Department of Labor’s New Focus During Retirement Plan Audits

August 15, 2018

Most employers are terrified at the thought of being audited by a regulatory agency. Retirement plan audits in particular cause high levels of anxiety given their complex nature and because they hold employees’ retirement assets. Retirement plans are generally policed by two federal agencies, Employee Benefits Security Administration (EBSA) through the Department of Labor and the Internal Revenue Service (IRS) through the Department of Treasury. Each agency has their own focus when auditing a plan. EBSA is focused on ERISA compliance and protecting plan participants, while the IRS is focused on ensuring the plan is abiding by the compliance rules that permit its tax-favored status.

The frequency of plan audits seems to vary based on a wide range of factors which the agencies prefer not to divulge, but often times is dictated by geographical region and agency budget constraints. We have recently seen a noticeable increase in DOL audits, specifically in plans with more than 100 participants. This has come as somewhat of a surprise, as agency budgets are very tight and many of the DOL’s audit resources have been allegedly allocated to ACA and HIPAA inquiries.

Nothing gets a human resources department all worked up like the thought of having the DOL coming to “hang out” in their office for a couple of days. Fortunately, these inquiries are strictly focused on the retirement plan and virtually never spin off into a broader investigation of a company’s benefit’s compliance. Investigation notifications typically come out of a local or regional DOL office via certified mail and include a fairly robust request for information. The requested information generally focuses on plan documents, 5500 filings, trust reports, and statements, as well as various fiduciary centric documentation. The DOL will also request very detailed information related to the timing of employee payroll withholding deposits.

After the DOL has reviewed the submitted information, they usually request to come to the company’s office and interview the two or three employees responsible for the day to day management of the plan. Interviews are typically scheduled for an hour each, with the auditor focusing on the employee’s knowledge of the plan and overall administrative or fiduciary processes. They are typically very casual and are not adversarial or accusatory. The entire process usually takes at least six months to no more than twelve, if a significant finding has occurred. The audit is wrapped up by the agent through a closing letter that addresses any findings. Some findings may be noted as ERISA violations that require action by the employer and a written response back to the agent.

The most common finding continues to be delinquent employee payroll deposits. The DOL determines the employer’s deposit timing pattern and effectively applies that timing pattern for all deposits under review. For most employers, the maximum time from the date of withholding to the date of deposit is three days. The three days is not absolute but is a good rule of thumb. Any contributions that are deemed late must have lost earnings calculated and deposited. Additionally, the DOL may require a completed Form 5330 along with an excise tax deposit of 15% of the earnings amount. The recent wave of audits has revealed a new DOL focus, participant force-out distributions and locating lost participants.

Regarding small balances, virtually all plans have a “force out” provision for account balances less than $1,000. Plan documents specifically spell out the treatment of these amounts. Employers generally are aware of this provision but fail to apply it consistently. Most plan documents read “will” force out benefits, not “may” force out benefits. As a result, failure to routinely, no less frequently than annually, force out amounts under $1,000 unknowingly gives rise to an ERISA violation.

A lost participant is a participant who has not had their address information kept current. The DOL has identified this as a significant problem that results in participants losing track of their benefits. While it would seem that this is the responsibility of the participant, it is not. The rationale of this is that participants are required to receive various ERISA required correspondences, benefit statements, and possibly required minimum distributions. Without the current address information, these requirements cannot be satisfied. Employers are required to try and find participants on a regular basis and are required to maintain evidence doing so. The requirement is not that the participant is found, but that an attempt was made to do so. Anecdotally, we have heard that fee for service people search vendors have yielded very poor results and that social media has been most productive. Merely sending a package via certified mail and keeping the receipt along with possibly the returned package is no longer satisfactory.

Failure to properly apply the force-out provisions and/or failure to attempt to locate lost participants is are resulting in ERISA violations. Employers must show the DOL agent that they are taking steps to correct the current violations and are implementing policies and procedures to ensure they do not occur again in the future.

Employers should review the force-out provisions and coordinate with their custodian to determine the best process for sweeping out these amounts at least annually. Additionally, they should coordinate with their custodian to receive a list of lost participants at least annually, so efforts can be made to track down former “lost” participants.

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