Navigating Common Pitfalls: Top 10 Employee Benefit Plan Audit Findings and How to Address Them

By Megan Stambaugh, CPA

April 22, 2024

Employee benefit plans are complex but critical components of your business’s relationship with its employees. Through our detailed Employee Benefit Plan audits, our Audit & Assurance team has identified the 10 most common challenges businesses face in managing these plans. This article will address each challenge by offering recommendations to ensure your plan complies with IRS and DOL regulations and provides clear, long-term benefits to your employees.

1. Missing or Outdated Employee Documentation

Often, documentation lapses occur in well-established companies where formal record-keeping was initially overlooked. Maintaining accurate and complete employee records is vital for compliance, especially as these records are scrutinized during Department of Labor audits. 

Recommendation: Keep updated records of demographic details and employment data securely, ensuring only authorized personnel have access.

2. Inaccurate Employee Census Data

The census is a report listing all relevant data by employee for the plan. The accuracy of the census is critical since this is the report used by the plan for compliance testing. The census is the starting point for most audit procedures for plans requiring an audit. Errors often arise from outdated information or manual data entry.

Recommendation: Regularly review and update census data to reflect current and accurate employee information.

3. Census Reconciliation Issues

A common issue is the failure of the census data to reconcile with Form W-3 and custodian year-end summaries, especially regarding gross compensation and contributions.

Recommendation: Always reconcile census data with these forms before submission for compliance testing to ensure accuracy.

4. Inaccurate Contributions

Errors in contributions can be due to manual input mistakes, exceeding contribution limits, or incorrect compensation definitions.

Recommendation: Implement double-checking by a second party, automate data entry where possible, and ensure all compensation definitions align with your plan document.

5. Auto-Enrollment Errors

While auto-enrollment promotes plan participation, it can delay the actual start of contributions due to administrative lags.

Recommendation: Coordinate efficiently with your payroll provider and plan custodian to streamline enrollment.

6. Unrecorded Forfeitures

Forfeitures occur when employees leave before becoming fully vested. Errors in recording these can lead to improper distributions.

Recommendation: Ensure all terminations are documented accurately and the appropriate forfeiture percentages are applied.

7. Tax Withholding Discrepancies

Issues with tax withholdings on distributions can arise from automation errors or miscommunication.

Recommendation: Always document tax withholding elections in writing to ensure they accurately reflect the employee’s intentions.

8. Lack of Segregation of Duties

Small businesses often struggle with segregating duties in payroll processing due to limited staff.

Recommendation: Set up user rights within your payroll system to limit access and authority, reducing the risk of fraud. Contact us if you need help setting up internal controls.

9. Inadequate Documentation of Fiduciary Duties

Employee benefit plans have a fiduciary responsibility to the participants of the plan. Fiduciary responsibility applies to any situation in which one person justifiably places confidence and trust in someone else and seeks that person’s help or advice. Fiduciary responsibilities require diligent oversight and documentation, which is often lacking.

Recommendation: Maintain detailed records of board decisions, audit reviews, service organization controls reports and investment performance reviews.

10. Issues with Terminated Employees’ Account Balances

Terminated employees often leave their account balances, complicating compliance and administrative responsibilities.

Recommendation: Proactively encourage these employees to roll over or distribute their funds, especially in light of recent changes to audit requirements and the SECURE 2.0 Act, which raised the cash-out limit.

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By addressing these common audit findings with our recommended strategies, you can enhance the effectiveness of your employee benefit plans, ensuring they meet regulatory standards and serve your employees’ best interests. Remember, a well-managed employee benefit plan is not just about compliance; it’s about contributing positively to your employees’ financial future.

Grimbleby Coleman can help your organization implement the strategies discussed in this article. Contact us to learn more about our Employee Benefit Plan Audit Services.