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Welcome to The JoyPowered® Workspace Podcast, where we talk about embracing joy in the workplace. I’m JoDee Curtis, owner of Purple Ink, an HR consulting firm, and with me is my co-host and good friend Susan White, a national HR consultant. Our topic today is Employee Benefit Plan Audits. What do you need to know? Generally, employee benefit plans involving at least 100 eligible participants must have an independent audit of the financial statements of their plan. The Employee Retirement Income Security Act of 1974, better known as ERISA, is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. The primary objective of ERISA is to protect participants and their benefits in the plan, and it ensures that the plans abide by guidelines that prevent any misuse of plan assets on the part of the administrators of the plan. Specifically, an employee benefit plan audit is part of the process for all sponsors to file a Form 5500, which is a required annual report filed with the Department of Labor. This form assesses investments, operations, and 401(k) financial conditions, and provides the IRS and the Department of Labor important information concerning compliance and operations of the plan. Shoo, that was a lot of technical jargon there, Susan. Right?
Yes, it was.
Yeah, so I think it’s…it’s kind of a scary topic for some people, because there’s so much technicality, so many rules, so many laws around these plans, but we thought it was an important topic for our listeners to hear and be reminded about. I specifically wanted to share this topic, because all of a sudden, for some reason, in the past few months, I’ve had several questions from some of our clients about this topic. In general, the sponsor’s human resources and financial accounting departments, an actuary, a third party administrator, ERISA legal counsel, investment trustees and administrators, as well as an independent auditor may all play a significant role in this process. Try and coordinate all those people together…Right?
So the AICPA, which is the American Institute of Certified Public Accountants, states that financial statement audits for all employee benefit plans should typically cover the following areas: benefit payments, employer and employee contributions, investments and investment income of the plan, administrative expenses, the data and the loans of the participants, allocation of participants, if appropriate, and plan obligations and liabilities. So once again, lots of stuff.
Yes. This process also includes highlighting areas of weakness or operational errors which can be addressed to enhance the operations of the plan. And lastly, an employee benefit plan audit assists the sponsor of the plan in carrying out the legal requirements. If all of this is not done properly, there can be significant fines imposed on plans. And, you know, so end of the story, right, is it’s important for even us as individuals to know that your company plan is going through this process, or if they have more than 100 participants, at least, anyway, so that your investments are protected. So end of the day, it’s all a good thing. We all want to know that our plan is protected, but lots of complications behind the scenes of it. So good thing we have an expert today on this topic.
Yeah, thank goodness. It’s not me, JoDee, thank you.
Me either. Although in my former life as an auditor and CPA, I did do some employee benefit plan audits, but I’m not about to answer any questions on that topic. So…
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We look forward to hearing from you.
So our expert is my friend and former colleague Dave Leising. Dave serves as BKD’s National Employee Benefit Plan Audit Director and oversees the sixth largest employee benefit plan audit practice in the country, and the largest practice in the state of Indiana. Dave has served as BKD’s liaison to the AICPA Employee Benefit Plan Audit Quality Center, and was also appointed to a three year term to the AICPA’s Employee Benefit Plan Expert Panel. He has been a firm-wide instructor for employee benefit plan audit seminars and was a contributing author to PPC’s Guide to Audits of Employee Benefit Plans, which is used nationally. Dave was also named one of Indiana’s Super CPAs by Indiana Business and is a two-time finalist in Indy’s Best and Brightest event. So, Dave, thanks for joining us today, and can you discuss what drives the company’s requirement to have an audit by an independent audit firm?
The standard, you know, it actually started…way back in 1974 was when ERISA came out, and they originally thought about different ways to go about it. You know, if you had certain asset size, but that could really fluctuate based on the size of the company and the size of the plan, and so they ended up settling on number of participants as the main metric that drives the audit requirement. And generally, it’s if you have more than 100 participants in the plan, and sometimes that trips people up a little bit in that participant…you know, you would think a participant would be somebody who actively participates in a plan. So in a regular 401(k) plan, it would be somebody who’s deferring money into the plan. But that’s not how the Department of Labor defines “participant.” They actually define “participant” as anybody who is eligible for a plan. So if you have somebody…if you have a plan that maybe doesn’t have a match feature, where you can only defer your own money, you may only have 25% participation. So if you have 130 people that are eligible, but only, like, 30 people contribute, you still have an audit requirement. You also have to include anybody who has terminated the plan or terminated employment, but then chose to leave their money in the plan. So a lot of times, clients will get tripped up, because you’ll have a lot of people who’ve terminated and just decided not to roll their money over to an IRA or a subsequent employer’s plan. And so if you have, you know, 20 or 30 people who leave their money in the plan, then that, you know, you put those two factors together along with, like, your regular employee count, and you can get over 100 pretty quickly. One other factor is that, when they first rolled it out, they had issues with companies coming back to them and saying, “Well, you know, last year we had 102 participants, and this year we have 98, so are we going to ping pong back and forth and have an audit this year and not an audit next year?” And so the Department of Labor put in a special rule to say that in your first year that you…that you have an audit requirement, you have to go all the way over 120 participants. But then once you clip that 120, for the audit requirement to go away, you have to go all the way below 100. And that’s only for plans that have a history. So if you have a first year plan with no prior activity, the standard is 100. But if you’re a company that kind of gradually grows, you can continue to file as a small plan, which doesn’t have an audit requirement, until you go over 120. Once you clip 120, you got to go all the way below 100 before it goes away.
Wow. So if people are even remotely anywhere in the neighborhood of 100 people, they really need to be talking to you, Dave, to make sure they’re on top, because we’re only on question number one, and lots of tricky situations already.
What is the primary difference between an audit by the Department of Labor and one performed by a firm like BKD?
Well, the Department of Labor is is much more sporadic, in that they are generally picking plans just to kind of test…it’s almost like, if you think about your own personal tax return, you know, if you were ever chosen for an audit, it’s not like they’re choosing all…all participants or all plans for audits, or all taxpayers. They’re just trying to target individual plans where they think there’s a possibility that, you know, something is happening with the plan that would create an issue. When we’re doing an audit, we’re doing an audit for any plan. You know, CPA firms like BKD, you’re doing audits on firms or for plans that have that audit requirements, so we’re doing, you know, a massive amount of plan audits. And so when we’re doing it, we’re trying to make sure that the…the financial statements are free of material misstatement. And so anything that affects those financial statements then kind of factors into that audit process. The Department of Labor is specifically looking for problems. They’re looking for, you know, if we’re remitting late contributions, if participants aren’t getting the proper vesting when they retire or when they terminate from the plan, they’re looking for anything that would cause a plan participant’s balance to be off, whether it’s they didn’t get the right contributions, they didn’t get the right investment income, they didn’t get the right vesting calculation, anything that drives that end check that you’re going to get at the end of your lifespan with the plan. That’s what they’re worried about. With us, we’re making sure that the financial statements are free of material misstatement. So it’s just a little bit of a different focus.
So do you have any sense of maybe how many of your clients ever get a Department of Labor audit in the course of a year? Or is there any way to have a sense of…how many are they out there doing, the DOL?
Yeah, it’s…it’s really kind of hit or miss, to be honest. Give you a just a snapshot, our practice in the state of Indiana is around 250 plans that we do on an annual basis, and I would tell you probably five to 10 clients a year would get a notice.
Okay, that’s helpful.
So that gives you a little bit of a feel for that.
Yeah. I don’t like living in fear of a DOL audit of anything, so the good news is, it’s not likely that you’re going to it’s going to happen to you.
Right. But the thing that really triggers it would be…there are certain things you can do on your Form 5500, which is the tax return related to the audit, and if there are certain answers in that tax return, because there are a lot of questions, that if you answer them in a certain way, if you identify certain problems that you’re legally obligated to identify, like if you’re late remitting employee contributions, then that kind of puts you up on their list a little bit, it’s a little bit of a red flag that you have to kind of deal with and realize that that might be part of the outcome of that process.
Makes sense. Thank you.
So Dave, if my company’s plan is audited by BKD, what’s my deliverable? At the end of the audit, what are you going to give me?
The two things that we’re going to give to you at the completion of the audit is the audited financial statements. And so in…in…in the vast majority of situations, we can prepare those financial statements. If you happen to be subject to an SEC audit, then we can’t prepare those. That client actually has to do that. That’s a pretty small…those are large, generally, publicly traded companies that are subject to that requirement. So we’re going to give you a financial statement, and that financial statement has to be attached to the Form 5500 when it gets filed with the Form 5500. So the 5500 and the financial statements get filed together. And then the second thing that we’ll give you is what’s called a management letter. It includes kind of required communications of things that we have to say in writing to the client, as well as any operational issues that we find that we feel like there could be improvements in the audit process. That is purely for the client’s eyes. That does not go to the Department of Labor. On occasion, our clients get a little confused about what has to be attached to the Form 5500. And we’ve actually had situations where clients have attached the management letter and not the financial statements, which, you know, then you’re kind of…kind of airing your dirty laundry, or your…you know, to everybody, because that becomes a public document. Form 5500 and financial statements, anybody can see that. And so you just want to be really deliberate when you’re making that filing.
That’s a bad day when that happens. Yeah. So Dave, what creates the most stress for HR executives and staff, do you think, as it relates to your audit process?
Well, I think a lot of times that answer depends on who we’re working with, because it…the 401(k) plan audit or a pension audit is a little bit different, in that sometimes we’re dealing with human resources departments and sometimes we’re dealing with finance departments. And I think, in general, HR departments are much more stressed in the audit process than the finance people, because finance people, when you say “audit,” they just know, okay, well, somebody is going to come in and look at our work and give us feedback, and I’m pretty sure we did a good job, and, you know, we’ll get through this, and they may nitpick us on something, but it’ll…you know, this is just part of our life in finance. When you talk with an HR person, they think, somebody is coming in to fire me because I’m…maybe I missed something or maybe nobody told me to do this, and now I’m going to get fired because I didn’t do something I didn’t know I was supposed to do. And I think one of the things that we try to do that I think we’re actually really good at is working with those companies that go just over that threshold for the 120. So the first time you have to have an audit, usually, if it’s a pretty small company, we’re dealing a lot more with HR than we are with finance, because they’re the ones that have kind of their hands in the plan. They’re the ones operating it, they’re the ones doing, you know, election forms, how much do you want to contribute to the plan, or if you have to field questions, those are generally going to HR, they’re not going to finance. And so kind of sitting down with them and just trying to take a deep breath and explaining what that process is, explaining what the deliverables are, you know, how long are we going to be out there…kind of in a pre-COVID world, you know, how long are we going to be at your office, and just trying to, you know, give…get them to take a deep breath and realize that, you know, if there are things that you’re not doing, but nobody ever told you to do them, then a pretty reasonable employer would say, okay, well, let’s find out what those things are and let’s make improvements to make sure that we don’t have fraud, that participants are getting what they’re supposed to get. And so if we have management letters in that first year that have comments, as long as they weren’t aware of that, then, you know, I would generally tell upper management that, hey, we just need to make sure from here on forward that you guys are implementing these things. Where I see more problems is if you have employers that we have the same comments year after year after year and they’re not making those improvements. So.
So Dave, for those of your clients who are stressed or worried about their fiduciary responsibilities related to the plan, what are some things they can do to reduce that stress? Sounds like you guys are doing a good job of helping them through that, but what might they do internally?
Well, I think the one thing that is really important that we see, because we work with a lot of clients that go through that Department of Labor process, if they get selected for an audit, and the real issue we’re go…the one thing that every client should have is that they should have some level of an administrative committee that oversees the plan, that has responsibility over the day to day operations as well as the oversight of the plan. Generally, it’s referred to as, like, 401(k) Administrative Committee. And, first of all, you need to have a committee that then you…it’s not like you’re on an island by yourself. If you’re in HR and you’re the only person administering the plan and nobody else is kind of in that room, well, when people start asking questions, they’re going to be asking you and why didn’t you do this, as opposed to having a committee where you have different perspectives. You have participants, you have management, you have maybe an outside advisors. There’s some really good fiduciary firms out there, and that’s a…that’s an industry that’s really come up over the last 10 or 15 years. They can advise you about what should we be doing to make sure that at the end of the day, somebody doesn’t point a finger at me individually to say, why didn’t you do this. And one of the key elements of having those committees is in keeping minutes of those meetings to make sure that you’re documenting the things that people might be asking you about. When we go through a Department of Labor audit, you know, the main thing you’re trying to do when you first meet with the Department of Labor is kind of put them at ease. They’re trying to assess…it’s almost like a police officer that comes up to a car. They don’t know what they’re dealing with when they walk up. Could be something that’s not very threatening, or it could be a very threatening situation. And it’s kind of the same thing with the Department of Labor. Like, they’re walking in, and they could be walking into a real mess, or they can be walking into something could be very straightforward. So you want to send every message that it’s a straightforward. And if the first thing you can do is say, okay, here’s our minutes, where we’ve kind of talked about issues, where we’ve had kind of quarterly meetings and we’ve addressed all these issues, just so that now they feel like, okay, well, they kind of have their act together. That’s the kind of message that you want to send. And the best way to start that is have a regular administrative committee meetings, and then keep minutes of those meetings.
Dave, what are the common mistakes or errors that you find when auditing a plan?
They’re kind of broken down into two areas. I would say there’s there’s two primary issues related to operations, and there’s two issues related to controls. And I’ll give you just kind of the smaller…the kind of snapshot version of this. The first one would be timely revisions of employee contributions. So the Department of Labor, the first thing they’re going to look at when they come in, if they do an audit, is they’re going to say, “How long did it take you to remit employee contributions and loan repayments?” and the rule out there that a lot of companies think is that…and I’m trying not to get too technical here. But any…any contribution made in an individual month, say in the month of November, then that has to be remitted at the furthest…at the latest, the 15th business day of the month after the month the contributions are withheld. So anything in the month of November would have to be remitted by about the 20th of December when you factor in weekends, depending on how the weekends fall. And some of our clients think, oh, as long as I get it in by then, I’m fine. Well, the Department of Labor doesn’t even really look at that far. And basically, they say that far in is like, if there’s anything past that, there’s nothing you can say that’s going to make that okay. What they generally think is contribution should be remitted within three to four days after payroll.
And when you say “remitted” it means shows up in their account, the individual’s account?
Yeah, it has to be sent from the the employer to whoever the third party administrator is, and ultimately, they will base that on when that hits that participant’s account. So if your third party administrator hangs on to it for four or five days before it gets, you know, credited to their account, then you can’t throw up your hands as a plan sponsor and say, “Well, that wasn’t our problem, that was a TPA,” because the DOL is gonna say, “Well, who hired the TPA?” If you hire somebody who’s incompetent, can’t get it in there, then that’s on you. That’s not so much on the on the third party administrator. The other operational piece is making sure that plans are using the right definition of compensation. So a good example there would be, let’s say that bonus compensation, by the plan document, is considered eligible compensation. And then we’ve had situations before when we worked with payroll, and payroll said, “Well, we didn’t withhold on 401(k) contributions, because that’s people’s bonus money, and they don’t want 401(k) taken out of there.” Well, that doesn’t really matter. You know, if you’ve defined bonus compensation as eligible compensation, that’s not the participant’s fault that you didn’t withhold that. That’s your…that’s the employer’s fault. And so then the Department of Labor is going to expect you to fix that. Well, if you put together the lost employee contributions, the lost employer contributions, as well as lost earnings, that number can get really high really quick, especially if you have to go back multiple years. And so we got to make sure that if you’re in payroll or if you’re in HR, you need to make sure that the way you’ve set up your payroll system, that you’re withholding on the right components of compensation, especially if you have lots of different pay codes. So if you’re a hospital, and you have all these shift differentials, or if you’re in a line of business that has a lot of different pay codes, you really need to take some time and make sure that you’re withholding on the right elements of compensation.
Thank you for that, Dave. And what…so, what happens if the DOL comes in or BKD comes in to audit the plan and you do have a lot of these errors, you’re making these mistakes, you’re…you’re not handling the timely payments? What’s going to happen?
Well, obviously, it depends on what are the elements of those issues that you have. And generally what we do is, you know, we always have an independent standard, in that we can’t function as playing management, and so our real role is to identify the issue. And then we try to encourage our clients, we have a lot of strong ERISA legal counsel firms here in town, and we work with a lot of them, and we kind of encourage you, to get it corrected the best way possible, we would encourage you to kind of go through the formal…there’s some formal policies and programs within the Department of Labor that you can go through to kind of get right. You kind of, you know, go to them and say, okay, here’s the problem we have, here’s how we’re going to fix it, here’s how we’re going to make sure it doesn’t happen in the future. And that’s really what we encourage our clients to do, and…and for our clients that have the more significant issues that have significant dollars involved, we definitely kind of encourage them to do that. If it’s a little bit on the lower end of the scale, you know, clients have to decide, you know, how significant it is, and are they going to go back and fix it, which is generally what we want them to do, or is it going to be a situation where, okay, we know what the issue is now, now we’re going to kind of fix it moving forward. But what I talked about earlier, the second deliverable, or management letter, is where we’re going to identify all of those issues. And in general, on that letter, we will say, hey, to get this fixed correctly, you really need to work with ERISA legal counsel to make sure that you’re addressing all of these issues, and at the end of the day, are the participants in the plan, are they getting the benefit they’re supposed to get.
Yeah. Also, Dave, you know, we’ve talked about a lot of the issues that could happen, lot of technicalities about who…who it applies to and…and not, but in the end this…this is a good thing, right?
Yeah, we…you know, kind of going through this process and making sure that participants are getting what they’re supposed to get is really important, you know. We had a situation with a large client a few years back where there weren’t adequate controls. There was a plan that had a life insurance policy, and we had a client who, there was a person at the client who was in charge of beneficiary change forms, and this participant would find out that somebody in the factory was terminally ill, and they would go in and change their beneficiary forms and include a relative of theirs as a secondary beneficiary. So if you think about it, they would, you know, if you’re a beneficiary, you just know that, you know, you’re…somebody you were close to passed away, and you feel horrible about it, and then you just, you end up getting a check, and you’re happy to get the check, but you’re kind of obviously sad that this person you care about is no longer here. Well, you don’t know what that amount of check is supposed to be. And so this person would fill out a secondary beneficiary to say that 40% of the benefit was supposed to go to this other person.
And so essentially, what happened was, the company who ensured the benefit would put the money in an account, and then that fictitious beneficiary would draw down money out of that account, and then after two years, that insurance company would cut a check to them for whatever the remainder balance was. Well, this person had left $7 in the account, and so when they cut the check and it went to the address, well, the address was a fictitious address, so that immediately flew up a red flag, so that control was…caught that activity. Otherwise, it could have gone on for quite a while. So, you know, a lot of people don’t think about there potentially being fraud in a retirement plan, but that’s an example of something that can happen. And so having these policies and procedures and this process is, at the end of the day, a good thing.
Wow. So Dave, if our listeners have additional questions about employee benefit plans, how can they reach you?
I actually oversee our employee benefit plan practice on a firm-wide level, and we have, obviously, offices throughout the United States. So if you want to reach out to me, my email address is dleising – L-E-I-S-I-N-G – at BKD dot com. Or if you just go to bkd.com and then click on Audit Services, you can kind of page through to the Employee Benefit Plan page, and that will populate with my information.
Thank you. And we’ll put that – Dave’s email and the BKD Employee Benefit Plan Services website – in our show notes, as well, so people can find that easily. So thank you so much, Dave. I know I’ve learned a lot this morning. So.
Me, too. Me, too. Thank you.
Great information that can help all of us. So thanks for joining us.
JoDee, we have a listener question. “Do you think organizations will shift to a four day workweek?”
You know, I do. I think it’s interesting that once we get into post-pandemic times, which we…hopefully, that won’t be too far away for us, I think, you know, the whole notion of how people work is definitely going to shift. But I do see a lot of people going back to work, I…in conversations I’m having or things I’m reading, I think that we’ve certainly opened the doors for much more flexibility and remote work. But I do see the core of people still coming to work on at least a semi-regular basis or sometime basis. But I do think this concept of a four day workweek will maybe emerge as a new opportunity. I’m curious, really, is the number one signal to this if schools might shift to a four day week, and if that happens, that that may force the four day workweek a little bit more. So I think the schools will be a key to that. What do you think, Susan?
Yeah, I do. I really believe that more and more employees want more flexibility in when and where they work. And the fact that with technology, people can work anywhere, that I think that if you have to be in an office or be “on,” whatever that means for your profession, four days a week, I think that answers a lot of the demand that’s out there, recognizing that professionals, usually, as long as they can, you know, connect in, that they’re going to be working and checking things those other three days. And I think that gives the employer the comfort that they’re covered and gives the employees the flexibility that they’re seeking.
Yeah, I agree. And I think it’s exciting times for…for the workspace, to see what happens and to see what types of policies companies adopt, so. And…and that employees ask for.
That’s right. And I know you and I both worked four day workweeks part of our career. I went 10 years, four days a week, and it was when my kids were…actually my youngest had just gone, I think…no, no, my oldest had just gone to kindergarten, and I just couldn’t figure out how I was going to continue doing everything that I needed to get done, plus be as involved as I wanted to be in school and scouting and volunteer work and all that. And at that point, there was no such thing as a four day full time. But there, I was able to do 80% of full time salary, so I thought it was just a wonderful win-win for me and for the organization. How long did you do it, JoDee?
So, I was thinking as you were talking, I…almost 16 years I did it, and…and that was starting in 1994, when, you know, we didn’t have much remote access to our emails and we didn’t have email on our phones. And so it was really…it was easier for me to do it, although it was somewhat leading edge. I didn’t have, really, a lot of the options to to work on that fifth day. So…so in other words, it was good for me because I didn’t feel compelled to check my emails. I would call in and check my voicemails. Remember voicemail?
Oh, don’t I ever! Yeah. Now no one listens to them. But yes, I sure do.
Right. So yes, I loved it. And I think it was the most productive time of my entire career when I worked four days, so.
I hope it becomes more normal.
I do, too. In our in the news section today, in late 2020 a survey by Jobvite reported that stress significantly increased for recruiters during 2020. Jobvite surveyed 800 U.S. based recruiting and HR professionals. The resulting data revealed that since the onset of the pandemic, stress levels at work have increased 61% for recruiters. Stress, of course, was up for most of all of us in 2020, but recruiters seem to feel it even more. They were working with reduced resources and dealing with job insecurity to adjusting rapidly to staffing up to fill urgently needed positions, all while living with the public health crisis themselves. Most of them switched quickly to video interviews and onboarding, but that was new for many of those recruiters, so it was technology as well. There is also an expectation from business leaders that when unemployment goes up, it should be easy to find talent, but sometimes when there’s more applicants, it can get even harder to find the best candidates, so it’s more stressful one way or the other.
So our advice is to show some recognition and appreciation to your recruiters. Of course, we should be doing that for all of our people, but it may it might have hit your recruiter harder than most. And consider if they need additional resources and/or if you can assure them of their own job security.
Yeah, it makes me think of “Have you hugged your recruiter yet today?” In the times of the pandemic, let’s not hug them, but maybe a virtual hug.
They might need it.
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