lee Barney | December 15, 2016
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The Department of Labor (DOL) and the Internal Revenue Service (IRS) both find numerous mistakes that retirement plan sponsors make in running their plans, and, as a result, they are conducting audits more frequently, experts say.

“The DOL and IRS are truly diving deep into the operations of the plans,” says Lisa Canafax, senior retirement consultant with Willis Towers Watson in Chicago. “We have seen a deeper dive into the operations of plans, particularly with data requests. Plans may be asked for a full census file on the transactions for each participant. Expect the DOL and IRS to do a lot of data mining.”

The number one “violation the auditors find with plans is the timely remittance of employee deferrals,” says Rick Skelly, client executive at Barney & Barney LLC in San Diego, California. “This causes plan sponsors to pay lost earnings and an excise tax on late deposits. The regulations require plans with fewer than 100 participants to make the deferrals within seven days. For larger plans, they must do so as soon as administratively feasible after each payroll, typically within three to five days.”

And if a sponsor is inconsistent about deferrals, that will also be seen as a major error, says Heidi LaMarca, head of the Employee Benefit Plan Service Practice at accounting and auditing firm Windham Brannon in Atlanta. For instance, if the sponsor makes a deferral for some participants within two days but others within five days, that will be a red flag for both the DOL and the IRS, LaMarca says.

The second most common mistake found in audits is the definition of compensation, Canafax says. “Payroll is enormously complex, and depending on the organization, it can be derived from up to 100 payroll buckets, such as base pay, bonus, overtime and moving expenses.”

“There are multiple types of compensation that can be considered as eligible for an employee to contribute from,” Skelly agrees. “Some of the most common are W-2, 415 or 3401, and the plan documents usually dictate which one the sponsor has to use.”

Then there is the issue of the plan not following own directives, says Ellen Bartholemy, accounting services principal at Hall & Company CPAs in Irvine, California. Plan sponsors and advisers should “ensure the administration of the plan conforms to the written plan document and any administrative policies and procedures of the plan,” Bartholemy advises. “Maintain up-to-date plan documents and conduct periodic compliance reviews.”

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