Operational Compliance Reviews

Do you know with certainty whether your plan is operating in full compliance with the plan document? Are you confident that it is operating in accordance with the rules of the Internal Revenue Service (IRS), the Department of Labor (DOL) and the Employee Retirement Income Security Act of 1974 (ERISA)? If you answered “no” to either question, you and your plan could be at risk.

A retirement plan sponsor has a fiduciary duty to ensure that the plan complies with all federal and state rules and regulations. Plan sponsors must follow the plan’s provisions without deviating from them unless the plan has been accordingly amended. Failure to follow the provisions can lead to plan disqualification. For the 2015 fiscal year, the Employee Benefits Security Administration (EBSA) reported that 67.2% of employee benefit plans investigated resulted in financial penalties or other corrective actions.

Financial Audits versus Operational Compliance Reviews

Your independent auditor conducts an annual audit to provide an opinion as to whether the financial statements and schedules required to be included in the annual report (i.e., Form 5500 and Schedules) are presented in accordance with generally accepted accounting principles. This examination must be conducted in accordance with “generally accepted auditing standards” (GAAS). A GAAS audit is not designed to ensure compliance with all of ERISA’s provisions or other requirements applicable under the Internal Revenue Code. Auditors are engaged by plan administrators only to review the plan as it relates to the presentation of financial data.

For the 2015 fiscal year, the Employee Benefits Security Administration (EBSA) reported that 67.2% of employee benefit plans investigated resulted in financial penalties or other corrective actions.

Operational compliance reviews, on the other hand, are concerned with validating the process being reviewed, with no restriction on whether it impacts the financials. An operational compliance reviewer wants to know that the process works, whether it is replicable, and consistent with the plan document.
Impact of Operational Errors

Errors can result in financial penalties. The longer the errors persist, the more it will cost to make them right. For fiscal year 2015, EBSA received $14.3 million under the Voluntary Fiduciary Correction Program, a program that helps plan sponsors identify and fully correct certain errors for ERISA plans.

Errors can result in employee confidence issues. Correcting issues and having to communicate them to employees one time may not be a big deal. However, correcting multiple issues and telling employees about them repeatedly, can erode employee confidence and may hinder plan participation. Furthermore, disgruntled employees may complain to the DOL which, in turn, may trigger an investigation.

Errors can result in financial penalties. The longer the errors persist, the more it will cost to make them right.

Errors, if not properly addressed, can ultimately lead to plan disqualification which poses serious tax ramifications to employers and employees. Employees must pay taxes on employer contributions that have been made, and they are not permitted to roll over money from a disqualified plan to another retirement plan or IRA. The employer’s tax deduction is impacted as well, and the trust must pay income taxes on trust earnings. Plan disqualification should be avoided at all costs.

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GENERAL DISCLOSURE: This paper is intended for sophisticated and/or accredited investors and is for illustrative use only. While the assumptions, data and models used to develop the information contained herein are from sources deemed to be reliable, there can be no certainty or guarantee regarding the likelihood of the outcomes as presented. This document is not and should not be construed as legal, taxation or investment advice. Any investment advice would be delivered pursuant to a written agreement and legal and taxation advice should be obtained from appropriate and qualified professionals. No part of this publication may be reproduced in any manner without our prior written permission. © 2015 Pavilion Advisory Group Inc.