By Kerri Norment, CPA, Audit Supervisor
As Published in Employee Benefit Plan Review
An increasing number of studies are finding that more employers may stop providing benefits to their employees once the health care reform takes effect in 2014. The majority of companies are continuing to offer their employees some benefits in the form of a qualified employee benefit plan.
For those employers that offer employees a qualified employee benefit plan, the Department of Labor (DOL) and the Internal Revenue Service (IRS) will regulate the plan. The majority of employers who offer a benefit plan to their employees understand the significance of their responsibilities to the DOL, the IRS, and their employees. The DOL requires an annual audit for plans that have more than 120 participants. The audit ensures the necessary funds will be available to provide the benefits promised to employees and ensures the plan remains compliant with federally mandated regulations.
As a result of the conditions that contributed to the financial meltdown a few years ago, there is an increased demand for transparency and more regulations in the business world. Therefore, the DOL has dramatically increased its oversight of employee benefit plans, its search for noncompliant transactions, and its assessment of penalties.
Because most employee benefit plan audits are highly specialized, it is important for employers to adhere to best practices as they relate to audits. Here are a few key best practices to keep in mind:
- Develop a strong team. As a result of the recent economic downturn, many businesses were compelled to downsize their workforce resulting in employees having to take on additional job responsibilities, including human resources duties. These duties often include administering employee benefit plans. Despite these changes, the employer needs to ensure those who are entrusted to handle the plan have sufficient training and knowledge of the plan. Therefore, the human resources and payroll professionals involved in the day-to-day operations of the plan should receive continuing education related to these responsibilities. The additional education will result in well-trained professionals who can assist in the audit and help it run more efficiently and effectively.
- Select a Plan Administrator. The plan administrator is given fiduciary responsibility for the plan’s operations. C-level executives frequently hold this position, but this position may be held by a senior HR manager. C-level executives are not involved in the day-to-day operations of the benefit plans and may not be familiar with the intricacies involved in maintaining an employee benefit plan.
- Establish a Committee. Large, publicly-held corporations are required by the Securities and Exchange Commission (SEC) to create and maintain an audit committee, which governs the plan and oversees the audit. Although small plans do not have the same requirement, it is strongly recommended they create an employee benefit plan committee charged with governing the plan and reviewing plan operations. It is recommended committees meet on a quarterly basis and document the discussions held.
- Know the Plan Document. Employees responsible for the plan should regularly familiarize themselves with the plan document. Plan requirements are constantly changing in response to changes in rules and regulations from the DOL and IRS. Therefore, it is important to keep plan documents up-to-date. If documents are not current, there is an increased likelihood the plan might not be in compliance. Noncompliance with plan documents could result in a plan losing its qualified tax status.
- Document an Investment Policy. An investment policy should establish the plan’s investment strategy. It should outline how the plan sponsor intends to select and manage investments in order to achieve its investment objective. Establishing performance benchmarks is a recommended way to monitor the performance of investments. By developing a clear and concise investment policy, employees are protected from unnecessary market risk and employee benefit plan committees and plan administrators can demonstrate they are meeting their fiduciary responsibilities.
- Segregate Duties. Properly segregating duties may be difficult for smaller companies. All organizations, regardless of size, should take steps to divide responsibilities whenever possible. A company should have one employee to authorize transactions, another to record transactions, and a final to maintain custody of the assets. This level of segregation protects the participants of the plan as well as those responsible for plan operations. If proper division is not in place to prevent potential fraud, it is imperative that a strong review process by senior management be in place to detect potential fraud.
- Maintain adequate records. In today’s business environment, most transactions are completed electronically. As a result, there is little to no paper trail for auditors to review. It is important to keep on file any electronic or paper documents relating to plan operations. Documents that should be maintained include not only plan documents and investment policies, as mentioned above, but also participant related documents. Some recommended participant documents to retain include evidence of individual’s employment, authorized employee pay rates, plan enrollment forms, requests for loans or distributions, and confirmations documenting receipt of plan contributions. When this documentation is handled by third parties, it is essential to acquire a SAS 70 Report from that third party administrator. This report documents the controls in place and the operating effectiveness of those controls. This creates another level of comfort in the absence of traditional documentation.
Conclusion
Despite the size of a company’s human resources department, it is important to know how to properly administer an employee benefit plan. The responsibility of plan operations rests squarely on the shoulders of the plan sponsor. Not only are participants counting on the plan sponsor and HR department, but also the government. Having a full understanding of employee benefit plan audit best practices will go a long way towards a well managed and federally compliant employee benefit plan.
Kerri Norment, CPA, is a Supervisor with Witt Mares, PLC, a regional accounting and consulting firm serving clients throughout the mid-Atlantic. She can be reached at knorment@wittmares.com.