The U.S. Department of Labor (DOL) generally requires an audit for benefit plans (EBP) with 100 or more participants, subject to specific rules and exceptions. The DOL requires that benefit plan auditors be independent, qualified public accountants. An audit plays a critical role in verifying compliance with relevant Internal Revenue Code (IRC) and DOL regulations, helping employers and employees feel confident that their benefits are properly managed and secure.
Correcting Operational Failures – IRS Programs
Failure to comply with the plan’s provisions or IRC requirements (commonly known as operational failures) must be corrected in a timely manner. Failing to address IRC operational failures in an ERISA plan can lead to disqualification of the plan, resulting in the loss of tax-favored status, substantial IRS monetary sanctions, DOL penalties for fiduciary breaches, and potential lawsuits from participants.
Most errors occur when a plan administrator, whether internal or outsourced, does not administer the plan according to its terms. Some of the most common mistakes include:
- Not properly implementing employee deferral elections
- Incorrect matching contributions
- Failure to apply eligibility rules
- Missed required distributions
- Failure to follow loan provisions
- Incorrect compensation definitions
- Not calculating distributions using the proper vesting schedule
- Nondiscrimination testing failures that are not corrected within one year
Plan sponsors are responsible for correcting any operational failures, whether they are identified during the annual audit or discovered by management, employees, or regulatory agencies. Employees who believe errors have occurred and were not properly corrected may also contact regulatory agencies directly to report suspected issues.
The IRS has published guidance for correcting operational failures under its Employee Plans Compliance Resolution System (EPCRS). Certain significant operational failures can be corrected promptly after discovery and before IRS contact using EPCRS Self-Correction Program (SCP) provided that the plan. SCP has established and consistently followed administrative procedures and applies reasonable, EPCRS-consistent correction methods. For other significant operational failures, a Voluntary Correction Program (VCP) filing is required; the IRS will then review and approve the correction. If an operational failure is identified while a plan is under IRS inspection, the plan sponsor must pay a sanction and make corrections through the Audit Closing Agreement Program (Audit CAP).
Correcting Fiduciary Failures – DOL Programs
The most common fiduciary failures under ERISA include prohibited transactions, failure to monitor plan operations, and late or missing contributions. These issues frequently appear in DOL enforcement actions.
The DOL is responsible for monitoring that annual Forms 5500, along with any required audited financial statements, are filed timely for plans covered by ERISA. Failure to file Form 5500 by its required due date requires plan sponsors to use the Delinquent Filer Voluntary Correction Program (DFVCP) to remedy late filings. Penalties for late Form 5500 filings have recently increased, making it more important to complete plan audits on time or correct late filings promptly to avoid penalty assessments by the DOL.
Another commonly used correction program is available for plan sponsors to address untimely remittances of employee contributions to plans. The DOL provides the Voluntary Fiduciary Correction Program (VFCP), which allows plan sponsors to calculate and restore lost earnings to the plan resulting in such delays. Plan sponsors may choose to self-correct such delays or submit a VFCP filing to the DOL for formal approval. Each plan sponsor should establish an appropriate policy for the timely remittance of contributions to EBPs, and there is no “safe harbor” timing guidance for large plans.
Preventing Failures
Plan sponsors should ensure their plan documents are amended in a timely manner to reflect recent legislation related to EBPs, and that responsible personnel receive regular training on common problem areas, such as timely remittance of deposits, eligibility and auto-enrollment, and definition of eligible compensation. Proactive communication among plan administrators, outsourced service providers, and auditors is essential to prevent surprises during EBP audits.
The reality is that many EBP audits fall short of the mark. According to a 2023 DOL audit quality study conducted on 2020 audits, out of a sampling of over 300 audits reviewed, 30% were found to have substantial deficiencies. Plan sponsors are responsible for selecting qualified service providers, including plan auditors, and for continually monitoring their performance and fee structures to ensure contracted duties are properly fulfilled and fees remain reasonable.
Connect With Us
If you need assistance with your annual EBP audit, CBIZ can help. Our professionals have the expertise to handle all aspects of EBP audits, including 401(k) plans, 403(b) plans, ESOPs, defined benefit plans and more.
If you have concerns about the quality of your EBP audit, please connect with our professionals today. Our auditors bring thorough expertise and comprehensive knowledge to every engagement, ensuring your audit meets all necessary standards, simplifies complex requirements, and supports smooth compliance with IRS and DOL regulations.
Frequently Asked Questions
Common mistakes include failing to follow plan provisions, incorrect contributions, missed distributions, and noncompliance with eligibility or loan rules.
Uncorrected failures can lead to plan disqualification, loss of tax benefits, IRS penalties, DOL sanctions, and potential legal action.
Sponsors can use IRS and DOL correction programs such as EPCRS, SCP, VCP, Audit CAP, DFVCP, and VFCP, depending on the issue.
Common issues include prohibited transactions, late contributions, and failure to properly monitor plan operations.
Prevention includes timely plan updates, staff training, strong communication among stakeholders, and selecting qualified auditors.
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