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Preparing for a DOL or IRS Audit of Your Employee Benefit Plan

November 1, 2011 3 Min Read Employee Benefit Plans
Mark G. Metzler, CPA, CGMA, CEPA Director, Audit & Accounting

The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have increased their scrutiny of companies’ employee benefit plans.  Letters from the DOL and IRS are being sent to plan administrators, advising them that their companies’ benefit plans have been randomly selected for examination and requesting that they submit relevant documents prior to an on-site visit by the investigator or agent.  Knowing what to expect can help make the process more tolerable.

As you can imagine, the documents requested typically include all information related to the plan and its operations, such as:

  • Signed plan document with any amendments
  • Signed trust agreement with any amendments
  • Most recent IRS determination letter
  • Current Summary Plan Description with any Summary Material Modifications that have been adopted
  • Signed copies of the plan’s filed Form 5500 for the latest three years
  • Summary annual report for the last three years
  • List of key plan officials, including plan administrator, plan and corporate trustees, plan and corporate committee members, asset custodians, auditors, attorneys, investment managers and advisors, and insurance representatives
  • The plan’s current fidelity bond
  • Fiduciary liability coverage, if applicable, for the last three years
  • Trust or administrator reports for the last three years
  • Payroll information
  • Results of the Average Deferral Percentage (ADP) and Actual Compensation Percentage (ACP) tests

The timeline for submitting this information to the DOL or IRS agent is generally within two weeks of the initial notification.

Each examining agency has its own agenda in selecting a plan for investigation.  The focus of the DOL’s review is often on the timeliness of employee deferrals into the plan.  Consequently, the DOL will require reports showing the aggregate amount withheld from employees’ pay for deposit (by payroll date) and the corresponding deposit to the trust for the last three years.  The DOL wants to ensure that employee deferrals are being remitted to the plan as soon as administratively practicable.  Although there is a safe harbor for small plans (typically those plans with fewer than 100 participants) of seven business days, there is no similar provision for large plans.

The IRS’s audit objectives are to document plan provisions and ensure that the plan is qualified; to determine if the plan satisfies the eligibility and coverage requirements of the relevant IRS regulations; to demonstrate how the plan satisfies the deductible limits of the IRC; to demonstrate that the plan is in compliance with the nondiscrimination requirements; and to examine the operation of the trust including ownership, existence, and fair value of trust assets.  Consequently, with the IRS audit, it is important that the plan document have the required amendments, provisions, and resolutions.  The agent will likely review the plan’s definition of compensation and may recalculate benefits.

In either case, plan management should not be alarmed by receiving the notification from the DOL or IRS.  Although it is not as rewarding as winning the lottery, companies can mitigate their exposure by engaging their CPA and ERISA attorney early in the process.

Mark G. Metzler can be reached at Email or 215.441.4600.

Contact the Author

Mark G. Metzler, CPA, CGMA, CEPA

Mark G. Metzler, CPA, CGMA, CEPA

Director, Audit & Accounting

Employee Benefit Plans Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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