401(k) DOL audit triggers: What you need to know

8 MIN READEditorial Policy

As an employer offering a 401(k) plan, you must ensure that your benefit plan fully complies with the Employment Retirement Income Security Act (ERISA)

What is ERISA?

ERISA is the primary law governing most benefit and retirement programs. ERISA is meant to protect employees that participate in benefit plans, and to ensure that employees have fair access to join them.  

There’s a few ways you can find your plan subject to an audit from the Department of Labor (DOL). The first is that your plan is randomly audited. However, it's more common for a plan to be selected for an audit due to a specific trigger. If your retirement plan is audited and found to be noncompliant with ERISA, penalties such as monetary fines can be assessed, or your plan may be disqualified, which can be expensive. 

Below, this article will address a few major points about 401(k) DOL audits, including the triggers that may cause them, how to prevent a DOL audit, and how to take action if your plan happens to be subject to an audit. 

What triggers a DOL audit? 

A DOL audit can be triggered for several different reasons, which is why it is critical for employers to take careful administrative actions to ensure their retirement plan stays compliant. Here are some of the most common triggers of a DOL audit:

  • The DOL receives a participant complaint about the plan. There are several reasons why an employee may complain about your plan to the DOL. Some of the most common reasons are delayed withdrawals, late contributions, missing notices, or the employee believes that he or she did not get the proper benefit outlined in the plan document. Being familiar with the terms of your plan and making sure your plan document is followed at all times should reduce the number of employee complaints. If an employee does complain, it's recommended that the plan respond promptly and seek resolution for the employee so they don't escalate further. 

  • A party in-interest engages in a prohibited transaction. There are many types of prohibited transactions, but the most common is late contributions. Failure to timely submit employee deferral deductions and loan repayments to the plan is considered  a loan to the employer and a prohibited transaction. Because late contributions are required to be reported on the annual Form 5500, the DOL is aware of instances when the issue occurs. 

  • Issues (incomplete or late) with filing Form 5500: Form 5500 is an important annual report that a plan must file on time. This form reports information to the DOL and Internal Revenue Service (IRS) regarding a plan's assets, as well as participant counts and issues that may have occurred during the year. Large plans (those with over 100 participants with a balance) must include an independent audit report - which can delay filing. Proper planning and communication with your auditor can avoid issues with untimely filing.  Because this form includes questions that could indicate a violation of ERISA, you’ll find that the Form 5500 is the main culprit for being on the DOL’s radar.

  • Media reports: If a company sponsoring a plan is experiencing financial issues such as bankruptcy, media coverage of the issues often get the attention of the DOL and prompt an audit. This is not something companies can necessarily avoid but should be aware of. 

  • Referral from other government agencies: If your plan has had an issue with a government agency such as the IRS or SEC, they may notify the DOL. Again, you can’t prevent this but should be aware of it. 

While it is impossible to completely eliminate the risk that your plan will be selected for a DOL Audit, being aware of these common triggers and proactively managing these items may help reduce your risk of a targeted audit.

File Form 5500 with Human Interest

An important step in avoiding DOL audits is properly filing Form 5500. Employers can file Form 5500 through vendor-approved software, and they must complete the form by a certain deadline every year. At Human Interest, we can file Form 5500 on your behalf with our Complete and Concierge service tiers

What happens in a DOL audit?

If your plan is subject to a DOL audit, here’s what you can expect. An investigator from the Employee Benefits Security Administration (EBSA) will conduct an investigation that can last a few weeks to a year (depending on the issue's complexity). You will receive a letter informing you of the pending audit. This letter will include a list of documents you must submit for review by a certain date. Investigators commonly ask for payroll records, claim processing records, plan policies and procedures, employee communications, and more. The investigator will then:

  • Review the documents you submit & possibly request additional documents or ask questions you must respond to.

  • Possibly conduct interviews

  • If no violations are found, issue a Closing Letter stating that the investigation is complete and no further action is expected.

  • If violations are found, issue a Voluntary Compliance letter identifying the violations and asking the plan officials to voluntarily make corrections.

  • Impose appropriate penalties. Fiduciary penalties may be addressed in a separate letter.

  • Issue a Closing Letter if corrective action has been taken and evidence provided to DOL

  • If plan officials do not voluntarily comply, the DOL can refer the case for litigation

  • Note: some violations cannot be corrected voluntarily. These are violations involving fraud, criminal misconduct, or severe or repeated fiduciary violations.

Remember, the most important step you can take while undergoing a DOL audit is to respond to their requests in a timely manner, provide detailed and complete responses, and be honest if you don’t have the records requested.   

How do I prepare for a DOL Audit?

Getting audited by the DOL is not necessarily a bad thing. The DOL is working in the best interest of your employees to help them get fair access to retirement benefits. However, it can still be an overwhelming experience that requires a lot of time to complete. 

The best way to successfully navigate a DOL audit is to be prepared. Here are steps you can take that will help any DOL audit run smoothly:

  • Conduct a self-audit of your plan: Review your plan thoroughly by reviewing all plan documents, participant notices and their timing, contribution and distribution reports, plan policies and procedures, plan reporting, plan limits, etc. This will ensure you find any issues before the DOL does. 

  • Correct any issues identified: If errors are uncovered as part of the self-audit, correct those errors as soon as possible following the Employee Plan Compliance Resolution System (EPCRS) process. Keep detailed records of the issue, the date it occurred, the date it was discovered, the date of correction, and the method of correction. This evidence will help you address any issues the DOL uncovers and also serve as evidence that you are diligently monitoring your plan.

  • Document investment decisions:  For plans in which the participants select their own investments, the plan’s investment fiduciary is still responsible for selecting the fund lineup participant's can choose from. The investment fiduciary must use a “prudent process” when selecting the funds. There may be an allegation of fiduciary breach If participants feel an investment is not the best option for the plan. Proof of a prudent process is necessary to defend the allegation. While not legally required, it is a good idea for retirement plans to have an investment policy statement (IPS) that identifies how investments available in the plan will be selected and monitored. The IPS should include the plan’s stance on alternative investments - items that aren’t readily traded or hard to value in general. Plan sponsors that follow an IPS and that can demonstrate a prudent process to select and monitor plan investments will be more successful defending a claim of fiduciary breach. The best way to document that a prudent process was followed is to keep written minutes for meetings where investment decisions were discussed.

  • Organize your records: The plan administrator and other key company officials should know where documents and other plan information is stored. Many plan service providers provide a variety of plan recordkeeping reports. Payroll reports should also be available from the company’s payroll provider.  It is a good idea to save copies of these reports with your plan records as well. Knowing where your plan-related documents are will save you time during an audit. 

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Who can help with a DOL Audit?

Plan officials may decide to handle a DOL Audit on their own while others may seek the assistance of an experienced ERISA attorney. This decision is unique to each company based on its risk sensitivity, awareness of existing issues with the plan, availability of  resources within the company to manage the audit requests, and cost.

A plan’s service providers should also make plan records available upon request. The level of reporting available and the time it takes to get requested information will vary from one provider to another. It is a good idea to make your service provider aware that the plan is being audited by the DOL and request required information as soon as possible. 

DOL audit support at Human Interest 

Human Interest can help your small business prepare for DOL plan audits by working with you to keep your plan compliant. Speak to a 401(k) specialist today to learn how Human Interest can help you plan to stay ahead of DOL audit issues.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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Human Interest Inc. is an affordable, full-service 401(k) and 403(b) provider that seeks to make it easy for small and medium-sized businesses to assist their employees with investing for retirement. For more information, please visit humaninterest.com. Investment Advisory services are provided through Human Interest Advisors LLC, a Registered Investment Adviser and subsidiary of Human Interest Inc. For more information on our investment advisory services, please visit http://www.humaninterest.com/hia/.

This content has been prepared for informational purposes only, and should not be construed as tax, legal, or individualized investment advice. Human Interest Advisors LLC does not provide tax or legal advice. Consult an appropriate professional regarding your situation.The views expressed are subject to change. In the event third-party data and/or statistics are used, they have been obtained from sources believed to be reliable; however, we cannot guarantee their accuracy or completeness. Investing involves risk, including risk of loss. Past performance does not guarantee future results.

Human Interest Inc. does not provide tax, legal or accounting advice. Plan Sponsors should take independent steps to validate the tax, legal, or accounting considerations of hiring any service provider for the Plan, obtaining guidance on any Plan document (or amendment thereto), and for any issues pertaining to design, implementation, or operation of a Plan.