A DOL Audit — Are You Ready?
The U.S. Department of Labor (DOL) plans to substantially increase the number of ERISA compliance audits it conducts each year. If your plan were selected for an audit, would you be ready? Below we answer questions you and other plan sponsors might have about preparing for a DOL audit.
How does the DOL select a retirement plan for an audit? Unlike the random audits conducted by the IRS, DOL audits are generally conducted for a reason. If you receive a notice from the DOL’s Employee Benefits Security Administration (EBSA) that your plan has been selected for audit, the DOL is likely looking for something specific, although some audits are random. For example, the DOL may be acting on complaints from plan participants or in reference to something on your Form 5500.
What will we need to show the auditor? Generally, the EBSA notice will list documents it wants you to have available at the audit. This list may include:
- The plan document and amendments
- IRS Form 5500 for the period being audited
- The summary plan description
- Distribution forms provided to participants
- The fidelity bond for the plan
- A list of the plan’s investments
- The plan’s investment policy
- Minutes of meetings of the trustee or investment committee showing how investment decisions are made
- Information about the plan’s policies with respect to the voting of proxies
If there’s anything on the list that is unclear to you, call and ask for clarification.
What else should we do to prepare? You should review all the requested documents, gather supporting evidence, and organize plan records. This groundwork will prepare you to answer the EBSA’s questions. Also, make the plan’s legal advisor and independent auditors aware of the audit and have them review the requested documents before meeting with the DOL. You may want your advisor and auditor to attend the audit (or be available to answer questions).
What areas might the DOL target in an audit? Some of the things an audit may focus on are:
- Timeliness of deposits of participant deferrals
- Employee compensation and eligibility for participation
- Payment of plan-related expenses
- Funding policy
- Investment process
- Prohibited transactions
- Accuracy of financial data reported on Form 5500
- Reporting and disclosure (including the new participant fee disclosures)
What happens if the audit uncovers an apparent violation? The EBSA will issue a voluntary compliance request letter. The letter informs the employer of the results of the investigation, cites pension law provisions that the DOL considers to have been violated, and asks for correction of the violation(s) through full compliance. Depending on the violation, correction may include restoring losses of plan assets and lost investment earnings.
Are there steps we could take now to be ready for a possible audit? Yes, regularly review the plan documents the DOL might request, along with plan investments and your investment policy, to make sure they comply with pension law (ERISA) and the tax law. In addition, you may want to periodically conduct — or have a benefits professional conduct — self-audits.