What are the three most common errors that CPAs find when they conduct plan audits?

By: David I Gensler, MSPA, MAAA, EA

CPAs are tasked with auditing plans that (generally) have more than 100 participants. So they get to see just about everything – the good, the bad and the ugly. Auditors test a sample of the Plan Sponsor’s employee population when auditing a plan. Once they discover an error, they must determine what their next step should be. It might involve testing a larger sample of the plan’s population or requesting additional information. Either of these steps can ratchet up the cost of audit.

Diane Wasser of EisnerAmper, LLC said the following are among the most widespread errors her firm sees. These include:

  • Using incorrect compensation in calculating employer and employee contributions;

Comment – Whether you know it or not, your plan defines what compensation is to be used in calculating both employee and employer contributions. Generally, but not always, you use an employee’s Medicare wages. It is that definition (and that definition only) that should be used in determining what percentage should be applied to their salary when calculating an employee’s salary deferral. Similarly, that same definition should be used in calculating the employer’s matching contribution.

  • Improperly applying the plan’s eligibility provisions;

Comment – The plan document also defines when your employees are eligible to enter the plan. If the plan’s eligibility rules are not followed, invariably employees end up entering the plan too quickly or too late. Believe it or not, letting employees into the plan before their correct entry date is a big a problem as not enrolling them on time.

  • Improperly conducting non-discrimination testing.

Comment – Get either of the above wrong (use the wrong compensation or get the eligibility rules wrong) and the non-discrimination test will be wrong as well. Of course, the best way to deal with an error is not to make it in the first place. Some ways to head off these errors before they are made are:

  • Have a highly qualified TPA, plan auditor and a knowledgeable plan recordkeeper;
  • Review the plan and know what it says before you begin the audit process;
  • Make sure that you understand the core components of how your plan is to be run (its eligibility, its entry dates, the definition of compensation, etc.);
  • Compare the plan document and any amendments to the way that the plan is being run;

AND

If you do find an error, consult with qualified professionals to correct the errors as soon as possible.

It is the Plan Sponsor that has the responsibility to run the plan correctly. Hiring professionals to do that work for you will help. But if an error occurs, remember that it is your plan and it us up to you to make sure that the error gets fixed.

Leave a Reply

Your email address will not be published. Required fields are marked *