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The DOL's Move to Increase ERISA Audits

The Employee Retirement Income Security Act is probably not high on HR practitioners' things to ponder list, but a new push by the Department of Labor should change that.

Thursday, September 13, 2012
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There have been recent rumblings that the Department of Labor plans to substantially increase the number of ERISA compliance audits it conducts each year, which may strike fear into the hearts of many HR professionals, particularly those responsible for this area. While experts and advisors don't believe that companies or their staff members are deliberately doing things incorrectly, they do believe that significant opportunities for error -- and audit -- exist.

The Employee Benefits Security Administration is responsible for protecting the integrity of pensions, health and other employee benefits, and is charged with administering and enforcing ERISA. Much of the justification for EBSA's 2012 budget proposal, which includes additional staff to conduct these audits, was based on concerns with how plan sponsors are managing these plans. The DOL has estimated that three out of four plans they audit have had an ERISA violation.

Lee Topley heads Unified Trust's entire retirement plan consulting group, in Lexington, Ky. The DOL conducts more than 3,000 audits each year, says Topley. "I've seen that in 70 percent of the audits they find some sort of failure, either in the operation of the plan or in the interpretation of the plan provisions. There are exorbitant amounts of money fined against plan sponsors," he says.

ERISA is one of those areas of HR administration that is probably not high on the list of most HR practitioners' favorite things to do. And, truth be told, many simply don't have enough people to spend sufficient time on plan issues, says Heidi LaMarca, vice chairman at the American Institute of Certified Public Accountants National Conference on Employee Benefit Plans. An increased chance of an audit, says LaMarca, means that HR departments need to double-check that:

* The people running the plan know the plan document inside and out

* Plan operations must be in compliance with the plan document

* The plan document must be in compliance with laws and regulations -- all required amendments must be made.

Jill Masur, an audit manager with Kaufman Rossin & Co., a Florida-based accounting firm, specializes in employee-benefit-plan audits, says that this move by the DOL has been coming around for some time, pointing to 2008 and the declining economy as a key factor. "A lot of peoples' investments have really taken a negative decline and I think a lot of employees and participants, specifically, are looking a little more intensively into their investments and [that] goes back to the person responsible for the investments -- the fiduciary."

With this ramped-up focus and DOL's announcement, it is unfortunately more likely than not that a company will receive a DOL audit.

Common Areas of Concern/Risk

Scott Austin is an attorney with Hunton & Williams' Atlanta and Dallas offices. HR leaders should thoughtfully consider how to prepare for an audit now, advises Austin. "A DOL audit can be time-consuming and disruptive of day-to-day business operations. Consideration should be given to the types of resources that will be necessary to collect, review and prepare requested documents and otherwise manage the audit process. This announcement, he says, means that now is a good time to review benefit plan documentation to ensure it is up to administrative practices.

There are some common areas of risk, and smaller companies tend to bear the brunt of these risks, suggests John F. Galvin, vice president of employee benefits at Longfellow Benefits, a Boston-based employee-benefits broker and consulting firm. Galvin says that his firm has seen more audits in the mid-market -- especially among employers with fewer than 500 employees.

Summary-plan descriptions are often the main target of audits, he says. The requirements are numerous and have been impacted significantly since first included in 1974 ERISA legislation. "Unlike an average benefits summary, the requirements of what must be included in an SPD are numerous," he says. "In fact, by the time all of this information is included, the document can hardly be called a 'summary'."

The second most-frequent item in DOL audits, says Galvin, is related to the Health Insurance Portability & Accountability Act and, specifically, the requirement under HIPAA that plans inform participants about special enrollment rights. "Employers should review HIPAA rules thoroughly to make sure their plan is in compliance," he says.

Peter Wand is an attorney who specializes in employee benefits/ERISA, with Lewis and Roca in Phoenix. He feels that health and welfare plans pose greater risks than retirement plans. "Many employers are in a very good place from a compliance perspective with their retirement plans," he says. "Unfortunately this doesn't always exist in the context of health and welfare plans. We find that a great number of employers -- more than we ever expected -- are not in compliance with ERISA on those health and welfare plans." In most cases, he notes, it's a plan document issue.

Putting together a plan document that satisfies the requirements of ERISA and putting together a summary plan description that satisfy the requirements of ERISA are absolutely essential to being in compliance, he says.

While it's typically smaller employers that run into trouble, Wand says he's seen issues with mid-size employers and large employers as well. "I don't think any of it is trying to hurt or hinder employees," he stresses. "I think it's just a failure to understand what the requirements of ERISA are."

For instance, he says, while most insurance carriers provide employers with a plan booklet or a certificate of coverage that may provide a very good description of the benefits available to employees, those plan booklets, he says, "in almost every case do not comply with ERISA."

Masur points to some additional areas of risk that she has noted:

* Delayed deposits of contributions

* Decisions about what compensation will be used to determine the deferrals that participants are making. "We've seen that a number of times, unfortunately, people are left out and they didn't know they were able to participate in the plan; that's a pretty big problem."

* Inadvertently excluding people who should have been eligible -- often part-time employees

* Employers that offer matching funds may sometimes provide a match to someone who was not supposed to get it.

* Hardship distributions, which she notes are particularly prevalent in this economy. Those requests and decisions must be documented very carefully, she stresses.

Compliance with ERISA, notes Austin, is in large part about having, following and documenting a process. For example, he says, when choosing investment options for a 401(k) plan, it's not necessary that the selected options outperform all other options that might have been selected. It is necessary, though, for the committee or group that selected the options to "go through a process of reviewing the investment options and understanding the nature of the options, their investment strategies and fee structure." Finally, he says, that process should be documented as resolutions and used as evidence to support the process.

Navigating the Rocky Terrain

One critical first step in ensuring compliance is clarifying where responsibility lies, notes Masur. "With some of the clients we've come across it seems as if there's a disconnect between whether it's the financial group and the plan sponsor, or the HR people, who should be responsible for managing the plan." That decision needs to be crystal clear.

It's likely that HR professionals will, at a minimum, want to partner with their financial colleagues as well as outside experts to navigate the complexities of ERISA.

"It's very complicated law," says Topley. "There are things inside these plans that, unless you're doing it on a regular day in and day out basis, you're not going to catch."

It is important, say the experts, for organizations to:

* Have good ERISA counsel. "If you don't have an in-house counsel, talk with the lawyers or accountants you work with. Sit down with them and just do an internal audit of your health and welfare plans to ensure that you're in compliance," advises Wand.

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* Have a plan consultant that can do a fiduciary review.

* Ensure that their actions are documented. "You never know when you may be audited and this allows you to easily present the documentation instead of having to scramble at the last minute," says Leymeister. "If HR leaders are not sure where their records are, they should call their service providers to see if all of the documents are up to date in case of an audit," she advises, adding that it is always a good practice to check in with service providers from time to time to see how records are being kept.

* Understand that DOL will look at timely remittance of participant deferrals. "Review it now and make sure you comply with the guideline and that you are consistent among all payrolls and pay periods," says LaMarca. "If you're not, fix it through the Voluntary Fiduciary Correction Program before the DOL finds it upon audit."

And "[i]t's always more cost effective under this program than getting caught in a DOL audit," Wand says.

* Ensure that you have complied with the rules of fee disclosures by the appropriate deadlines.

* Ensure that, if you've had any recommendations from independent auditors, that you've addressed them.

Gabriel Potter, a senior consultant with Westminster Consulting, a fiduciary oversight consultant in Rochester,N.Y., offers two additional recommendations: "The number one piece of advice we could offer to HR leaders worried about an audit is to have a checklist. "Putting the checklist in front of your plan or investment committee on a regular basis, like your quarterly meeting, identifies gaps in compliance, reinforces its importance and encourages best practices." Second, she says: have a clearly identified repository for your information. "Our clients have access to an online central repository where all of the information is stored and organized so, in the case of an audit, all of the information is quickly available."

For more information, LaMarca points to an IRS "401(k) Fix-It Guide" on the IRS website and says "it would be a great idea for any plan sponsor to review this checklist to find areas that might need to be fixed before they are selected for an audit."

 

What You Need to Get In Order

Janel Leymeister, a partner and benefit consultant at Conrad Siegel Actuaries in Harrisburg, Pa., suggests that HR leaders start with a quick review of some major items, which include:

* Summary Plan Description: "Changes to the plan happen periodically. When you amend the plan, the SPD needs to be amended to ensure it's up to date."

* Form 5500: "This annual filing needs to be filed in a timely manner. Late filings can be corrected through the DOL's Delinquent Filer Voluntary Compliance Program.

* 401(k) Contributions: 401(k) contributions, after-tax employee contributions, and loan payments need to be deposited in a timely manner. Generally, this means these deposits should be made at the same time paychecks are distributed."

* Investment Policy Statement: "This document sets the plan's guidelines for the investments that will be offered to participants and how those investments will be monitored. HR leaders should make sure this policy is in place, it is up to date and being followed. Investment decisions made based on the investment policy statement should be well documented."

* Benefit Statements, Annual Disclosures & Other Notices: "For participant-directed plans, 401(k) statements must be provided quarterly. Depending on the plan's provisions, other annual notices and disclosures must also be provided. HR representatives should have documentation that this information has been provided to participants in a timely manner."

* Service Provider Review: "Plan fiduciaries should understand the full and total costs of the retirement plan. Procedures should be in place to review the costs of each provider and to make sure those costs are reasonable based on the services being provided. These periodic reviews should also be well documented."

 

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