How To Survive A DOL Audit
Benefits & Compensation Digest
You receive a notice by mail that your employee benefit plan is about to be audited. The notice asks for specific documents and information and for a meeting. You may never have to deal with a DOL audit. But if you do, you can minimize the cost to your plan in terms of time, effort and anxiety by careful planning, systematic recordkeeping and purposeful organization. If you have administered your plan in accordance with DOL regulations and were diligent in documentation, the audit need not be a painful process.
If you're a plan, congratulations! You can face a Department of Labor (DOL) audit. It's not a happy moment. You receive a notice in the mail that your employee benefit plan is about to be audited. It asks for specific documents and information and for a meeting. What do you do next?
It can happen to you. That scenario repeats itself thousands of times each year throughout America. If you're the trustee or administrator of an employee benefit plan, no matter how well run, you can be audited by DOL. An audit can be triggered by any number of things, from a participant complaint to certain red flags, and DOL has a duty to investigate them. There are even random audits of auditors. The results of an audit, from DOL's perspective, can range from a finding that everything is as it should be to discovery of serious improprieties and the need for legal action. But even in a best-case scenario where you come away with a clean slate an audit will place demands on your time, energy and organizational resources.
What You Can Do
Fortunately, there are steps you can take now to make it easier to survive an audit. You need to make sure, first of all, that your plan is run properly and that you have complied with all regulatory requirements and documentation. Be sure to educate yourself and keep up to date on DOL requirements, and work with your legal counsel and independent auditors to stay in compliance. DOL has a new Fiduciary Educational Campaign, started in June 2004, which offers free educational materials and a series of seminars for plan profes¬sionals, which you can find out about at www.dol.gov/ebsa. In addition, you need to have access to your essential documents and to have a plan in place for dealing with the demands an audit will put on you and your organization. The time to prepare is now, and it's not difficult.
First, a bit of background. As part of its responsibility to protect plan participants, DOL relies on the Employee Benefits Security Administration (EBSA) to administer and enforce ERISA's fiduciary, reporting and disclosure provisions. (Until February 2003, EBSA was known as the Pension and Welfare Benefits Administration (PWBA).) EBSA reports that, through its enforcement program, it helped recover more than $1.3 billion to employee benefit plans in 2003.
EBSA is the agency responsible for conducting audits and investigations of plans. The audits and investigations can result from a variety of triggers. These can include bankruptcy, participant or vendor complaint, and problems with the Form 5500. To focus its resources where they will have the greatest impact, EBSA has identified national enforcement projects in which field offices are to place particular investigative emphasis. EBSA also allows its regional offices to formulate and act on their own projects. The national enforcement projects include:
- The Multiple Employer Welfare Arrangements (MEWAs): A MEWA is a welfare benefit plan or other arrangement that is created to benefit employees of two or more employers. EBSA is particularly on the lookout for instances where a small employer that cannot find or cannot afford health care coverage turns to a MEWA that cannot fulfill its obligations, either for lack of funds or for malfeasance. Audits under this program can be triggered by complaints from participants, management whistle blowers or other government agencies.
- Employee Contributions Project: EBSA has aggressively pursued employers that delay remitting employee contributions to the 401(k) and health care plans for their own benefit. DOL regulations require that contributions for a benefit plan become plan assets as soon as they can reasonably be segregated from the employer's general assets, which must occur within 15 business days after the end of the month the contributions are withheld from employees' pay. For multiemployer 401(k) plans, an additional issue to the plan administrator is how to monitor the timeliness of the contributions of various employers participating in the plan. In performing payroll audits for multiemployer plans, timeliness of 401(k) plan contributions should be addressed. Audits under this program have the same triggers as MEWAs.
- Rapid ERISA Action Team (REACT): Because participants and beneficiaries are at special risk in the case of bankruptcy, EBSA has a special team called REACT to protect their benefits. REACT makes sure all available legal actions have been taken to preserve pension plan assets. Investigators will take particular care to look for commingled assets and to determine whether there are plan contributions that have not been paid. They also keep an eye out for assets that should be paid to the plan but which employers may still beholding. REACT investigations are triggered when DOL learns of an impending bankruptcy from whatever sources.
- Orphan Plans Project: If a plan has been abandoned by its sponsors and fiduciaries, or fiduciaries are not available for reasons of "death, neglect, bankruptcy, or incarceration" (as DOL puts it), EBSA searches for an available fiduciary or one who can be appointed to protect the assets of the plan. The focus of the Orphan Plans Project is not the investigation of a plan's documents and procedures, but maintenance of responsible supervision so participants and beneficiaries can receive their earned benefits.
- Health Disclosure and Claims: EBSA has dedicated substantial resources to identifying fiduciary and criminal violations relating to health benefit plans. Recent statutes, including the Health Insurance Portability and Accountability Act of 1996, the Mental Health Parity Act of 1996, the Newborns' and Mothers' Health Protection Act of 1996 and the Woman's Health and Cancer Rights Act of 1998 have expanded EBSA's role in this area. EBSA investigations primarily focus on ensuring that the plans are financially sound and are run prudently and in the participants' interest.
- On Site Reviews of Audit Work Papers: EBSA's Office of the Chief Accountant performs random audits that do not directly involve you or your fiduciary duties. These are audits of the auditors; their purpose is to make sure the auditors' work is up to standards. If this happens to your plan, you may receive a notice from DOL that such an audit is underway. This does not indicate any shortcoming in your auditors, since they have been selected at random. In most cases, work will be performed in the auditors' office, where DOL will review audit work papers. You may wish to ask your auditor and DOL for a copy of the final report, just for your own peace of mind.
Steps To Take
When you are notified of an audit, your first step should be to find out what's being investigated. Chances are, your audit will fall into one of the categories listed above. Knowing what the investigators want will help you gather the information you need and alert the necessary personnel to be available. Generally, DOL will give you a list of documents they would like you to have available during their visit. If there is something on the list that is unclear to you, call and ask for clarification. Make that call early in the process to give yourself ample time to obtain any documentation required.
In addition to what is requested, the following is a list of documents you generally should have on hand during the DOL visit:
- Plan document.
- Trust agreement.
- Master trust agreement, if any.
- Latest IRS determination letter.
- Form 5500, together with supporting schedules and documentations, including the audit report with the accountant's opinion and financial statements with notes for the period being audited.
- Board of trustees meeting minutes.
- Bank and investment custodian statements.
- Investment guidelines.
- Independent investment appraisals, if any.
- Expense allocation methodology documentation (including allocation studies and expense allocation agreements with related plans, if any).
- Summary plan description.
- Agreements with service providers.
- Insurance policies.
Looking at the audit as a process you must participate in, one of your next steps should be to appoint a point person. Make it clear what the extent of this person's authority and responsibility is. Because of an audit's potential impact on the plan and its administrators, this individual should be the plan administrator, attorney or outside accountant. He or she should have broad powers indeed, and requests for information should receive the highest priority. The point person's duties will include coordinating with DOL on the timing of the audit, assembling and reviewing the requested documentation, coordinating meetings with appropriate personnel, reporting to the board of trustees and devising recommendations for future audits.
You should also make the plan's legal counsel and independent auditors aware of the audit from the very beginning. They can provide you with invaluable assistance in responding to DOL inquiries, finding information and interpreting government regulations. You may also want to request their presence during interviews, where they can protect your interests and respond to technical questions quickly and authoritatively. It may be advisable to have the plan's legal counsel and independent auditors review the documents DOL is interested in before meeting with DOL or handing over the documents.
Once these steps have been taken, let other plan personnel know what's going on. At the very least, they should have the name of the point person in charge of responding to the audit, plus directions about what to do if information is requested by DOL investigators. Depending on the size of the plan's staff, you may not need to inform everyone, but anyone who might be approached by DOL should be aware of the protocols.
In your communications with DOL investigators, do not give them information they do not request. Resist the temptation to try to bury them in unrelated paperwork The last thing you want is for them to identify a new area into which they should inquire. You will do better to cooperate with DOL and provide documents in a timely manner than to drag your feet and delay, which can raise suspicions of problems. Remember, DOL and you have a common goal to protect the assets of the plan and provide participants with the benefits they are entitled to.
If the investigation finds problems, you'll have to fix them. Voluntary compliance will generally satisfy DOL and avert any civil lawsuit. You may have to pay amounts to restore losses, disgorge profits or pay penalty amounts, depending on the violation that has been determined. If you don't, DOL will refer the case to its attorneys. In that case, you may be able to settle without going to court, but you're in an unhappy position.
Problems Apart From The Audit
If you find problems before or apart from a DOL audit, you should know about the Voluntary Fiduciary Correction Program (VFCP). This program allows plan officials to make corrections on prohibited transactions such as purchase of assets from party in interest, sale of assets to party in interest, payment of excessive compensation and 12 other specified prohibited transactions. If you document an acceptable correction, DOL will issue a no action letter. A no action letter reports EBSA's decision to take no civil action against you and not to impose certain penalties on the amount you have repaid to the plan.
If your plan is late in filing its Form 5500, DOL also has a Delinquent Filer Voluntary Compliance (DFVC) program. This program allows plans to file their late Form 5500 before a DOL late-filing notice with far lower penalties than if DOL found their failure to file and requested the missing forms. The maximum penalty per late filing is $750 for a small plan and $2,000 for a large plan. There is also a new per plan cap of $1,500 for small plans and $4,000 for large plans. The per plan cap is designed for plans with multiple late filing years. Note: Once you have received DOL notice of late filing, you can no longer participate in the DFVC program and will face stiffer penalties if DOL identifies you as a delinquent filer.
You may never have to deal with a DOL audit. But if you do, you can minimize the cost to your plan in terms of time, effort and anxiety by careful planning, systematic recordkeeping and purposeful organization. If you have administered your plan in accordance with DOL regulations and were diligent in documentation, the audit need not be a painful process.
David Lee is a partner at Berdon LLP, where he heads the Employee Benefit Plans and Labor Group. He has served as moderator and guest speaker at several Foundation conferences and is a former member of the Accountants Committee.
©2004 International Foundation of Employee Benefit Plans
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