Navigating the Complexities of Employee Benefit Plan Audits
In this episode of the PKF Texas – The Entrepreneur’s Playbook®, Kevin Hengst,CPA, an audit director and Approachable Advisor™ at PKF Texas, discusses the critical issue of delinquent participant contributions in employee benefit plans. Kevin explains the Department of Labor’s (DOL) expectations regarding timely remittance and clarifies common misconceptions surrounding the 15th business day rule. He emphasizes the importance of correcting mistakes, reporting late contributions, and understanding the potential penalties for non-compliance.
Jen: This is the PKF Texas Entrepreneurs Playbook. I’m back once again with Kevin Hengst, an audit director and one of the Approachable AdvisorsTM on our employee benefit plan audit team. Kevin, welcome back to the Playbook.
Kevin: Glad to be here.
Jen: So, over the years, we’ve talked about some common mistakes you know, plan sponsors make, and one of the things you’ve mentioned to me is that sometimes there’s delinquent participant contributions, there’s errors there. What is that? What’s the Department of Labor looking for? And can you explain that a little bit more?
Kevin: Yes. and this is probably the thing the Department of Labor talks about the most, a lot of potential misinformation out there with the late contributions. But the rule is they should be remitted as soon as reasonably possible. Reasonably possible. You know, broad term, a little loose, but, but where the confusion comes into play is the DOL as it’s written. And this has been written for the 25 years that I’ve done employee benefit plan audits. They also say no later than the 15th business day of the subsequent month. A lot of plan sponsors are going to harp on that and say, hey, we have remitted it within the 15th business day of the subsequent a month. The DOL wants to 100% stress that is not a safe harbor that is just an upper limit.
The company is going to set the pattern as to what the timeliness every minutes should be. And again, they should be done as soon as reasonably possible. Small plans do have a safe harbor rule. And small plans are under a hundred participants. They’re not audited. They have seven business days to remit it. It’s a safe harbor if it’s any time of that. That safe harbor again, does not apply to large plans. You know, again, large plans should set their pattern. A lot of times the DOL will probably feel that three or four business days is reasonable if not instantaneous, you know? I mean, if the company can remit payroll taxes on the day of payroll, they should be able to remit the 401k contributions. The thing is, if you do make a mistake, it is very important the DOL says, report it. You know, it’s fine. It’s, you’re not, it’s not going to be a red flag.
Jen: Hey, we missed one, sorry.
Kevin: But report it and fix it. And, and by fixing it, you also, there is going to be late lost earnings that the participant will have to pay. A late remittance is viewed as a breach of fiduciary duty, and it will be considered in most cases a prohibited transaction. But again, you report it you can fix it multiple ways. The DOL would recommend you fix it through the VFCP, which is a voluntary program that the DOL has set up, which has an interest calculator on it, but there, self-correction can be done the key in both cases and maintain the documentation on how you corrected it and stuff of that nature. And they will look at the filings. I mean, there is two other issues with late remittances that the DOL has noticed. This amount needs to be reported on the form 5500. It will be schedule H line 4a that number should match the financial statements. One red flag that will happen is if the financial statements has a number, say $10,000, and the form 5500 says $5,000, that’s going to be a red flag and could be, you could get a notice of rejection of the audit filing. The second thing with that line, the Schedule H line 4a is you must report late amounts through the year corrected. So, if we noticed a client had late remittances of $10,000 in 2022 we report it probably was not identified till 2023, and that’s when it was corrected. So, in 2022, we would report the amount as not corrected, in 2023, we would need to report that amount as corrected. If the DOL sees a financial statement or the form 5500 that has amounts not corrected and they never hit the corrected column, that will also be a red flag and could lead to a letter of rejection for the audit and inquiries.
Jen: And are there penalties that are imposed upon for this? Or what does, what does that look like?
Kevin: There are penalties that could be imposed. There’s actually various ones that could be with it being a breach of fiduciary duty there could be civil penalties to the fiduciaries. In addition, when you have late remittances, if you have not filed it correctly and reported it, it is like you haven’t filed the form 5500, it can be rejected. So, you will have all of those monetary fines that could be associated with a late filing. Normally, if you do the right thing and get it correct, the DOL will waive all penalties in all cases. You just need to show the right duty. And again, it’s very important that your report, I mean, it, there’s, there is the feeling that this, the lost interest is very immaterial. These amounts don’t matter. But if the DOL comes in and looks at your audit and you did not report it, then it’s automatically going to be rejected. You’re going to have to get a re-audit. And you’re probably going to have to get ERISA counsel involved. And so, the cost will escalate exponentially by not doing the right thing when you notice it and detect it during the audit.
Jen: So, it’s probably best to just file them timely and you’re good to go.
Kevin: That’s absolutely correct. 100%.
Jen: Perfect. Well, we’ll get you back to talk about more employee benefit plan topics. Sound good?
Kevin: Great. Thank you.
Jen: This has been another thought leader production brought to you by PKF Texas – The Entrepreneur’s Playbook®. For more information about this and other topics, visit pkftexas.com/insights. Tune in next week for another chapter.
