As another employee benefit plan audit season gets underway, plan sponsors have a valuable opportunity to get ahead of the issues that most frequently surface during a retirement plan audit. A little preparation now can prevent findings, corrections, and uncomfortable conversations later.
Below are three areas that consistently draw scrutiny and where a proactive review pays off.
The timely remittance of employee deferrals and loan repayments remains one of the most common and most avoidable audit findings. Under ERISA, participant contributions must be deposited to the plan as soon as they can reasonably be segregated from the employer’s general assets. Plans with fewer than 100 participants benefit from a seven-business-day safe harbor; larger plans have no safe harbor and are held to the “as soon as reasonably possible” standard, often measured against the earliest date the employer has historically been able to remit.
Late deposits are treated as a prohibited transaction and are effectively an interest-free loan from the plan to the employer. Correction requires depositing the missed amounts plus lost earnings and either paying the 15% excise tax (reported on Form 5330) or correcting through the DOL’s Voluntary Fiduciary Correction Program (VFCP).
Review your remittance patterns for consistency now. Your auditors will trace deposit dates against payroll dates and report delinquencies on Form 5500, Schedule H, Line 4a.
Using the wrong definition of compensation is one of the most frequent operational errors we see. Your plan document dictates precisely what is eligible for contributions. It is surprisingly easy for payroll to fall out of sync with that definition. Common culprits include improperly excluding (or including) bonuses, commissions, overtime, or other fringe and supplemental pay.
When the applied definition doesn’t match the plan document, contributions are miscalculated for potentially every affected participant. Corrections under the IRS’s EPCRS program typically require corrective contributions plus earnings. This can be a costly and time-consuming fix.
Before your audit, reconcile the compensation used in your payroll and recordkeeping systems against the exact definition in your plan document. Confirming this alignment is one of the highest value checks a sponsor can perform.
SECURE Act 2.0 introduced several new penalty-free distribution options, including emergency personal expense distributions (up to $1,000 per year), domestic abuse victim distributions, terminal illness distributions, and pension-linked emergency savings accounts. Depending on which provisions a plan has adopted or made available, these new options may require updated administrative procedures and coordination with the plan’s recordkeeper or TPA. Many of these provisions rely heavily on employee self-certification, which raises the risk of improper or undocumented distributions. Plan sponsors should confirm that their recordkeeper or TPA can properly administer, code, and track these new distribution types, that self-certifications are retained, and that any applicable repayment provisions are monitored. Auditors will test whether distributions are properly authorized, documented, and consistent with plan terms.
Ensure your plan document and administrative procedures have been updated to reflect the specific SECURE 2.0 features you have adopted and that operations match the paper.
The common thread across these areas is documentation, consistency, and making sure plan operations align with the plan document. Reviewing these areas before the audit begins allows you to identify and correct issues early. If you would like a pre-audit readiness review or help evaluating any of these areas, our team is here to help.
For more information on this topic, please contact a member of our team.
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