When the stock market tanked a few years ago, it spurred government regulators to take a closer look at how commercial and nonprofit organizations were managing their employee-sponsored benefit plans. What they found was disturbing: About $2 trillion in Americans’ retirement savings plans, mainly from 401(k) plans, was lost during 2007 and 2008, according to the Congressional Budget Office.
In part, many consumers contributed to the losses by making poor investment selections. However, the responsibility of prudent investing, compliance and other operations related to employee benefit plans (EBPs) will now fall heavily on the plan administrators themselves.
The deteriorating economy has fueled additional scrutiny from both regulators and plan participants. As such, the United States Department of Labor (DOL) has refocused its efforts on performing compliance and regulatory examinations of qualified, employee-sponsored benefit plans. These examinations are the equivalent of an IRS income tax audit. Some of the more common plan failures relate to the improper enrolling of employees and inaccurate employer matching contributions, as well as not adhering to the plan’s vesting guidelines.
Companies and employees should be aware that the Employee Retirement Income Security Act (ERISA) of 1974 is the federal law that sets the minimum standards for pension plans in private industry and provides extensive rules on the federal income tax effects of transactions associated with EBPs.
The ERISA was enacted to protect the interests of EBP participants and their beneficiaries by requiring financial disclosures and other information concerning the plan. The DOL acts as the governing authority enforcing these standards. While the law has been around for many decades, its interpretations are periodically revised.
For instance, just last year, federal rules changed requiring 403(b) plans, which are available to nonprofit organizations, government entities, schools and churches, to undergo annual compliance audits conducted by an independent accounting firm. In fact, several recent rule changes have had the effect of slowly eliminating differences between 403(b) and 401(k) EBPs. For example, 403(b) plans now must file additional forms with the DOL or face stiff penalties.
There are many potential risks for EBPs that have significant and recurring plan failures. These risks include monetary penalties, suspension of contributions and the possibility of having the company’s EBP disqualified. If a plan were to be disqualified, employees would then have to pay taxes on non-taxable income, such as the 401(k) contributions, which were originally tax deferred.
To avoid scrutiny by the DOL and disqualification, we recommend organizations take note of the many red flags that might trigger an examination. Common examples include failing to properly document when certain employees, such as contracted workers, are excluded from the plan and not properly informing employees of eligibility requirements if there’s no automatic enrollment.
Another red flag is failing to track an employee’s years of service according to the plan’s provisions regarding vesting. Even failure to comply with the audit or tax-filing deadlines or requesting an extension is often considered a signal there may be a problem with the plan’s operations.
There are many more warning signs tracked by the DOL, making it critical organizations hire experts who are knowledgeable about DOL and ERISA guidelines. If your plan has more than 100 eligible participants, it is considered a “large plan” and is required to undergo an annual compliance audit. This is great opportunity to work with your plan auditors and request suggestions and recommendations that will improve the effectiveness of your plan.
If your plan has less than 100 eligible participants, it is considered a “small plan,” and an annual audit is not required. However, to ensure compliance, it’s recommended you periodically engage a qualified firm to assist you with an internal review of the plan’s operations, thus putting to rest any concerns and establishing a well-maintained retirement program for your organization’s greatest assets: your employees.
Ultimately, it is the plan administrator’s responsibility to ensure the plan is operating under the guidelines of the “plan document,” which is considered the owner’s manual of the plan. Though adhering to the details of the plan document may be tedious and cumbersome, it is the first step to ensuring the plan is compliant.
What else can plan administrators do to stay ahead of the game? They need to understand what could go wrong and focus on prevention, detection and the timely correction of errors. The DOL provides a valuable ERISA compliance checklist on its website to help plan administrators. One of the top suggestions on the checklist is a reminder to make sure a plan’s investments are diversified to minimize the risk of large losses.
It is important to emphasize the risks previously mentioned are very real, and it is the plan administrator’s goal to protect the plan participants.
Adrian Martinez is the manager of the commercial and employee benefit plan audit practice with Carneiro, Chumney & Co. L.C., a full-service professional firm. Carneiro, Chumney is one of the largest and tenured CPA firms in San Antonio. To contact Martinez, e-mail amartinez@carneiro.com, or visit www.carneiro.com.
