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How to Prepare for a Successful DOL Audit

Prepare for a Successful DOL Audit

Last week, we shared nine specific ways to avoid a visit from your local “friendly” DOL investigator. Rumors continue to swirl that the DOL is increasing its audits of 401(k) plans. A DOL 401(k) audit can be triggered by (1) an employee complaint; (2) information submitted on your retirement plan’s annual Form 5500 filing; or (3) random selection.

A diligent plan sponsor should be prepared for an audit, even while hoping it never comes. To prepare below are several categories of lists to help you prepare including the types of questions or information you should know.

What You Should Know (Background of Plan)

  1. Type of Plan. There are two major types of plans, defined benefit and defined contribution. A defined benefit plan, funded by the employer, promises you a specific monthly benefit at retirement. A defined contribution plan does not promise you a specific benefit amount at retirement. The 401(k) plan is a popular type of defined contribution plan. There are four types of 401(k) plans: traditional 401(k), safe harbor 401(k), SIMPLE 401(k), and automatic enrollment 401(k) plans.
  2. Plan Administrator. Who at your organization determines and communicates eligibility to join the plan, distributes the Summary Plan Description (SPD) and Summary Annual Report (SAR), maintains records, and processes/approves distribution requests?
  3. Service Providers. Who is your Third-Party Administrator, Recordkeeper, and Investment Advisor? Who conducts the annual testing required for your plan? Which independent qualified public accountant audits the financial records of the plan (if plan has over 100 participants)?
  4. Name(s) of Trustee and type. Does your plan have individual trustees – usually the owners or officers of the business – or a single institutional trustee, such as an affiliate of a bank, insurance company or other financial institution?
  5. Financial Institution, Custodian, or other Parties Holding Plan Assets. Who holds plan assets?
  6. Fidelity Bond Provider & Amount. We know the rules on fidelity bonds. What is the name of your insurance carrier and the amount of your fidelity bond?

How the Plan Functions

If applicable, ensure that you have a consistent process for the following items – and that your process agrees with your plan documents:

  1. Contributions. What constitutes compensation when determining employee and employer contributions (e.g., is it based on W-2 earnings, are bonuses and commission payments excluded, etc.)? Are they submitted in a timely manner? Does your plan allow for a separate deferral rate for bonuses?
  2. Participant Loans. Under what circumstances can a loan be taken? What happens if a plan loan is not repaid according to its terms?
  3. Missing Participants / Unclaimed Benefits. What process does the plan employ to keep the plan “clean.” Do you view and update census data periodically? What steps do you take to locate participants who have uncashed distribution checks?
  4. Fees and Expenses. How are all of the service providers identified in the previous section compensated (amount and who pay – is it out of plan assets or is it a company expense)?

 What Should Be in Your Files

The general rule is that you should retain at least 6 years’ worth of information or as long as you can. Scan and retain documents to serve as a backup. Be sure to have signed copies of documents, if applicable.

  1. Plan documents/Trust Agreements/Plan Amendments
  2. IRS Opinion Letter
  3. SPD/SAR/SMM (Summary of Material Modification)
  4. All Plan Notices (e.g., blackout notices, fund lineup changes, etc.)
  5. All Participant Notices (if applicable)
    1. 401(k) Safe Harbor Contribution Notice
    2. Qualified Default Investment Alternative (QDIA) Notice
    3. Automatic Contribution Arrangement (ACA)/Eligible Automatic Contribution Arrangement (EACA)/Qualified Automatic Contribution Arrangement (QACA) Notices
    4. SIMPLE 401(k) Plan Contribution Notice
  6. Meeting Minutes
  7. Distribution records (hardship withdrawals, loans, terminations, rollovers, etc.)
  8. Form 5500 and Attachments with documentation of filing
  9. Discrimination testing results
  10. Service Provider contracts
  11. Beneficiary Designation Forms for every participant
  12. Investment Policy Statement

Completing a thorough review of your plan provides the opportunity to self-police your 401(k) plan if “red flags” are discovered.