Common Plan Errors and Internal Control Shortfalls

Employee retirement plans are a great benefit to provide to employees of your organization, but the requirements associated with them are very specific and numerous. Many plans fail to meet some of the requirements with design of the plan, or they make operational errors. Usually it’s just an oversight. Both of these can lead to findings during the audit, and corrections will need to be made to avoid potential consequences from the Department of Labor (DOL) or the IRS. The IRS and DOL each have extensive lists of common plan errors. It’s a good practice to read through them periodically and ensure your plan isn’t making one of the mistakes. If you notice an error, you can often correct it yourself, but in some instances utilizing IRS and DOL programs and/or involving legal counsel is prudent. If an error isn’t corrected, and it’s found in an IRS audit, penalties are often involved in addition to the correction.

Check out the IRS 401(k) Plan Fix-It Guide.

Check out the Department of Labor Retirement Plan Correction Programs

In our experiences auditing 401(k) plans, we typically see the same types of errors across several different plans. Even when sponsors are doing their best to meet the requirements, errors can occur. Sponsors should take a proactive approach to identifying plan errors and correct them as soon as possible.

What Are Common Errors We See During Audits?

Errors in Applying the Plan’s Definition of Compensation

An error is often identified upon audit of plans that recently met the requirements to have audits. The Plan Document details how the Plan defines compensation for calculating contributions and employer match amounts. The employer must use that definition of compensation and apply it to all employees.

• Auditors often identify errors in the compensation codes that are used, and fringe benefits that are or aren’t included in gross compensation for purposes of calculating contributions. These errors make up about 40% of the errors we see with compensation. To avoid them, be sure to read and document the plan’s definition of compensation and recalculate a few participants to ensure it’s being applied correctly.
• The other 60% of errors are made with the treatment of bonuses and manual checks. For example, ABC Company had a great year of operations, with record sales and profits. Management decides to give bonuses to all employees. Management wants the employees to receive a certain round number as a bonus after taxes (let’s go with $1,000 for this example). So payroll is calculated, the taxes are factored in to get to a net check of $1,000, but a 401(k) deferral is not withheld, and John Doe gets a bonus check of $1,000. For ABC Company 401(k) Plan, the Plan Document states that W-2 compensation is used as the definition of compensation with no adjustments. In this case, the Plan requires that the bonus be subject to deferral as well.

The remedy for compensation issues can vary, but the IRS Plan Fix it guide provides some detailed examples and treatment. In many cases, these errors can be corrected under a self-correction program without reporting to the IRS or DOL.

Untimely Remittance of Employee Elective Deferrals

Plan sponsors are required to remit employee contributions to the plan “on the earliest date the sponsor can segregate deferrals from general assets.” In our audits we measure this in business days. If the sponsor demonstrates they can remit contributions on the same day as the payroll, a remittance that is several days later would generally be considered late. This often happens when the responsible person “forgot” to do the transfer for one payroll, and then makes the transfer for two payrolls at once, or if someone goes on vacation. It is the employer’s responsibility to design procedures to ensure deferrals are timely contributed to the plan. Late remittances are often corrected through the DOL’s Voluntary Fiduciary Correction Program (VFCP), which can be accessed from the site above. Participation in the program will usually result in a “no action” letter from the Department of Labor, which protects the sponsor from a DOL investigation or associated penalty. The employer could also self-correct the late remittances, but there would be no protection from liability if the corrections were not done in accordance with DOL and IRS guidance (for example, the DOL could perform an audit and assess significant penalties based on what they find).

Segregation of Duties

One of the most common findings for retirement plans is related to the plan Sponsor’s segregation of duties. While the trustee and administrator perform many of the internal control procedures for the Plan, the plan Sponsor (employer) is responsible for complimentary user controls (procedures not performed by trustee or administrator). One of the most common deficiencies is in how the Sponsor allocates the duties related to the retirement plan. To achieve a proper segregation of duties, the Sponsor must separate the duties of authorization, recording, and custody. Here’s a quick summary of the accounting duties that should be separate as they relate to a retirement plan.

• Authorization – In a retirement plan, authorization is usually in the form of approving plan transactions (most commonly contributions and enrollment of participants). The ability to approve changes to plan documents, authorize access for other employees and auditors, etc.
• Custody – Access to the cash and performs the process of transferring contributions to the plan. Access to payroll records and employee information.
• Recording – Accounting duties related to maintaining the general ledger and often reconciling transactions made between the plan and the sponsor’s accounting records.

When the same person enrolls new participants, transfers funds to the plan, and records contributions in the employer’s general ledger, that person would be performing all three duties. Potential for mistakes or misappropriation could exist if these duties continue unchecked. Ideally, these duties would be performed by different employees. When it doesn’t make sense to segregate some of the tasks, implementing a detective control is the next best thing. For example, if Sally transfers the funds to the plan and records in the Sponsor’s general ledger, John could review the transactions and compare the transfer against the payroll records and the general ledger.

During an audit, the team will review the sponsor’s procedures and whether they appropriately segregate duties or have a detective control in place. Upon identification of any segregation of duties issues, the audit team will offer suggestions on changes to make to improve the structure and eliminate or reduce any deficiencies.

New Participant Issues

Capturing the right information to identify eligible participants can be tricky, and a lot of details need to be correct to set them up in the plan correctly. Here are a few things to watch out for:

• Age requirements – The Plan will have an age requirement, and depending on the industry, sometimes employees are allowed to enter because they met the service requirement, and the employer didn’t have a control in place to check for the age requirement.
• Hours requirements – Plans usually have hours requirements, and explanations on how the hours are calculated. Sometimes employers understand the hours requirements differently, which can lead to delayed or early entry for participants.
• Service requirements – Many plans have service requirements to join the plan. Most errors occur on the treatment of service requirements for rehires. Be sure to re-read your Plan Document to make sure rehired employees are treated properly and consistently.
• Delays in entry – Some employers correctly calculate eligibility requirements, complete the enrollment for the individual, but don’t commence salary reductions upon Plan entry.
• Errors in contributions – With many plans, there is a human element to getting the first payroll correct. We suggest especially vigilant of the first payroll with contributions for a new participant, recalculating to make sure the amount of the contribution matches the requirements of the plan document (see Plan Compensation Issues).

Plan Document Updates

Legislation changes requirements applicable to employee benefit plans, most recently with the SECURE Act (where certain changes are required) and the CARES Act (where most change are voluntary). To avoid this misstep, check on the processes for identifying when plan amendments are needed, ensuring the required changes are implemented. Ensuring the Plan Documents are up-to-date and current with existing regulations is part of the sponsor’s (employer) fiduciary responsibility to the plan and its participants. In many instances the third-party administrator/trustee has a compliance department that alerts sponsors of changes and suggests them.