A Department of Labor (DOL) Audit can be a costly and time consuming endeavor. In addition to monetary penalties, those subjected to an audit can spend a significant amount of time gathering information in response the DOL’s inquiries. By 2016, the DOL’s monetary recoveries exceeded $700 million.

What Triggers a DOL Audit?

First, you can simply be chosen for a DOL audit at random. While being selected for an audit at random is a possibility, the DOL also looks out for other “red flags” that could prompt an audit of your 401(k) plan. These audit triggers can come from documents that are submitted to the DOL, for instance, your 401(k) Plan’s Form 5500 filing or from direct communication with the DOL from a 401(k) plan participant. Errors on the Form 5500, such as not completing all the required schedules or failure to file the Form 5500 by the required due date can also catch the attention of the DOL.

What are Common Findings by the DOL in an Audit?

  1. Plan document is not up to date. A plan sponsor must make sure that the Plan Document is continually updated for any changes in regulations that affect their Plan.
  2. Plan Document is not followed. The Plan Document is the document that defines how the Plan is to operate.  Too often the Plan is operated in a way that does not reflect the outline of the Plan document.  This can occur because of change in company personnel or a change in operations.
  3. The correct definition of compensation is not applied correctly. When determining the deferral amounts for the 401(k) participants the Plan must determine that the definition of compensation is being applied correctly.  Certain pieces of compensation may be excluded from the definition as outlined in the Plan document.  If there are issues, corrective action must be taken.
  4. Participant contributions are not remitted timely. Late payroll remittance is one of the most common DOL audit issues. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets. However, the deposit should never occur later than the 15th business day of the month following the withholding of the employee’s wages. The word “reasonably” is not defined under federal law or guidance for purposes of determining whether a deposit of deferrals has been made timely. Generally for larger businesses, a timely deposit will most likely happen within a couple of business days after the payroll withholding. There is a small business safe harbor that applies to businesses with fewer than 100 participants. The safe harbor states that 401(k) deposits for a small business are timely if they are made within seven business days from the date the contributions were withheld from employee wages.
  5. Not following eligibility requirements. The Plan document defines how eligibility to participate in the plan is defined and what the requirement are.
  6. Participant Loans and Hardship Withdrawals. The Plan document will provide the specific criteria for when a hardship withdrawal and loans are permitted to be taken.  If these criteria are not met a company could potentially make a distribution from the plan that is not permitted.

Running a 401(k) plan can be a challenging for a small business given the compliance requirements that must be met.  Continuous monitoring of the Plan and self-auditing of specific plan features may be beneficial for a company.

The best way to prepare for a DOL audit is to be prepared, and to conduct a periodic self-review or internal audit as a preemptive measure. Contact Barnes Dennig to learn more about these options and how your company can stay ahead of the curve.