If your company has a benefit plan such as a 401(k) with 100 or more eligible participants, each year you are required to have an audit performed on that plan that is filed with the IRS and the Department of Labor (DOL). Failing to do so could mean major penalties for your business, says Danielle B. Gisondo, CPA, a principal with Skoda Minotti.
“What often happens is that a company gets to that 100 employee mark and it is not aware of the requirement,” says Gisondo. “A few weeks before the deadline, the company that is preparing the required Form 5500 for all benefits plans for the company will send the company a letter that says, ‘You need to have an annual audit this year because your participant count has climbed to more than 100, so please forward us your auditor’s information.’ The company may read that and begin the search for an auditor or just ignore it. And ignorance of the requirement is no excuse.”
Smart Business spoke with Gisondo about what you need to know to stay on the right side of the law and avoid stiff penalties.
When is a benefit plan audit required?
ERISA requires that an audit be performed on most benefit plans with more than 100 eligible participants. The auditor is required to be an independent accounting firm, one that is independent not only of the client but of whomever is administering the plan and holding the investments.
Every plan has to come up with a standard plan document that outlines how the plan should operate relating to contributions, distributions and loans. The DOL wants to make sure companies are properly running their plans in accordance with what their plan document says.
What happens if a company does not have a benefit plan audit performed?
If a company fails to have an audit performed, it will be faced with penalties from the DOL and the IRS, which can get very steep. If you fail to file at all, the penalties can be up to $30,000 per year per plan. And a deficient filing can result in penalties of up to $50,000 per year per plan.
How long does the benefit plan audit process take?
If the auditors get everything they need, the process typically takes three to four weeks. If there’s a delay in getting information, either from the client or from one of the third parties involved, it may take six or seven weeks to complete.
The auditors will first compile a comprehensive request list with everything they need copies of and access to. Depending on the size of the plan, the auditors will be on site for one to three days and will typically work with someone in HR or accounting to get the necessary information. The rest of the work is done off site to minimize disruptions to the client’s business.
What are the deadlines?
For a calendar year-end plan, the initial due date for Form 5500 and the audit is July 31. If you can’t meet that deadline, you can file a two and a half month extension, which brings the due date to Oct. 15.
What steps can you take if you realize you should have had an audit performed but you didn’t?
If the IRS/DOL notifies you that you should have had an audit, it’s difficult to get out of paying the penalties by saying that you didn’t realize you needed one.
However, the DOL offers compliance programs that companies can go through if they failed to file. These programs allow you to pay a reduced fee that varies depending on the type of plan and the number of participants. Once you have paid that fee and file the necessary 5500 forms and audits as needed, you can be relieved of the penalties.
If you know you have a problem, don’t wait. Reach out to the IRS/DOL and let them know you have a problem. If they come to you and say, ‘We don’t have your 5500 form and the applicable audit,’ it’s too late to go through the compliance program and you will face major penalties.
What should companies consider when selecting a benefit plan auditor?
Ask if the firm has expertise in performing benefit plan audits. A lot of people assume that any accounting firm can do them, but it is a separate area of expertise and you should make sure the firm has it. Accountants undergo specialized training on an annual basis to ensure they are comfortable with all of the changes that continue to come from the IRS and the DOL.
Make sure the people you are working with are properly trained, that they know what they are doing and that they audit multiple plans, because a firm that audits just one or two plans doesn’t have the experience of a firm that is doing 20 or 30. Also ask about the audit process and ensure that whomever you are working with has the experience necessary to perform the work.
Danielle B. Gisondo, CPA is a principal with Skoda Minotti. Reach her at (440) 449-6800 or firstname.lastname@example.org.
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When running a business, it’s difficult not to compare your company practices to those of other successful businesses. Benefit plans, however, need not be identical. Effective benefit plans should be as unique as the companies that create them and the employees for whom they provide financial security, health assurances and lifestyle perks.
There are, however, some best practices that can transcend all plans.
Design a benefit plan that achieves the employee’s goals and yours
When creating or redesigning a benefit plan, consider what you hope to achieve for the company and for your employees. Do you want a plan that provides financial security or promotes wellness? If you aren’t certain, think about your existing employees as well as those you hope to attract.
What is important to them? Almost every employee wants health care insurance and a savings plan, but younger workers may also value education reimbursement while working moms may want childcare or flexible schedules. If you aren’t sure what is most important to your employees, ask them. A thorough benefits survey can help clarify your employees’ values and correct misconceptions.
Educate employees on benefit options
Benefit plans have little value if employees don’t participate in them. Take time to educate employees on the various benefit options your plan provides so they can make smart choices when enrolling in the plan.
When employees fully understand their benefits, they are more likely to use them to their fullest potential. Plus, employees will better appreciate the value of their benefits and how they contribute to their total compensation.
Use benefits as a recruiting tool
When you’re competing for top-notch talent, compensation alone may not give your company the edge it needs. Use your benefit plan to enhance your company’s appeal and target the type of employee you want to attract.
For example, if you want to attract hard-charging employees who are focused on the long-term success of the company, initiate a profit-sharing plan that rewards employees based on the company’s performance. Highlight those aspects of your plan when interviewing job candidates, screening out those that are more concerned with their immediate gain than in contributing to the business’ bottom line.
Initiate a wellness program to minimize health care costs
With recent changes to federal health care regulations, employers are under more pressure than ever to provide health insurance for their employees, so you can bet most employers are looking for ways to reduce those pricey premiums. Just as “an ounce of prevention is worth a pound of cure,” a well-designed wellness program can be an effective remedy for high healthcare costs.
Promoting fitness and healthy lifestyle choices can help your employees prevent injuries and avoid serious illness down the road. A wellness program doesn’t have to include an onsite health club or expensive gym memberships. It can be as simple and inexpensive as supporting your employees in a walk for charity, hosting a health fair or sponsoring a companywide weight loss challenge.
The value in retaining critical employees is beyond measure. Not only can the cost of continued turnover do serious damage to your company’s bottom line, but maintaining your business’ institutional knowledge and a consistent point-of-contact for your customers is priceless.
With this in mind, design benefit features to encourage longevity and reward retention. Provide options for every stage of your employee’s lifecycle, from the time they are hired to the time they retire. Recognize and reward employees’ tenure with the company with benefit features that grow in value over time.
Maintain a constant commitment to benefits
When things get tough, as they often do, it is natural for employers to consider cutting employee benefits to reduce costs. Don’t automatically assume that this is the most effective cost-cutting measure, because the fallout can be hazardous. Providing a sound benefit plan for your workforce, especially when times are tough, provides employees a sense of security and reminds them that you are still committed to them. As a result, they are more likely to remain committed to you and the company long after an economic upturn.
Too often, benefit plans are a source of stress for employers. It doesn’t have to be that way. If employers adhere to a few tried-and-true best practices when designing their plans, they can offer a benefits package that provides employees long-term security, boosts morale and makes a powerful statement about the company’s commitment to its workforce.
John Allen is president and COO of G&A Partners, a Texas-based human resources and administrative services company that manages human resources, benefits, payroll, accounting and risk management for growing businesses. For more information about the company, visit www.gnapartners.com.