Did Your Auditors Find an Error During Your Plan Audit?
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It is the first week of summer, even though in Ohio the smoldering heat has made it feel like summer for weeks now. Summer reminds many of us of pool days, eating watermelon and corn on the cob, Fourth of July fireworks, and 401(k) plan audits. Oh wait, that last one may just be me. But once the summer season arrives, most plan auditors begin the process of working on their retirement plan audits. If you are on a calendar year plan and your plan is subject to an audit, it is likely that you have already had or have scheduled your first meeting with your outside audit firm. Even if you extend your Form 5500 deadline until October 15th, the slower summer season for accountants usually leads them to start their plan audits in the summer.

What this also means is that shortly the season will begin when I start to answer my phone and commonly hear “Our plan auditors discovered an issue and have said that we aren’t doing X right.” Sometimes the person on the other end of my line is panicked, sometimes annoyed, and sometimes a little of both. The first thing I generally advise is not to panic. We can review the information provided by the auditors and sometimes there is an explanation and there was not actually an error at all. For example, they believe you have incorrectly not withheld deferrals from bonus checks, but in reality, they weren’t provided the latest amendment that excluded bonuses from the definition of compensation. There are also situations where the plan administrator may be interpreting a provision differently than the auditor, and we can explain that to the auditor and they become comfortable that it was not in fact an error.  

However, there are other times when the auditors do find errors. My advice remains not to panic. Even the most well-intentioned plan sponsors can have a plan error because plan administration is increasingly difficult. Depending on the type of error, it may not be something that the auditors need to report. The most common error that we see detected during plan audit is late deferrals and, unfortunately, this error must be reported on the Form 5500 even if it is corrected. The auditor’s report must include the amount of late deferrals and whether the plan sponsor corrected the late deferrals and if they did so inside or outside of the DOL’s Voluntary Fiduciary Correction Program (VFCP). If you choose not to correct using VFCP, you may very well find yourself receiving a letter from the DOL in coming months letting you know about the program and why you should go through it. Check out our recent post with more detail on how you can remedy late deferrals. 

But even if the error is not one that needs to be reported on your audit, it should be corrected. The IRS has the Employee Plans Compliance Resolution Program (EPCRS) that outlines the way a number of operational errors should be corrected and whether a plan sponsor may self-correct or whether it may only correct through its Voluntary Correction Program. Over the years, the IRS has made EPCRS significantly more liberal on when an employer may self-correct operational and plan document errors. In SECURE 2.0, Congress further expanded the self-correction relief.  While we are still waiting for the IRS to issue a revised version of EPCRS to incorporate the SECURE 2.0 provisions, the IRS has provided some limited guidance that provides that plan sponsors may apply a good faith, reasonable interpretation of SECURE 2.0 in completing self-corrections.

In a prior post, I explained why time can be of the essence in correcting these errors. Therefore, we recommend starting to remedy the errors as soon as you are able. Also, for certain corrections, such as improperly excluded employees, the amount an employer needs to correct is less if they act quickly. Our Employee Benefits Team assists plan sponsors of all sizes in determining the best way to correct errors in your plan. If you find an error or want additional information on the new rules, please reach out to any of the attorneys on our Employee Benefits team.

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