Where Should an Employer Look for Benefit Plan Fraud?

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

Employee benefit plans are often a side note in the day-to-day transactions of a business, lacking the constant oversight and review given to the operational activities.  Also, benefit plans involve the majority of the employees in a company in some way or another.  These and many other reasons make benefit plans susceptible to fraud. 

As auditors we look for financial statement fraud and misappropriation of assets.  An employer may be more concerned with the later. So where should an employer look for fraud in a benefit plan?  The three following areas will be a good place to start:

1. Distributions – Fraudulent distributions can be the product of an employee requesting an inappropriate distribution.  For example, documentation proving financial hardship could be forged to receive a hardship distribution. An employee may also request a loan larger than allowed under the plan document.  In both cases, close review of all distribution requests will limit the possibility of fraud.

More worrisome than fraudulent requests are fraudulent distributions made by a plan administrator.  For example, an administrator could request a distribution of funds for a former employee with an undistributed account balance after changing address and beneficiary information in the account. The best way to protect against this type of fraudulent disbursement is with segregation of duties. Typically when fraud like this occurs, it is a direct result of one employee having too much access and responsibility.

2. Contributions – Contribution fraud is often much easier to commit than distributions fraud.  For example, a payroll clerk who prepares payroll and manages submission of contributions could re-allocate deferrals from other employees’ paychecks to his or her own contribution. 

In many small companies, the same person may prepare payroll and prepare the submission of the employee contributions.  Once again, segregation of duties will prevent or detect fraud in most cases.

3. Eligibility – Plan administrators who have control over employee records can easily manipulate data regarding eligibility. For example, an administrator could make an employee eligible early for a plan in exchange for some sort of consideration.  Even more troubling, a plan administrator could set up a fictitious employee in the company payroll and begin deferrals from the employee’s paycheck.  The paycheck could be small enough to go unnoticed in budget analysis but the deferral to the fictitious employee’s account could be a large portion of the paycheck.

Once again, segregation of duties will prevent the majority of fraud associated with eligibility.

There are many ways to commit fraud, however, in an environment with strong internal controls and segregation of duties, the task becomes much harder. No matter the size of your organization, try to divide some key tasks mentioned above, and sleep a little easier.

Rex Platt