Employers have been virtually assured that a DOL audit is in the future. The questions are: What is a DOL audit and what can you do to prepare?
An Employer’s Nightmare: The Dreaded DOL Audit and Who is Doing Them
Rumor has it that the Department of Labor (DOL) has plans to audit all employee benefits plans by the end of 2015. It’s hard to believe that is even possible, especially considering the fact that the government is not exactly known for completing tasks on schedule, but the threat is still real enough to cause loss of sleep for most employers. And I think it’s safe to say that you don’t want to be the employer who assumes the DOL won’t make due on the threat – until they come knocking on your door.
Up to this point, the DOL conducts, on average, over 3,000 audits per year; a number that is certainly destined to rise by leaps and bounds in the coming years. What is even more frightening is that 70 percent of these audits uncover some sort of discrepancy, either in the operation of the plan or in the interpretation of the plan provisions. As a result, there has been an exorbitant amount of monetary fines against plan sponsors.
The Employee Benefits Security Administration (EBSA), a division of the DOL, is responsible for protecting the integrity of pensions, health and other employee benefits. As such, it also must administer and enforce ERISA. Much of the justification for EBSA’s recent budget proposal, which includes additional staff to conduct audits, was based on concerns with how plan sponsors are managing their plans.
Watch Your Step: How to Avoid Common Pitfalls for Health and Welfare Plans
- Always file the 5500 for health and welfare plans with over 100 participants. This is the responsibility of the employer, not the accountant, broker, or insurance carrier and it must be done. Do not get penalized for skipping this important step.
- Make sure there is a Summary Plan Document (SPD). Employers often mistakenly assume that the insurance company has provided the requisite information in its Certificate of Insurance. However, an SPD is typically more detailed, as is required by ERISA, and to just rely on the Certificate of Insurance often results in noncompliance.
- Do not forget about the ACA. Many employers who do have an SPD think they’ve done what they need in order to get a gold star from the DOL. However, many fail to modify the SPD to comply with ACA (Affordable Care Act) regulations.
Form 5500 filings and Summary Plan Description reporting and disclosure requirements are often the main target of audits for health and welfare benefit plans. These ERISA reporting and disclosure requirements alone carry fines of $110 per day, per person, per violation for every plan participant covered under a single contract. Even though these requirements have been in place since the inception of ERISA in 1974, the introduction of the ACA has uncovered this unrealized/misperceived noncompliance with ERISA and the DOL is now focused on enforcing these requirements.
Now Is the Time to Prepare for Battle
Now you know the common problems that cause stress and financial distress when faced with a DOL audit. The good news is that there is much you can do to avoid these missteps, but don’t wait. If (or rather, when) the DOL comes calling, they won’t give you much time to gather the necessary documents or create those that are missing, so the best thing you can do to avoid costly fines – not to mention serious headaches – is be prepared. That means making sure your 5500s are filed and that your plans are documented as required, including up-to-date SPDs.
When considering the health and welfare ERISA issues, the quickest and most affordable solution to remedying a noncompliant SPD is to create an ERISA “wrap document”. A wrap document provides the required ERISA information by incorporating or “wrapping” itself around the insurance policy or similar third-party contract. The insurance policy or contract remains part of the plan document and the wrap document simply supplements it with the necessary additional or missing information. This provides a dual benefit by first creating an ERISA compliant SPD for the plan and by allowing the employer to address all of their health and welfare plans that are subject to ERISA requirements in a single document. This also allows the employer to file only one 5500 per year for all plans combined under the wrap.
Following this advice may not absolve you of the stress of enduring a DOL audit, but it will help to ensure that your health and welfare plans will pass with flying colors – and may help you to get a good night’s sleep in the meantime.
This article refers to regulations issued through May 1, 2015. It is intended to be a summary of important issues and should not be considered legal or tax advice.
© Bell Associates and “Ask the Professionals,” 2015. Unauthorized use and/or duplication of this material without express and written permission from Bell Associates is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Bell Associates and “Ask the Professionals” with appropriate and specific direction to the original content.