Preparing for a Retirement-Plan Audit

A new survey finds one in three employers had their retirement plans audited by either the Department of Labor or the Internal Revenue Service in the past two years. Experts discuss ways to survive an investigation.

By Jill Cueni-Cohen

Companies that haven't conducted an operational compliance review of their defined-benefit and defined-contribution plans in the past two years will want to do so in light of a recent Willis Towers Watson survey. In a poll of more than 300 U.S. employers, nearly one-third reported having their retirement plans audited by the federal government over the past two years.

"Retirement-plan governance is becoming increasingly critical," says Lisa Canafax, senior retirement consultant in the Chicago offices of Willis Towers Watson, adding that employers are currently facing heightened scrutiny by the Department of Labor and the Internal Revenue Service regarding their retirement plans. "It's very important to make sure your company is in compliance with laws and regulations, process documentation and results measurement."

Los Angeles-based Heather Abrigo, of Drinker Biddle, agrees that DOL investigations have been on an uptick over the past two years, but acknowledges that she hasn't seen as many IRS audits as she used to.

"The DOL has had so much guidance come out on fee disclosures," she says, adding that the No. 1 issue of a DOL investigation is late deferrals. "Deferrals are something they always look at regardless of why they are investigation you."

According to the DOL's website, which serves as a source of information and guidance for plan administrators and accountants, "complying with the requirements of Form 5500 Annual Return/Report of Employee Benefit Plan for reporting delinquent participant contributions is intended to safeguard employee contributions to 401(k) plans and healthcare and other welfare plans by investigating situations in which employers delay in forwarding participant contributions to employee benefit plans.""Make sure you fix the issue, and how you disclose it is important," says Abrigo, adding that, if there are too many days in between a plan sponsor taking a contribution from an employee's paycheck and putting into its benefit plan, the DOL will see this as a late deferral and expect interest to be paid on it. "They're going to want to know the normal amount of days it takes to get the paycheck to the trust account and the reason for the delay. If you don't state a good reason, then you're going to have to fix the issue and get your payroll in order."

Attorney Robin Schachter of Akin Gump's Los Angeles office agrees that DOL investigations are happening with more frequency. "Some IRS audits and DOL investigations are random, but more often they're initiated in response to a review or transaction, complaint or litigation, and some of those events may trigger an inquiry from the DOL or IRS," he says. "The IRS has been active in auditing retirement plans, but their resources have been constrained, and more recently I'm seeing more activity from the DOL."

Not all audits are bad, though, says Schachter.

"Sometimes a random audit is designed to measure compliance, and it usually becomes an educational process for the plan sponsor, even when they have no problems," he says, "because you get a sense of what the DOL is looking for and what kinds of records you have to keep. Schachter stresses the importance of record-keeping, document-making and documenting the fiduciary decision-making process. "This is true for both agencies, but the IRS more often is looking at plan-document compliance."

Fiduciary responsibilities are also getting scrutinized by the DOL, and Abrigo says it's crucial that fiduciaries are knowledgeable about what their responsibilities are, and the DOL is going to want to know if they're satisfying those responsibilities. "They'll also want to know if the fiduciary received training on what those responsibilities are and if the plan's participants are receiving their disclosures under [the Employee Retirement Income Security Act of 1974]," she says.

Employee stock-ownership plans or plans that invest in employer securities have also been of interest to the DOL, Schachter says. "They've been particularly concerned with stock valuations," she says, adding that there have been many cases filed by the DOL alleging that ESOP or other company plans pay too much for stock purchased from a related party.

Employers would be wise to document all meetings "showing the process the administrators went through to monitor and valuate and choose investment and investment providers," Schachter says, adding that part of the fiduciary's legal responsibility is to act prudently.

"This isn't a result," he says, "it's a process. Sometimes fiduciaries don't always make the best choice, but that's not the standard, it's how they made that choice. Was it in a prudent manner, and if it was bad, did they take action to change and correct their decision? It's important to maintain documentation that shows the steps you went through to valuate and consider a fiduciary decision."

Besides being disruptive to business, a federal audit that identifies problems can open your business up to a whole world of pain, Schachter says. "In situations where audits identify issues, oftentimes you have to be concerned about not just regulatory agencies but participant litigation as well. It's important to maintain compliance procedures to mitigate exposure and to avoid private litigation as well as regulatory action."

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Jul 28, 2016
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