Compliance for Small Company Employee Benefit Plans

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

As another employee benefit plan season draws to a close, I was reflecting on the many compliance errors that we find each year while auditing plans. The plans that require audits are typically larger employers with over 120 employees. These plans are typically administrated by professionals with significant experience in their fields. And yet, due to the complexity of employee benefit plans, we still find compliance errors in many of these plans during the course of our audits.

This led me to think, what about those plans that aren’t required to get audited each year? These would be smaller employers. Many of these plans are likely administered by a payroll clerk or bookkeeper with limited experience in employee benefit plans. If I had to guess, I’d say that the likelihood for errors would be much higher. So, what can smaller plans do to make sure they are not perpetually making compliance errors in their plans?

Many small companies are now engaging audit firms to perform agreed upon procedures, or procedures that are substantially less in scope than an audit but that are specifically tailored to detect the most common compliance errors. An auditor would focus these procedures on the areas that most frequently cause compliance errors for both large and small companies alike. A few examples are:

  1. The auditor can design specific procedures to determine if the correct definition of compensation is being adhered to by the plan. This will involve reading the plan document’s definition of eligible compensation and then determining if employee compensation is being correctly deferred. For example, if the employer is not deferring on bonus compensation but the plan document includes bonuses in the definition of compensation, these procedures would identify this error. In my experience auditing benefit plans, the errors that end up being the most costly to clients are typically involving the definition of compensation. It is best to catch these as early as possible as the employer is required to correct the error as far back as the error was occurring.
  2. The auditor can recalculate the number of days from each pay date to the date that deferrals are contributed to the plan. If the contributions are not consistently contributed within a few days, the auditor can identify which contributions may need to be considered as late contributions. More importantly, the auditor can identify why the contributions were contributed late to the plan and recommend improved controls to prevent future late deferrals.
  3. The auditor can recalculate employer contributions to determine if the plan is calculating them in accordance with the plan document. For example, the plan document might call for the employer match to be calculated on an annual basis, but the employer might be calculating on a pay period basis. If this is the case, a true-up contribution could be required at the end of each year. If this is not happening, the employer will need to make the contributions plus lost earnings for prior years missed.

I would highly recommend for any small employer plan to engage a benefit plan auditor to come and “kick the tires” on your benefit plan. Finding any compliance errors now will save additional expense in the future and give you peace of mind that your plan is in compliance with regulations.

By Rex Platt, CPA