The complex and sometimes convoluted task of administering benefit plans while complying with a steady stream of government mandates makes it difficult to keep plan documents and administrative procedures up-to-date. And even when documents reflect current requirements, some members of the benefits staff may not fully understand or follow the new procedures.

Incongruities or ambiguities between plan documents and procedures can lead to misunderstandings and expensive inefficiencies. They also make the plan vulnerable to costly government penalties and participant litigation.

Plan audits and other enforcement efforts (e.g. the 401(k) Compliance Check Questionnaire ) by the Internal Revenue Service and the Department of Labor make the practice of documenting plan procedures and keeping them up-to-date more important than ever. Plan fiduciaries are under a federal obligation to act in the best interests of the plan participants and subject to strict standards of accountability. Failing to act affirmatively in connection with this responsibility can be construed as a violation of a fiduciary’s duty to participants. Perhaps most compelling is that the personal assets of plan fiduciaries are at risk in undertaking ERISA fiduciary responsibilities; thus the consequences of noncompliance are that much more worthy of a plan administrator’s attention.

A plan administration review can uncover potential problem areas before they become employee or participant complaints or lawsuits. In light of self-correction opportunities under various Internal Revenue Service and Department of Labor Programs and the significantly lower penalty risk if self-audit procedures are implemented, fiduciary inaction on this matter is probably a per se violation of their duty to the plan and plan participants.

Given the above, I strongly believe that it is essential that plan sponsors conduct a thorough review and audit of their operational plan procedures and follow-up that review with a maintenance audit every year. The following pages discuss the objectives, the process and potential areas of inquiry for such a review.

Objectives of a Self-Audit

  • verify that plan procedures correspond to what your plans promise and what the law requires,
  • reduce risk and expense of significant IRS or DOL penalties,
  • lower expenses by identifying ways to streamline fund administration,
  • establish a benchmark training program and reference guide for your benefits team,
  • create an audit template for ongoing compliance and self-audit best practices and procedures
  • demonstrate your good-faith effort to comply with IRS and DOL rules.

The Process

Generally, a self-audit encompasses a four-stage process. It should include defining the scope, reviewing all plan documentation, interviewing individuals responsible for the day-to-day operations of the plans, and a presenting a written report to interested parties.

Step One: Develop scope of project in order to determine plan(s) to be reviewed, timeline, project participants and leader, stakeholders and functional managers that might be asked to provide information and be available for interviews.

Step Two: Prepare benchmark documentation, including plan document, summary plan descriptions, and administrative forms.

Step Three: Conduct onsite review and conference, which should include questions concerning documentation, interviews with all those responsible for plan administration and random review of participant data.

Step Four: Draft a report and present findings and recommendations to interested parties.

A plan operational review should include at a minimum the following areas that impinge upon the day-to-day administration of a plan, depending on the type of plan being reviewed.  Note that these areas are listed for brain-storming a formal audit and not as a complete list or technical description of the areas that should be audited.

  • Fiduciary Responsibilities and Duties
  • Delegation of duties; reporting
  • Claims and Appeals Procedures
  • Reporting Requirements
  • Required disclosures to Participants and Beneficiaries
  • Participant notices including those required under ACA, e.g. the Summary of Benefits and Coverage (SBC)
  • Monitoring and auditing contributions to plan; timing
  • Correction methods used if an error is discovered in contribution, distribution, elective deferral, discrimination testing, etc.
  • Minimum Coverage Requirements
  • Rules Governing Eligibility
  • Minimum Vesting Requirements
  • Minimum Distributions
  • Suspension of Minimum Distribution rules in 2009 (Worker, Retiree, and Employer Recovery Act of 2008 – the “WRER Act”)
  • Determining Service and Breaks in Service
  • Employer Contributions; Benefit Formula or Allocation Formula
  • Maximum Benefits and Contributions under IRC Section 415
  • Qualified Joint and Survivor Annuities; Spousal Consent, if applicable
  • Revised definition of spouse and associated changes, pursuant to United States v. Windsor and Obergefell v. Hodges
  • Cash Out Rules
  • Distributions from Plan
  • Tax Withholding Requirements
  • Direct Transfer (Rollover) Requirement
  • Hardship Withdrawals
  • Plan Loans
  • Participant-Directed Investments (compliance with ERISA Section 404(c)); execution of transactions
  • Compliance with fee disclosure regulations under ERISA Section 404(a)(5)
  • Opportunity to elect designated Roth contributions and, if so, the amounts contributed
  • Claims and appeals procedures (compliance with ERISA)
  • Qualified Medical Child Support Orders (“QMCSOs”) Procedures
  • Family and Medical Leave Act Tie-in to Plan
  • Veterans Rights (USERRA and HEART), tie-in to Plan
  • VEBA and other IRC rules and constraints (§§105, 106)
  • COBRA (including coordination with self-pay programs)
  • Medicare Secondary Payer (MSP)
  • Newborns’ and Mothers’ Health Protection Act
  • HIPAA Privacy and Security
  • Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA)
  • Patient Protection and Affordable Care Act (ACA)
  • Accounting requirements – SOP 92-6, FAS 106