Having recently passed the final filing deadline for employee benefit plan audits, it is an appropriate time for construction firms to consider how to improve processes to avoid the same headaches again next year.

Consider who’s eligible

The audit requirement is driven by the number of employees eligible to participate, not how many are participating. Contractors can find this number on page two, line five of form 5500. Not uncommonly, plans are designed to sweep up far more employees than are actually participating. This can trigger an unintended audit requirement. Talk to a third-party administrator (TPA) about whether changes in the plan design can eliminate the audit requirement, including cashing out small account balances of former employees.

Consider your custodian

Not all custodians (the organization that holds the plan’s assets) can issue what’s referred to as a “complete and accurate” letter certifying the plan’s assets. Auditors can rely on these letters to reduce audit procedures related to the plan’s investments (which can in turn reduce audit costs), but not all custodians can issue such a letter. Generally only banks, trust companies and insurance companies can. Brokerage firms generally cannot.

Consider your service providers

Can they provide a service organization control (SOC) report? Not all TPA’s or custodians spend the money to obtain a SOC report. Others don’t receive unmodified, or “clean” reports. Since most plans operate on an online platform provided by a service provider, the functioning of that platform in accordance with its goals of safeguarding the participant’s retirement information and access to investments is key.

Consider participants’ deferral contributions

The funds withheld from the employees are still the employees’ funds. The Department of Labor looks harshly at plan sponsors that don’t transmit those funds “as soon as administratively possible” to the custodian. This is subject to interpretation, but one rule of thumb is that those funds should be transmitted as quickly as payroll taxes withheld would be. Late payment of funds withheld from employees exposes the plan sponsor to regulatory risk.

Consider the definition of plan compensation

A contractor’s plan document defines what qualifies as compensation. Employers and employees can be confused about whether bonuses are eligible for deferral or not. Plans differ on how they are treated. Be sure to know how plan compensation is computed and make it as as clear as possible, as mistakes can be costly.

Consider the policy for matching

There are many philosophies about how the employer’s match should be computed. Some are easy to calculate, and some are difficult to calculate. Those that are difficult to calculate, such as fixed amounts, are subject to more errors than those that are simple, like flat percentages across the board.

Consider the auditability of the payroll system

The sponsor’s payroll system calculates the amount of the employee deferral. If a contractor’s payroll system is unable to perform the required calculations correctly and consistently, the amounts contributed will not be correct and will not be deposited timely which can be costly.

Consider the process for approving distributions (whether on paper forms or through the provider’s online portal)

Documentation requirements for hardship withdrawals should be met and documentation retained. Other distributions require varying amounts of sponsor involvement depending on the platform used. Are your controls around approval clearly communicated to whomever is responsible for approval?

Consider the state of personnel files

Demographic data such as hire dates, birth dates, termination dates, plan entry date and so on should be accurately maintained. Inaccurate information can lead to incorrect amounts of distributions, participants who are not offered enrollment on a timely basis, participants who are incorrectly included or excluded from participation and other operational errors. The sponsor has a duty to keep accurate records.

Consider plan expenses

Is there an approval process for expenses paid by the plan, if any? Do the trustees consider the fees and document their consideration of them? Are fees reviewed and compared to industry metrics on a regular basis?

Consider the results of compliance testing

TPA’s run complicated tests required by IRS rules to determine if plans are top heavy and if there are excess contributions. If a contractor consistently fails its testing and makes corrective distributions every year, work with the TPA to see if this can be avoided through changes in contribution amounts or plan design.

Consider your responsibilities as sponsor

Employee benefit plans and the regulatory requirements surrounding them are complicated and most sponsor personnel encounter them once per year. Using a TPA, advisors and auditor as a resource is appropriate. Not doing basic due diligence as outlined above will only lead to problems, as the sponsor is ultimately responsible for the plan and its operations.

Taking the time to consider these issues now while this year’s audit is fresh may help avoid similar issues in 2020.