To Err Is Human—to Correct, Divine

Editor’s Note: This is the second in a two-part series about service providers’ audits of clients and their plans. The first is here. 

Audits may be a frightening and painful experience from the perspective of plan administrators and plan sponsors. But what does it look like from the auditor’s vantage point? Maria Hurd, Director of Accounting and Auditing at Belfint Lyons Shuman, gives ASPPA Connect a look. 

Plan Favorites

Professionals who audit retirement plans identify a variety of errors. But what mistakes stand out? 

“The mistake we see most frequently is the use of an incorrect definition of ‘compensation,’” says Hurd. She continues, “One would think that plan sponsors should be able to set it and forget it, but there are so many ways to make a mistake.” 

Hurd elaborates, enumerating additional common mistakes: 

• assuming that taxable non-cash compensation cannot be eligible compensation;
• excluding a type of compensation that should be included in eligible compensation, such as bonuses, commissions, or overtime; and 
• failure to: 
  • withhold deferrals from manual checks;
  • begin contributions on a timely manner after a participant’s election; 
  • enroll employees automatically;
  • code a new type of compensation as eligible compensation on the payroll; and
  • include all types of compensation when the definition of compensation is gross compensation.

Most Worrisome

Hurd says that the most serious mistakes her firm’s auditors identified were: 

• The exclusion of bonuses from eligible compensation can be a very costly error to correct when significant bonuses are involved.
• The failure to make a top-heavy contribution in a year when the discretionary employer contribution had been discontinued required the largest unexpected, unbudgeted contribution from a plan sponsor.
• Universal availability violations in the case of 403(b) plans.

Hurd adds, “One client had invested plan assets in a personally owned business and obtained ballots from the participants to prove that they wanted the prohibited investment. The DOL didn’t like that.”

No, We Won’t

“Auditors can speak softly because they carry a big stick,” says Hurd. But regardless of how serious a mistake the auditors identify may be, Hurd notes that some of their clients still do not heed their advice. 

And that can have serious, and cumulative, consequences. “Passed adjustments are accumulated from year to year until they become material to the financial statements,” Hurd observes. Before things reach that point, Hurd says, “we alert the clients that they can no longer truthfully represent that the plan has maintained its qualified status on the management representation letter, and in turn, on the tax-status note disclosure on the financial statements.” 

That can wake a client up, Hurd indicates, remarking, “The possibility of disclosing that operational violations have jeopardized the plan’s tax status can be a convincing reason to comply with EPCRS.” She says that EPCRS, the IRS’ Employee Plans Compliance Resolution System, “can be the carrot to the disqualification stick.”  

“Sooner or later, clients are forced to make the corrections,” says Hurd. 

But Receptivity More Common

Despite the reticence of some clients to take the steps they recommend, Hurd says, “In most cases, clients want to make any necessary corrective contributions or process any corrections needed to keep the plan compliant.”  

But they aren’t always happy about it. “When contributions are significant, unexpected, and unbudgeted, clients detest the financial and logistical ramifications, but in our experience, they always make the right choice.” 

Hurd adds, “Universal availability violations sometimes require a VCP application. These clients are receptive, but nervous about the possible outcome of the correction process.”

And, Hurd notes, “In most cases, clients make the changes they recommend before the following year’s audit.”