Payroll Audit Basics for Trustees
Under the auspices of ERISA, the Department of Labor (DOL) has substantial authority to examine virtually all aspects of multiemployer plan management and operations. The health of a plan is largely a function of the proper management and collection of contributions. Accordingly, plan fiduciaries should ensure that they are actively verifying the accuracy and completeness of employer contributions and getting in front of problems before they develop. Payroll compliance audits perform a central role in this regard. Below are some of the reasons why trustees should include payroll audits as part of the collection policy:
- Financial Statement/Form 5500 Support: Payroll audits help protect the plan and its trustees by providing critical audit support to ensure unmodified (clean) audit opinions. This reduces DOL audit risk and liability to the plan and its trustees.
- Increased Reporting Accuracy: Employers are effectively served notice that they need to be diligent in contribution reporting if they know they will be audited. They are more likely to have controls in place and “self-audit.” The result is a reduction in delinquencies, collections costs, and headaches for trustees.
- Level Playing Field: Payroll audits help trustees differentiate problematic employers from the rest. This prevents the proverbial bad apple from spoiling the bunch and ensures that all reportable covered work is collected, including any covered work that is subcontracted.
- Third-Party Review: Payroll audits help provide feedback for the plan administrator to ensure necessary written agreements are in place, that payments reach their destination at the correct contribution rates, and that potential contract misinterpretations are clarified.
Three Primary Considerations
When designing a payroll audit program, there are three primary considerations: Audit Selection, Testing Methods, and Reporting Procedures.
A representative sample of all employers (including locals and trustee employers) should be tested each year using a risk-based approach. The selection of the sample of employers should be dependent on factors such as, but not limited to, past audit experience, delinquency concerns, geographic dispersion and the number of contributing employers.
In addition to the routine payroll audit program, there are three general categories of audits that should be selected for testing:
- For-Cause Audits: From time to time, the trustees may be alerted to potential reporting issues from the plan administrator, plan collections counsel, members, or other employers. In these cases, they should direct the payroll auditor to test employers with known or suspected delinquency issues.
- New Employer Audits: New employers should be tested to ensure potential delinquencies are mitigated early, which benefits both the plan and employers alike. These are sometimes called “courtesy” audits, as they provide employers peace of mind and confirmation that their reporting methods are properly set up.
- Terminating Employer Audits: Withdrawing employers should be tested as soon as practicable while assets are available to collect, should a delinquency be detected. These audits may also provide support to ensure the accuracy of withdrawal liability calculations (if applicable).
- Sampling vs. 100% Population Testing: Depending on trustee direction, the payroll auditor may perform contribution testing on a sample basis focused on likely discrepancy areas or, perhaps for small employers, testing of 100% of the employer population. Every plan has unique needs and delinquency risk factors, so the trustees should work with its payroll auditor to determine what method benefits the plan best in terms of cost and collection.
- On-Site Testing vs. Remote: Trustees should work with their plan auditor to determine the venue for the payroll audits. When possible, we recommend a hybrid model, where the auditor conducts the audit remotely in part and goes on-site when it makes sense to do so for testing or wrap-up purposes.
- General Procedures: A robust payroll audit program is typically set up to verify the following:
- All covered employees are reported.
- All reportable hours are included in remittances.
- Employees are reported at proper rates (i.e., classifications and annual rate changes).
- Probationary/waiting periods are followed.
- Extended coverage periods are properly applied (for welfare plans).
- Reporting of non-bargaining unit employees complies with appropriate participation agreements.
- Covered work is not outsourced and left unreported (subcontracting and double-breasting).
It is essential that the Trust does its best to equip auditors with the necessary information in advance of the audit. This includes participant-level contribution data, collective bargaining agreements and memoranda, project labor agreements and participation/subscriber’s agreements. The plan administrator plays a critical role in gathering this information for the auditor.
At a minimum, the employer should be required to provide the following records, preferably stated within Trust policy documents, to remove all doubt as to the scope of the Trust’s authority to conduct audits:
- Payroll registers – this is the source of reportable hours.
- Federal and quarterly state tax returns – to verify completeness of payroll and identify all employees potentially performing covered work.
- Trust contribution reports, hours backup and payment support – to verify contributions were made.
- Cash disbursement records, 1099s, and general ledger – to test for subcontracting of covered work.
- Employee rosters, union dispatches, transmittals to other trusts and workers’ compensation information – to identify job classifications and hire and term dates.
It is often a good idea for the payroll auditor to review readily available public records such as filings with the secretary of state, certified payroll, and contractors’ license information. This may be helpful in detecting unreported covered work or related entities with potentially outsourced covered work.
An effective payroll audit program includes regular communication with the auditor to report findings and provide feedback to the trustees. This typically includes reporting on:
- Individual payroll audit reports that include quantified findings with liquidated damages and interest if included in the Trust collection policy.
- Overall payroll audit status report for the testing program. This is typically monthly or quarterly and includes a status report on all active audits.
- Trust-level issues observed across the payroll audit program.
In addition to helping insulate trustees from DOL audit risk by supporting plan financial statements, effective payroll audit programs help level the playing field for all contributing employers. This encourages employers to establish controls that ensure accurate reporting, which mitigates delinquencies and related collections costs. To be effective, the payroll audit program must be aligned with the trust collection policy, and both testing procedures and reporting should be tailored to specific plan needs. Ultimately plan fiduciaries are charged with the responsibility to safeguard and ensure proper delivery of benefits, and payroll audits assist trustees in meeting their responsibilities to deliver on the promises made to plan participants.