The U.S. Department of Labor (DOL) generally requires large employee benefit plans to have a yearly audit conducted. While the main purpose of the audit is to provide reasonable assurance that the plan’s financial statements are presented fairly in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the auditors also evaluate compliance with certain ERISA rules and documented plan provisions.

This often presents a double-edged sword for small plans: While sponsors don’t have to bear the time and expense of conducting an audit, not performing an audit can result in compliance problems going unnoticed. And this can lead to financial penalties and, in a worst-case scenario, plan disqualification.

If you sponsor an employee benefit plan with 100 or fewer participants, you should carefully monitor compliance with ERISA rules—even though you’re not required to conduct a formal plan audit. This will not only help ensure that you’re meeting your fiduciary duties, but it could also uncover easy-to-correct plan errors that could lead to problems if undetected.

Performing a Plan Review

The best way to monitor a small plan for compliance is to perform an annual plan review. In this review, you’ll examine plan documents and participant data to determine whether your plan is operating properly.

A plan review typically examines the following areas:

  • Investment policies
  • Internal controls
  • Transaction processes and reconciliation
  • Form 5500
  • Payments and withdrawals
  • Board minutes
  • Plan forfeitures

 

In addition, a plan review also performs various tests to make sure that the plan:

  • Handled participants’ deferrals and investments appropriately
  • Calculated matching contributions correctly
  • Met eligibility requirements
  • Didn’t discriminate in favor of highly compensated employees

Common Small Plan Errors

Most small plan compliance problems occur in the areas of plan design and plan operations. Common mistakes include improperly matched deferrals, incorrect eligibility information, and failure to follow plan documents and other requirements. Other high-risk areas where compliance errors often occur include the following:

  • Calculation of vesting—This is especially prevalent if the plan has changed vesting schedules or merged other plans where some participants may have vested balances that are grandfathered.
  • Hardship withdrawals—If your plan allows hardship withdrawals, be sure to document the need. Also encourage participants to take advantage of other available options first, such as plan loans. And don’t forget to suspend participant contributions for six months after the hardship.
  • Participant loans—Set up a system for making sure that loan repayments are being remitted and applied to participant loan balances in accordance with the plan document. If your plan only allows one outstanding loan at a time, make sure participants aren’t taking out multiple loans.
  • Definition of compensation—Make sure contributions are being calculated on the correct compensation as defined by the plan document and that amounts agree to participant requests. If a participant changes his or her contribution amount and it isn’t updated and the wrong amount is then withheld, it is your responsibility to restore the amounts that should have been contributed.

Specialized Expertise Required

The final responsibility for accurate and timely financial reporting lies with plan management, which makes it critical that management is actively involved in the financial reporting and auditing processes. It’s smart to retain an outside party to perform your small plan review since conducting such a review requires specialized expertise in plan compliance that internal staff members usually don’t possess.
We can perform a small plan annual review to ensure your plan is compliant.

About the Authors

Rachel L. Gilbo

CPA, MAcc
Senior Manager, Assurance and Advisory

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