As explained by Tom Schendt, a partner in the employee benefits and executive compensation practice at Alston & Bird LLP formerly employed by the IRS as a technical assistant to the associate chief counsel within the Employee Benefits and Exempt Organizations for the Office of the Chief Counsel, neither DOL nor IRS have the resources to simply rely on random auditing anymore.
“Instead they have had to become much more focused and selective in how they use their auditing resources,” Schendt explained. “The DOL, for example, has become very focused on Form 5500 audits, due to the emerging realization that there are significant problems in terms of audit quality in this area. Both organizations are increasingly relying on specific red flags to hone in their auditing resources where there are likely to be problems.”
Jeb Gramah, retirement plan consultant and partner with CAPTRUST Financial Advisors, and James Moyna, principal with the auditing firm JMM CPA, agreed with that assessment—warning that the regulators are leveraging new and old sources of data more aggressively to target potentially problematic plans.
“They focus primarily on plans with 2,500 employers or more these days, but small plans also get audited if there appears to be issues,” Schendt added. “They look at ebb and flow of people going in and out of an organization. They look at the numbers of plans you have, and of course they consider any referrals of complaints coming from government agencies.”
Moyna and Schendt both suggested the most audited issue today is 401(k) plan loans.
“IRS and DOL know that loans are difficult to administer and that if they look deep enough into your plan records they can probably find examples of defaulted loans or other timeliness issues,” Schendt said. “Loans can be very difficult to manage. You’re dealing with payroll, the third-party administrator (TPA), and the participant. There’s an ebb and flow of money going back and forth according to very strict terms. This is fertile ground for an audit. It’s easy pickings as far as they are concerned.”
Put simply, the greater the number of loans and the greater the number of defaults, the greater the likelihood of an audit. Panelists explained another likely trigger of an audit on the defined benefit (DB) side of the equation: how many people in the plan are eligible for a benefit but are not getting a benefit?
NEXT: Inside the DOL and IRS mindset
“DOL is focusing on this right now, no question,” Schendt said. “They’re saying there has not been a good enough effort by DBs to find missing people. They believe you’re not following your fiduciary duties if you are accepting that there are people who are over 65 or even 70.5 and who have not started collecting a benefit. They will not necessarily just accept that these folks may be missing. They will want to know exactly what you have done to find these people and to pay them the money they’re owed.”
According to Moyna, DOL feels a need to get even more aggressive than it might have been in the past due in large part to “serious concerns emerging about the audit quality of CPA firms serving plans that are not actually experts in ERISA.”
“A recent study by the DOL found a whopping 39% of independent third-party Form 5500 audits commissioned by larger plan sponsors contained factual errors or other deficiencies,” he explained. “It’s very problematic right now and there is no way this issue is going away any time soon. Plan sponsors must be very aware of who they are hiring. They must ask their auditors tough questions about their expertise in ERISA, and if they lack confidence in what they hear, it’s time to find a new auditor who is actually expert in ERISA.”
Turning to practical takeaways for plan sponsors, the panelists suggested it’s probably not within their power to avoid all audits. Even though DOL and IRS are being more targeted, it’s still pretty much luck of the draw for a given plan sponsor in a given year—whether they’ll be audited by either DOL, IRS, or even both.
“DOL and IRS have always asked tough questions of plan sponsors,” Schendt concludes. “If you have great processes and documentation and controls in place, they’ll leave very quickly. If not, they could be with you for months.”