A review of employee retirement plan audits over the last five years has revealed that Internal Revenue Service (IRS) and Department of Labor (DOL) auditors are increasing their focus on the internal controls employers maintain for their employee benefit plans.

Why the Escalated Enforcement?

In 2014 alone, the DOL restored nearly $600 million to plans, participants and beneficiaries, $356.2 million of which was attributed to audits triggered by more than 213,000 employee complaints about their benefit plans. Accordingly, the DOL and the IRS has drastically increased and revised its enforcement strategies, which is expected to increase the number of audits in 2015. Due to the uptick in audits, those employers with a company-sponsored plan that might not have been targeted before are now subject to an audit, regardless of size, industry or location.

Compliance Concerns

The focus of recent audit activity and underlying issues of the escalated enforcement seems to be non-compliance within one or more of the following areas:


DOL vs. IRS  Audit

IRS and DOL plan audits, although both unwanted, vary in their objectives. While IRS audit concentration is on the compliance related to Internal Revenue Code, the DOL audit focuses on violations of ERISA. However, just when you think you passed through the ringer of one agency audit, it is likely the other agency will come knocking based on a referral of uncovered errors or inconsistencies from the first audit.

What to Expect

The DOL spends most of its effort during a plan audit process on determining the compliance with fiduciary responsibilities and timeliness of employee contribution deposits and participant loan payments. Be prepared to provide them, at a minimum, with:

  • Copies of committee and trustee meeting minutes
  • Required service provider and participant fee disclosures, service agreements and contracts
  • Related analysis for determining plan fees reasonableness
  • Any documents related to the review of plan investments (i.e. investment policy statement)
  • Support for internal control policies in place

On the other hand, the IRS focuses on tax deduction issues, plan compliance and other various operational issues. Most information requested within an IRS examination is accessible form the plan’s record-keeper and/or third-party administrator (TPA). The audit information likely to be requested includes:

  • A census listing
  • Payroll records
  • Annual compliance testing materials
  • Distribution/participant loan paperwork
  • All plan documents and related amendments

In general, most IRS and DOL plan audits will only require this information going back three years. However, if major errors are identified, it is likely they will look back up to six years or more.

The Audit Process

The DOL and IRS audit processes are strikingly similar. The process begins with a letter requesting numerous documents, which sometimes can be completed electronically. Don’t provide incomplete information, as it could raise warning signs you don’t really know what is going on with the plan. In most cases the next step is an onsite meeting. During this phase, the Employee Benefits Security Administration (EBSA) typically conducts interviews with plan fiduciaries and administrators. Counsel should be available and present during these interviews.

Be Prepared for the Unexpected

Opening the dreaded letter from the DOL or IRS informing you that your company’s 401(k) or 403(b) plan has been selected for review can cause a state of panic. Looking at the long list of requested documents with a short window of time to provide it can create undue stress. Don’t find yourself in this position by planning what you can now.

3 Ways to Prepare

Typically, the smoother you can make the audit process for the auditor, the less painful the process will be for you overall. Doeren Mayhew shares three ways to help you survive the audit process:

  1. Document decisions and changes – Keep up-to-date minutes and documentations related to any meetings and decisions about the plan and its operations, as well as changes made to the plan operations.
  2. Seek third-party assurance – Get an annual independent third-party audit of the plan completed. Often times this will help you identify any internal control weaknesses and allow time to correct them at a fraction what it would cost if it had been identified in a regulatory audit. It will give you peace of mind when you receive your audit notice from the DOL or IRS that you will pass with flying colors.
  3. Keep your advisory team close – Considering the majority of documents requested will most likely need to be obtained from your third-party service providers, keep them close. Notify your team of the audit, documents requested and the timeframe in which they are required immediately. These professionals can help you gather and organize the information, as well as review final documents and answer any questions needed during the audit.

It is best practice to take stock of all required documents occasionally, so that an audit doesn’t consume your time when you don’t have it to spare.

Come Out on Top

Although the process may be brutal, you will survive the DOL or IRS audit process.  Coming out unscathed is the goal, but may not be the reality for you if you’re not properly prepared.

Whether you just finished a plan audit, or managed to avoid one thus far, you should immediately begin preparing for your next potential audit from regulators. Consistent, up-to-date documentation, sound funding practices and an independent annual plan audit will put you in a position to come out on top. Contact Doeren Mayhew’s employee benefit plan auditors in Michigan and Houston to receive your annual plan audit today and avoid costly exam penalties.