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Have you ever wondered what the auditors typically find in terms of plan violations? Our team at Delap has put our heads together and from our collective knowledge has identified what we consider to be the top 3 operational violations found during an employee benefit plan audit.
The Department of Labor (DOL) requires that participant contributions be remitted to the plan as of the earliest date that the contributions can be segregated from general assets, but no later than the 15th business day of the month following the month in which the contribution is withheld.
A common misconception is that the 15th business day is a safe harbor, when in reality – it is not! Generally, if the Company is able to segregate assets for federal tax withholdings within one day of paying employees, we would anticipate similar timing when looking at remitting contributions to the Plan.
The most common situation we encounter is this: an employer will have well designed payroll processes, including the consideration of timely remittances. But once or twice a year we notice a delay in the remittance of employee contributions. Upon further investigation it is determined that the delay is due to an employee being absent due to vacation. The DOL looks for consistency and historical timing, therefore we do as well. The absence of an employee due to a vacation most likely did not prevent payroll from processing, so it should not have an impact on the remittance of employee contributions either. Proper planning and cross training of your team is a simple solution to untimely remittance.
The definition of compensation for your plan may be as simple as W-2 wages; however, it could also be a highly complicated formula. Misunderstanding the definition of compensation and miscommunication of the definition are common violations.
Compensation, as defined by the plan document, can be used to calculate participant deferrals, employer contributions, benefit accruals and tax non-discrimination tests. It is essential to understand that these definitions can be different.
Additionally, newly eligible employees may not be eligible to defer on their annual compensation. Therefore compensation, in terms of calculating an employee match, may need to be manually adjusted to calculate the match in accordance with the plan document. Ensuring that your team of professionals are performing calculations for the plan with a solid understanding of the plan's definition of compensation is an easy way to avoid violations.
Do you have different groups of employees, part-time vs. full-time, maybe? Or did your Company recently acquire another Company, introducing a new group of employees to the plan? These different groups of employees may actually have different eligibility requirements. It can be confusing and difficult to track everyone's eligibility status. However if you hold the fiduciary responsibility, part of your responsibilities are to properly notify employees when they are eligible to participate in the plan.
By understanding the definition of years of service for eligibility purposes, the plan entry dates, and different eligibility provisions for employee and employer contributions as defined by the plan document, this common violation can be prevented.
So what does this mean for your company's employee benefit plan? Ultimately, you can lower the chances of violating your Company's plan document by learning what the common violations are and educating your team on them. Additionally, all plan violations require the Company to make the participant whole, including corrections to employer matching contributions, lost earnings, and interest.
Can't get enough about employee benefit plan audits? Our team of nerds at Delap is happy to answer any questions you have regarding tax, audit, accounting, or finance questions. Reach out today!