Recap of the 2019 audit season: Top 5 internal control findings (and how to prevent them)

February 28, 2020

Employee benefits can become a minefield in terms of compliance — and that’s why auditing is so important (and not simply a requirement).

As your friendly neighborhood auditor, I wanted to share the top 5 findings my team and I found in our work this year – to bring to your attention areas where your organization may have gaps in internal controls, affording you the opportunity to change policy and procedure before they become a problem.

Here’s what you need to know:

1 Lack of an investment policy

Does your organization have an investment policy regarding the management of employee retirement accounts?

The Employee Retirement Income Security Act of 1974 (ERISA) imposes a fiduciary responsibility upon the employer. This means that the company is responsible for managing plan assets in the best interest of participants and beneficiaries. and to diversify investments to minimize risk of large losses.

To ensure plan assets are prudently and effectively managed, your company should institute a policy that outlines the roles and responsibilities of the individuals and committees that administer and manage the plan.

The investment policy should also address permitted investments, asset mix, and concentration, and provide a method of reviewing, monitoring, and taking appropriate action with regards to the plan’s overall investment return.

2 – Inadequate documentation of the oversight process

To demonstrate the fulfillment of its fiduciary responsibility, the Plan Administrative Committee should conduct regular meetings and maintain formal minutes. The minutes document actions taken by the committee and/or trustees during the year.

Here are the actions meetings should include:

  • Evaluate the plan’s investment performance and fees, as well as alternative investment options.
  • Create and monitor the investment policy, reviewing and approving (or not) any necessary amendments.
  • Evaluate service providers, including third-party administrators and investment advisors, and review reports from them.
  • Review employee complaints, if any, and take appropriate action.
  • Approve any discretionary contributions.

3 Less-than-timely remittance of employee contributions

Department of Labor (DOL) Regulation 251.3-102 requires that participant contributions be sent to the plan during a reasonable time frame.

So, what’s reasonable? Technically, it’s the earliest date on which they could be reasonably separated from the company’s general assets. It can also be no later than the 15th business day following the end of the month in which the contributions were collected.

If you don’t remit participant contributions in a timely manner, they become prohibited transactions, which must be reported separately to the DOL.

Late remittance can also result in lost potential earnings for the plan and penalties to the sponsor.

4 – Unclear definition of eligible compensation for contribution calculations

Say that ten times fast!

Eligible compensation is defined in the plan documents. Most of the time, it includes gross wages and any adjustments for bonuses, fringe benefits, and so forth.

Frequently, the definition of compensation differs for different types of contributions allowed in the plan. Occasionally, the plan will allow for participants to elect or opt-out from having their wages deferred from bonus compensation.

This need to define eligible compensation can make a plan challenging for sponsors to manage.

If plan sponsors are unclear about eligible compensation, they could inadvertently exclude a portion of eligible compensation, leading to reduced gains for employees.

What we recommend is that organizations adhere to strict, well-defined controls as to which compensation is considered eligible, for employee reporting.

5 – Missed eligibility for re-hired or temporary employees

What not every plan manager knows is that re-hired employees, who were previously eligible to participate in a plan, should be allowed to participate in the plan immediately on the date of their re-hire. They are not subject to the waiting period that is applicable to new hires.

Under certain conditions (which are dictated in IRS Code Section 414(n)), if you hire someone who previously worked for your company through a temporary agency, you need to credit them with the amount of time they worked as a temp, as if they were a permanent hire.

For example, if a temp works for three months and then gets hired permanently, they are treated as an employee who has worked for three months, not an employee who has worked for 0 months. So, if employees who have worked for three months are eligible for benefits, the temp would be given benefits.

The appropriate internal control in this case is to track time logged for eligible temporary employees as well as permanent employees, ensuring that they get the benefits for which they qualify if they are hired permanently.

Compliance, especially for a company new to all these requirements, can feel a bit like a juggling act.

Balancing efforts between written investment policies, documentation of the oversight process, timely remittance of employee contributions, and defining eligible compensation as well as eligible employees (whether new hires, re-hires, or hired from temp). A misstep in any of these areas could lead to costly fines for an organization and issues for employees.

Worried that your company may be dropping the ball in one of these internal control areas? We can help. Schedule a complimentary consultation at 630.886.7669.



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