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Our assurance team at Delap audits more than 50 employee benefit plans (EBP) each year. When it comes to EBP compliance issues, we've seen it all. So we put together this Employee Benefit Plan Guide for plan administrators.
We hope this guide helps you better understand your own Plan Document as well as considerations having to do with employee eligibility, contributions, distributions, and switching third-party service providers.
Employee benefit plan participant eligibility is one of the top three operational violations that we see during our audits. What type of participant eligibility issues do we see? The most common violations are related to the Plan not operating in accordance with the Plan Document. The Plan Document specifies the provisions of each plan. Plan Documents can differ significantly between plans.
Many of the most common reasons for employee benefit plan eligibility errors include:
One common election is the type of employees excluded from the plan. Many plans exclude union, leased, temporary, and/or foreign employees. Please read your Plan Document to verify whether these employees are eligible. Also, consider if any other types of employees should be excluded.
Another common election is the initial requirements for an employee to participate in the plan. Many plans have an age requirement (e.g., 18 years of age), as well as a service requirement (e.g., one year of service), prior to employees becoming eligible.
As service requirements vary, make sure to understand the nuances within your plan (e.g., Is a year of service based on 1,000 hours? Is a month of service credited after 30 days of employment? Must an employee only work one hour during the period?).
Your employee has become eligible; on what date can they enter the plan? Many Plan Documents allow employees to enroll on the first of the month. Some plans allow enrollment quarterly or semi-annually. Other plans are immediately upon hire or becoming eligible.
Processing paperwork for an employee to enter the plan takes time. Therefore, ensure employees are enrolled “as soon as administratively feasible.”
Also, verify that the time period for processing paperwork is consistent for all employees.
It's important to realize that there are uncommon employee situations that lead to employee benefit plan eligibility errors. Nonstandard employee situations may include the following:
Every Plan Document has a different answer to these questions. Read your Plan Document to understand how to operate in these situations.
Quite a few employers make a matching or a profit sharing contribution. Some employee benefit plans have the same requirements for all forms of contributions. These contributions include employee deferrals, employer matching, and employer profit sharing.
But it's also common to see many plans have different requirements for employer contributions. Eligibility requirements and entry dates can differ for each type of contribution. Review the Plan Document to understand the terms specific to your Plan.
To put it another way, the rules vary significantly based on the Plan Document's specific provisions. Be sure to read your Plan Document in detail!
Operating an EBP requires a variety of significant processes. One such process includes ensuring the employer applies all contributions on a timely basis. In addition, verifying each participant receives the correct amount. Therefore, plan auditors’ test the accuracy and timeliness of contributions. Employers are required to make contributions in accordance with their Plan Document. In addition, employers have to meet Employee Retirement Income Security Act of 1974 (ERISA), U.S. Department of Labor (DOL), and Internal Revenue Service (IRS) guidelines.
Here are some suggestions that employee benefit plan administrators can follow to help ensure compliance related to contributions:
Ensure all ineligible employees are excluded from the Plan. Eligibility requirements for employer contributions can differ from those for employee deferrals. Be sure to review the Plan Document eligibility requirements for each contribution type.
Implement a review process verifying that participant deferrals are withheld from payroll. Ensure deferrals are applied to the correct participant’s account.
This review helps verify:
Many employers rely on a third-party administrator to help perform this analysis. However, remember that it is the plan administrator’s fiduciary responsibility!
One of the most common errors we see relates to the definition of compensation. Differences often occur in the Plan Document's definition of compensation and the definition used for calculating employee and employer contributions. These include W-2 wages and section 3401 compensation. Additionally, Plan Documents may exclude other types of compensation. These exclusions often relate to bonuses, severance pay, and other incentive pay. Review your Plan Document's definition of compensation before calculating employee or employer contributions.
The DOL sets a maximum deadline for participant deferrals to be remitted to the Plan. The employer has until the 15th business day of the month after the funds were withheld. The rule also requires the remittance of employee deferrals “as soon as reasonably possible.” Many employers generally remit deferrals within 3-4 days after payroll. In that case, the DOL could consider anything longer to be late. Late remittances generally require disclosure in the form 5500. An additional schedule is attached to the financial statements. The employer is also required to take corrective action to replace the “lost earnings.”
Next up in our Employee Benefit Plan Guide: how to dodge distribution disasters. Your employees have been working for years, saving their hard-earned money in the company employee benefit plan for their future. Now they want their money out of the plan to enjoy the fruits of their labor. How do you ensure they get their money out of the plan and still meet all of the IRS, DOL, and ERISA requirements?
Distributions are an area where it's tempting to rely on your third-party administrator (TPA) to issue distributions accurately, but remember that it is ultimately the plan administrator's fiduciary responsibility to ensure that distributions are being made in accordance with the Plan Document.
Here are a few common errors we find during our testing of distributions during EBP audits:
Each employee benefit plan varies in the types of distributions allowed to be paid out to participants and how those payments can be made. The Plan Document includes the distribution options specific to each plan, so become familiar with it.
Some of the common differences between plans include whether:
Not all plans allow hardship distributions, but when allowed, they are a common area for mistakes. Employees are required to meet certain need-based requirements before qualifying for a hardship withdrawal, and an early-distribution penalty tax is assessed by the IRS.
While a TPA often helps process the distribution, the IRS expects the plan sponsor to properly administer hardship distributions. Therefore, we suggest that documentation is retained for all hardship withdrawals.
In addition, it is common for plans that allow hardship withdrawals to also require that employee deferrals be stopped for six months following the withdrawal. Many errors can occur in ensuring that employee deferrals are stopped and restarted on a timely basis.
There are plenty of areas for mistakes, so verify if your Plan allows hardship withdrawals and, if so, make sure you understand the various requirements.
When taking distributions, employees generally forfeit any balances in which they are not 100% vested. Employees are always 100% vested in their own deferrals and any employer safe harbor contributions. For other employer contributions, the vesting schedule is included in the Plan Document and is generally based on the years of service worked by the employee.
Verify that forfeitures are only being calculated on the appropriate types of contributions. While the TPA often calculates the forfeitures, it is important to review the calculation for errors, paying specific attention that the hire date is correct and that the years of service are being appropriately applied based on the definition within the Plan Document.
Years of service can be credited based on a variety of methods, including the employee's anniversary date, the first of the year following the anniversary of the employee's hire date, or based on hours worked. Review the vesting schedule and the definition of years of service within your Plan Document to enable you to ensure that forfeitures are being calculated correctly.
What can mean the difference between a poorly or well-managed plan? Often it is the level of service provided by third-party service providers. Plan administrators should evaluate their service providers on a regular basis. This includes weighing factors such as fees, performance, and responsiveness to inquiries. Is the service provider meeting the needs of the participants and the plan? Ongoing monitoring is one of the key fiduciary duties of a plan administrator.
What if you determine it is best to switch service providers? Fortunately, both service providers should have experience with such a transition. They should be able to guide you through the process and offer steps to follow in order to facilitate the transition smoothly.
Here are some additional tips to help you achieve a successful employee benefit plan third-party service provider transition.
There are often small differences that are important to be aware of when it comes to third-arty service providers. Custodians and recordkeepers provide different services. Be sure to understand each providers' responsibilities as outlined in your service agreement. For example, a custodian typically holds the plan’s assets and executes trades. A recordkeeper generally tracks contributions, earnings, and investments on a participant-level. They also may perform annual compliance testing.
Work with your service providers to ensure employees receive adequate communication. Recommended notices include the nature of the transition, accessing their accounts, blackout periods, etc.
This is arguably the most important step. Ensure total plan assets per the predecessor agree to total plan assets per the successor. Perform this reconciliation immediately after the transfer. It is also important to agree the total of participant accounts, as well as individual participant balances before and after the transfer. If the plan changes both recordkeepers and custodians, agree or reconcile the total of all participant accounts per the recordkeeper to the custodian prior to and after the transfer.
The SOC-1 Report (System and Organization Controls Report) is a report on the service organization's internal controls. These controls are relevant to your own internal controls at the plan sponsor. By reviewing the SOC-1 report you will understand the relevant internal controls at the service provider.
You can evaluate if your own internal controls (i.e. user entity controls) complement the third-party’s internal controls. You can also identify if there is a weakness in your own internal control environment.
These reports ensure you have everything you need from your service providers for your year-end audit. Ensure you receive the following items from both predecessor and successor providers (as applicable):
There are many challenging aspects of administrating an EBP and we hope this Employee Benefit Plan Guide for Plan Administrators has been helpful. Hopefully, these recommendations on employee eligibility, contributions, distributions, and switching third-party service providers can help you better understand your own Plan Document.
Our dedicated employee benefit plan team at Delap has extensive experience auditing a wide variety of employee benefit plans. We assist in interpreting Plan Documents, advising plan administrators, and helping implement best practices for plan operations. We would love to help you through any questions you might have regarding your plan.
Editors note: This Employee Benefit Plan Guide was originally published January 2018 and has been updated for accuracy and comprehensiveness.