Pitfalls to Avoid in Plan Administration

To err is human. An initial audit can bring before errors in plan administration before a government official conducts one and help in avoiding possible penalties.

Not only that, an internal audit can help in making sure that a plan functions well and efficiently in order to serve participants and beneficiaries as it should and must. 

Maria Hurd, Director of Accounting and Auditing at Belfint Lyons Shuman, in “Could I Fail my First 401(k)/403(b) Plan Financial Statement Audit?,” provides a look at common mistakes that her firm has identified in internal audits—and in the process provides ideas regarding mistakes that a plan administrator and a plan sponsor should avoid. 

Administrative Matters 

Failure to automatically enroll all newly eligible employees into the plan as the plan document requires.

Lack of:

• written documentation of employees opting out, which prevents corroborating that participants were not supposed to be automatically enrolled without alternative audit procedures. 
• sufficient controls to ensure that changes to employee deferral elections are timely and accurately updated in the payroll system. 
• controls sufficient to properly identify participant eligibility dates and the related entry dates as defined by plan provisions. 
• procedural controls to ensure forfeited participant accounts are used by the end of the following year after the forfeitures are generated pursuant to plan provisions. 

Discrepancies between what the recordkeeping and payroll systems have shown; for instance: 

• payroll totals and totals on census data submitted for nondiscrimination testing that do not agree; and 
• hire dates, termination dates, and hours worked that are inconsistent or missing altogether. 

Compensation 

Compensation used to calculate employee deferrals in consistent with the definition of “eligible compensation” the plan document spells out. 

Contributions

Lack of controls that would ensure that:

• contributions are remitted to the plan with accurate source type, including: 
  • employer matches; 
  • employer safe harbor nonelective contributions;
  • pre-tax deferrals;
  • profit sharing;
  • QNEC;
  • rollovers; and 
  • Roth deferrals.
• the employer segregates all employee contributions and loan repayments from its general assets as soon as administratively feasible—which the Department of Labor (DOL) requires. 

Distributions

• Terminated participant accounts that do not exceed $5,000 at year-end.
• Participants receiving an incorrect distribution because vesting and forfeitures were calculated incorrectly. 
• Insufficient withholding of federal taxes.
• Lack of documentation supporting the assertion that a participant had directed that a lower amount of taxes be withheld.
• Failure to maintain source documentation to support and corroborate hardship distributions.

Documentation 

Failure to maintain: 

• documentation showing that all newly eligible employees were timely notified of their ability to participate in the plan; 
• documentation of enrollment and changes of election, which could put the plan sponsor at risk of corrections, fines, and penalties; and
• documentation showing there had been a review of the plan’s elements and fiduciary oversight. 

Loans

Failure to set up timely repayments of loans to plan participants. 

Insufficient controls to ensure that:

• loan repayment deductions stopped when the loan was paid off; and. 
• delinquent participant loans were monitored and deemed distributed at the end of the grace period the written loan policy specifies.