For any organization, one of the key components of internal control is how the organization identifies threats to the organization, and how such risks are assessed. Companies take this very seriously when it comes to their day-to-day operations, but the plan as a reporting entity is often overlooked. Many of the errors we see on audit result from situations that could have been avoided if proper risk assessment had been in place. Here we offer some reminders to management of circumstances to consider with respect to plan operations.
Changes in personnel
Except for smaller companies with limited resources, the plan’s operations are affected by both Human Resources (HR) as well as accounting personnel. The HR team is often responsible for onboarding employees and capturing their demographic data, setting their compensation, and communicating information to third party recordkeepers. Accounting personnel handle the actual timekeeping, payroll and remittance of funds to the custodian. All involved personnel should understand the plan’s eligibility provisions and definition of compensation for the plan to operate properly. When there is turnover in these positions, which can occur due to layoffs, restructuring, promotions as well as resignations, there is a risk of breakdown in the controls over these processes. A new payroll person might not know that bonuses are included in the definition of compensation and fail to take withholdings on that compensation. A new supervisor responsible for ensuring payroll amounts are sent to the plan may not be aware of the rules related to timely remittance. Management should be alert for these risks, provide proper training surrounding plan operations and ensure that supervisors of these positions take extra care during the review process in looking for errors.
Changes in payroll systems
Payroll is an important part of any business, and management usually takes great care when implementing a new system to ensure hours and rates are captured properly, tax withholdings are correct, and reports generated are complete and accurate. Sometimes the items related to the plan are not inspected with as much attention. When there is a new system, there is a risk that payroll codes are not set up for plan withholding and match purposes in compliance with the plan’s definition of compensation. Compensation and deferral limits may not be set up to operate effectively. Failure to identify these risks and establish a review of the system set up at the time of implementation can result in errors that require costly corrections.
Growth of a business enterprise is exciting – it is a sign of success! However, management should consider the impact of such growth on the plan operations as with all other systems. The number of participants that enter the plan heavily influences the financial activity of a plan. An increase in employees tends to lead to an increase in participation, often in a short period of time, which can burden HR and payroll personnel responsible for getting the individuals set up at the third-party provider – certain controls may fall by the wayside in an effort to stay on top of tasks. Management should be cognizant of this and put controls in place to review activity in these timeframes more closely for errors.
Benefit plans are an important part of the employment packages plan sponsors use to attract and retain talent. Retirement plan committees spend a lot of time looking at their plan provisions and considering the costs and benefits of the various options they can offer to their employees. Plan sponsors may consider plan amendments to make the plan more appealing – changes in age or service requirements, changes in vesting provisions, adding automatic enrollment or escalation. Approving the amendment is “easy” – understanding the impact the amendment has on plan administration is not. Any time there is a change, there is a risk of improper implementation. Failure to implement the amendment properly can lead to operational defects that cost more to fix than the amendment itself. It is important to communicate the amendment to all personnel responsible for the plan in a timely manner. It is also important to evaluate operations after the amendment to ensure the change has been put in place in all relevant systems.
Changes in Laws or Regulations
Laws and regulations impacting benefit plans are continuously changing. It is hard to keep up. If there is not an individual on staff who is responsible for considering the risks of new legislation, management should consider outside consultants, third-party recordkeepers and/or ERISA counsel to assist them in identifying and responding to these risks.
If you have any questions on this article or any benefit plan audit or compliance matter, please contact Kathryn Petrillo at 301-231-6233 or any of our employee benefit plan team members at 301-231-6200.