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Retirement Doctor: Audit Red Flags

Sep 6, 2018 10:10:26 AM / by Mike Rogers

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Avoiding Audit Flags – How to reduce the chance of an audit.

On the heels of our most recent post regarding increased audit activity, learning how to avoid some of the more obvious red flags can help reduce your risk and increase the odds that you will survive any audit for which you are selected without major problems.

With increased staffing by the Department of Labor (DOL), the electronic filing rules making it easier for them to mine data, through the random audit program, or via employee complaints, the likelihood of audits for plans of all sizes has increased.

The Form 5500 Can Be Audit Bait.

Bad answers to Form 5500 can attract the Labor Department’s attention and serve as an excuse to dig deeper into the plan. One of the more obvious compliance questions asks whether the plan is protected by an ERISA bond and if so, the amount of coverage. A “no” answer to this question or a coverage amount that is too low are warnings that the Plan Sponsor is not following the rules.

Another red flag we see on a regular basis is a Plan Sponsor not taking advantage of the Qualified Default Investment Alternative (QDIA) rules related to the default investment. The lack of code on the 5500 is a red flag to the DOL that the plan fiduciaries may not be properly fulfilling their duties. In addition, the DOL will also look at the investment and financial information shown in the asset report. If your plan has many alternative investments such as hedge funds, has invested in other hard to value investments, or if you have large amounts of loans, you may also be inviting an audit by the DOL.

Other answers that may get you targeted for further investigation are if you indicate that you have late deposits of employee contributions or that you have not made required minimum distributions to former employees who are age 70 1/2. Lastly, large numbers of terminated participants can be an issue as they are required to receive the same disclosures and notices as active participants. Without a work email address, many of these notices must be manually printed and mailed. We saw a recent case where the DOL auditor asked to see proof of the distribution of the required notices.

Don’t Ignore Employee Claims and Complaints.

Many plan sponsors don’t realize that employee complaints to the IRS and DOL often lead to audits. Make sure that employee questions and complaints receive a response, and if a formal claim for benefits is filed, make sure to follow the ERISA regulations on benefit claims and appeals. Even something as simple as requesting the Summary Plan Description requires a timely response. The DOL is required to follow-up on every question or complaint regardless of merit.

Be Prepared.

If your plan is selected for IRS or DOL audit expect to be asked to provide; executed plan documents, minutes from Committee Meetings, participant notices and fiduciary policies, such as your Investment Policy Statement.  You should also be prepared to show that you are making diligent efforts to find missing participants, deal with defaulted loans and review plan fees. A recent request from a DOL audit was to provide documentation around a vendor search and the criteria used to evaluate providers as well as justification for staying with the same providers.

The team at Filice Retirement Services can help you with a self-audit and assist with processes and procedures to ensure that the Plan Fiduciaries are properly protected. Let us know if we can schedule some time to review your plan

Topics: 401(k) plan, 401(k) plan sponsor, Fees, 401(k), best practices, ERISA, Audit, Retirement Doctor

Mike Rogers

Written by Mike Rogers

Mike is an industry veteran with 30 years of experience in every aspect of retirement planning, including registered investment advisory, third party administration, and record keeping. His list of credentials is as extensive as it is impressive: Qualified Pension Administrator (QPA), Qualified 401K Administrator (QKA), Certified Pension Consultant (CPC), Qualified Pension Financial Consultant (QPFC), Accredited Investment Fiduciary (AIF®), Tax Exempt and Governmental Plan Consultant (TGPC), Certified Behavioral Finance Analyst (CBFA), Professional Plan Consultant (PPC), Global Fiduciary Strategist (GFS). Mike is also a former member of the Schwab SRT Technologies Advisory Board, Schwab TPA Advisory Board, and Fidelity/IBG Advisory Board.

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