Over the past few years, the Internal Revenue Service (IRS) and Department of Labor (DOL) have ramped up their focus on employee benefit plans (EBPs). Because EBPs must comply with the requirements of the Internal Revenue Code (IRC) as well as the Employee Retirement Income Security Act of 1974 (ERISA), they are subject to audits by both the IRS and DOL. With this increased likelihood of an EBP being audited, it is important that you and your company are prepared before it happens. There are four common deficiencies that we see frequently, and which are on the IRS and DOL radar:

  • Late or missed deposits of employee salary reduction contributions
  • Participant loan failures
  • Failure to timely amend your plan to keep it updated with recent changes in the law
  • Plan operational errors arising from the failure to follow plan terms

The following will discuss what procedures can be put in place to help ensure your compliance and to prevent errors. Fortunately, if you discover errors, both the IRS and DOL have programs to correct them. These are also discussed below. It is important to note that self-correction of such deficiencies is the most effective way of dealing with them, as the process of correction becomes much more complicated during and after an IRS or DOL audit.

Late or missed deposits of employee salary reduction contributions

The DOL requires employers to remit employee contributions to the plan as soon as they can be reasonably segregated from the employer’s general assets. Plans with fewer than 100 participants are afforded a “safe harbor” which allows them to remit employee contributions no later than the seventh business day after being withheld. There is no safe harbor for all other plans. It is important, therefore, to ensure that deposits of employee contributions are timely. Consistency is the key. Be sure to determine and document the earliest date you can reasonably segregate deferral deposits from general assets. Put procedures in place to ensure that you make deposits on or before that date consistently. In the event of a missed or late deposit, all is not lost. You can correct the error through the DOL’s Voluntary Fiduciary Correction Program (VFCP). This requires the employer to deposit all missed and late elective deferrals withheld and the related “lost” earnings into the plan’s trust as soon as possible.

Participant loan failures (e.g. loans that exceed the maximum permitted dollar amount)

Loans from a plan to a participant are prohibited transactions unless they meet certain specific requirements. Therefore, to avoid prohibited transactions and potential disqualification of the plan, these requirements must be strictly adhered to. Plan provisions should detail specific matters related to loans, such as: loan amount, term of the loan and repayment terms. Procedures should be in place to ensure that all participant loans issued are in compliance with the plan’s provisions and IRC Section 72(p). Outstanding loans should also be reviewed periodically to ensure continued compliance. In reviewing participant loans, should you come across a loan that does not conform to the requirements of the plan and IRC Section 72(p), you may self-correct for non-compliance by making such actions as a corrective repayment or modifying the loan’s terms. This can be done through the IRS Employee Plans Compliance Resolution System (EPCRS). For certain failures, you may also need to make a correction using the DOL’s VFCP Online Calculator.

Failure to timely amend your plan to keep it updated with recent changes in the law

New laws and regulations regarding employee benefit plans are not uncommon. It is your responsibility to keep apprised of recent and potential changes and to ensure that the plan document is amended to reflect all enacted changes. The most effective way to meet your responsibility is to work with your third party service providers and other service professionals to ensure the plan is compliant with new laws and regulations. A good monitoring tool is to maintain a calendar with notes regarding when amendments must be completed by. If you haven’t updated your plan document within the past few years, there are steps that can be taken to get your plan document up to date. Start by reviewing the annual cumulative list released by the IRS to see if the plan has all required law changes. You can find the 2012 notice here. Be sure to update your plan, as needed, with adopted amendments for missed law changes. If you missed the deadline to adopt an amendment, you may need to use the IRS’s EPCRS to bring the plan into compliance.

Plan operational errors arising from the failure to follow plan terms (e.g., an employee who meets the plan’s eligibility requirements but is not allowed to participate)

It is important to note that even with plan operations in place, not following plan terms precisely is a very common mistake. Some common examples include: not using the definition of eligible compensation, failing to automatically enroll eligible employees or otherwise not allowing an eligible employee to participate, and failing to determine or make the appropriate employer matching contributions. It is a best practice to develop a communication chain that makes all relevant parties aware of plan document changes in a timely and accurate manner. We suggest performing a review of the operations surrounding your employee benefit plan at least annually to ensure that you are following the plan terms. If you find that your operations are not following the plan document’s terms, then apply a reasonable correction method that would place affected participants in the position they would have been in if there were no operational deficits. These types of self-corrections can be done through the IRS’ EPCRS.

By ensuring that you are in compliance with the most common deficiencies, you will increase your chances of having a smooth audit when the time comes. Your selection of quality service providers, including effective auditors, will help to mitigate your risk. A quality audit firm, expert and experienced with employee benefit plans, will not only assist with your financial reporting requirements, but will help you avoid the deficiencies discussed here. We’re here to assist you. If you have questions or concerns regarding your plan document, proper procedures and controls, or general employee benefit plan audit questions, please feel free to contact Shea Labagh Dobberstein.


You can find more detail regarding these common deficiencies, as well as others noted by the IRS, here. The most important thing you can do for your company and its employee benefit plans is ensure that you know and understand your fiduciary responsibility. Learn more about what you are responsible for in our article, “Meet Your Retirement Plan Fiduciary Responsibilities.”

About Shea Labagh Dobberstein

Employee benefit plans must conform to particular operational, financial and regulatory requirements. Employee benefit plans with 100+ participants are typically required by the federal government to perform an audit as part of their fiduciary responsibility of filing an annual report. An incomplete incorrect or untimely audit report could result in penalties levied against the plan’s administrator, which is why selecting an experienced auditor is of critical importance. Shea Labagh Dobberstein specializes in auditing benefit plans for privately held organizations and has been in business for over 70 years. Our firm is a voluntary member of the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center, which supports our commitment to providing you with the highest quality audit to save you time, energy and money.