Protecting the Employer Sponsored Benefit Plan

Protecting the Employer Sponsored Benefit Plan

It is no small proposal to be a plan sponsor, trustee, or administrator of an employee benefit plan.  A sponsor of a defined contribution 401(k) plan is responsible for compliance with the Department of Labor (DOL), Internal Revenue Service (IRS), third party service providers (TPA), and most importantly, the plan participants.  For plans with 100 or more participants, the sponsor is also responsible for the selection of a qualified auditor.  A high quality audit firm that maintains a specialty in ERISA plan audits will help navigate clients through regulatory issues as well as offer recommendations to strengthen internal controls surrounding plan operations.

The DOL has been focused on audit quality and based on the results of a newly released assessment, an astonishing 39% of audits were found to be deficient in multiple areas.  While the findings in the DOL’s audit quality study are largely relevant to specific audit procedures, there are many takeaways for a plan sponsor to learn from.  Be proactive and use the knowledge of the mistakes highlighted in the DOL’s report to minimize the risk of errors that could occur in the day-to-day plan operations.  The plan is important to the participants as it is their retirement income at stake.  Protect it.

At Herbein + Company, Inc., we have analyzed the findings in the DOL’s audit quality study and identified 3 areas where plan sponsors can be self-reliant in guarding against error.  Those 3 areas showed failures by the auditor to test: participant accounts; timeliness of participant deferrals; and test compliance with plan compensation.  We present these 3 areas below and offer guidance to plan sponsors who may wish to test these areas within their own plan.  Additionally, if an error is discovered, we list steps that can assist with correction.

Failure to test participant account allocations
The DOL study conducted 400 audits and found 151 major unacceptable findings in the area of participant data and participant accounts.  The most common error noted was the failure to adequately test allocations to participant accounts.  For purposes of this article, we will tackle some examples of contribution allocation and income allocation.  As a plan sponsor, ask yourself the following questions:

Contributions: Have employee wages withheld and remitted to the plan been properly reflected in each individual investment account?

Income:  Are you aware of the rate of returns for each investment in the plan?  Are the earnings reflected in individual participant accounts reasonably equal to those rates for each investment held?

The DOL requires an appropriate sample of individual participant accounts to be tested for proper allocation as part of an audit regardless of whether or not a full scope or a limited scope audit is performed.

A plan sponsor can ensure that transactions are properly reflected in participant accounts by performing the following steps periodically:


  • Select 1 or more individual participants during a pay period and list their deferral amounts. Obtain trust report information from the TPA for the same period and verify that the amount allocated to their accounts matches their individual payroll record.  An error here could indicate a problem with the information used by the TPA resulting in contributions being credited to the wrong individuals.  In this case a plan sponsor must work with the TPA to correct the situation for all participants that are impacted.  Errors involving contributions are quite often compounded over several pay periods, months, or even years.


  • Review the rate of return for several investments in the plan’s portfolio for 1 month (or a quarter; year; etc.) using a published source. Select 1 or more individual participants with those investments and calculate the rate of return based on their investment balances and ensure that both rates are similar.  Differences may exist if the participant did not hold the investment for the entire period.  The key is to ensure that investment income is proportionately distributed and allocated to the participants. In addition, you can test investment returns to a published source.  If a fund earned 10% overall, and the participant only earned 3%, a deeper understanding of the difference is warranted.

Herbein + Company, Inc. auditors perform procedures such as these, among many others, for a larger sample of individual participant accounts.  Any errors noted are reviewed with the plan sponsor and management and we will communicate the proper correction methods.  Additionally, we do not apply a materiality factor to individual participant account transactions.  The DOL has made it quite clear on several occasions that even $1 is material.  The accuracy of participant account allocations cannot be underscored enough!

Failure to test timely remittance of employee deferrals
The DOL requires participant deferrals (contributions) to be remitted to the plan on the earliest date on which the plan sponsor can reasonably segregate the deferral deposits from general assets.  Failure to remit participant contributions to the plan in a timely manner results in a prohibited transaction that must be separately reported to the DOL and may result in penalties to the plan sponsor.

Plan sponsors should review their internal control processes in place and determine the earliest date in which deferrals can be segregated from general assets.  This date should be compared to the date the deferrals were actually deposited to the plan.

If a late contribution is identified by the plan sponsor, a correction should be made (normally through the DOL’s voluntary fiduciary correction program).  The correction will include any lost earnings resulting from the late deposit into the plan.  In addition, a Form 5330 should be filed with the IRS to remit excise taxes due on the contributions that were not remitted timely.

As part of our audit, Herbein + Company, Inc. reviews the timeliness of all contributions remitted during the plan year.  The audit engagement team will discuss any late contributions with management and will provide valuable recommendations to correct to error and to avoid the error in the future.

Failure to test compliance with plan compensation
The plan documents specify provisions of the plan in which the plan sponsor should follow while administering the plan.  The provisions will include a definition of eligible compensation which should be applied uniformly across all participants.

Plan sponsors should review and be familiar with the provisions of the plan documents.  The definition of compensation should be known for determining elective deferrals, employer nonelective and matching contributions, maximum annual additions and top-heavy minimum contributions.    In addition, plan sponsors should review plan election forms to determine if they are consistent with provisions of the plan.

If the plan sponsor identifies an instance where the definition of compensation was not accurately applied, a corrective contribution or distribution should be made, and in some cases lost earnings should be funded to make participants whole.

As part of our audit, Herbein + Company, Inc. reviews all relevant plan documents.  The audit engagement team designs our audit tests to ensure the plan is in compliance with the provisions of the plan documents.  During the audit, the engagement team will discuss any discrepancies in plan provisions with management and will provide guidance if any correction is needed.  In addition, Herbein + Company, Inc. will suggest improvements to management to avoid similar errors in the future.

If you would like more information on the article or how Herbein + Company, Inc. can service your plan, please contact Carolyn BryNildsen at or Kristin Kohler at

To review the DOL’s report on audit quality, click here:

Assessing the Quality of Employee Benefit Plan Audits