Management’s Role in Benefit Plans, Including Third-Party Providers

As management, are you providing adequate oversight and maintenance of the employee benefit plan your company is offering? It’s a question that should be on your mind.

Employers are ultimately responsible for compliance and proper management of employee benefit plans, even when third-party service providers are involved.

Gaining a deeper understanding of your duties and establishing effective policies and procedures may help you oversee plan operations successfully while complying with rules and regulations.

The cost of providing benefit plans

Employers often provide benefits to their employees for incentive, reward, and satisfaction — and benefit plans like 401(k)s, 403(b)s, and employee stock ownership plans tend to be a huge part of the packages offered.

Providing these kinds of benefit plans comes at a cost, but it may not be obvious that the cost translates to more than just payment of a vendor invoice. There’s also the cost of your or your staff’s time in daily management and operation of the plan, as well as overarching fiduciary responsibility.

Employers must oversee, review, and reconcile third-party activities

If you’re currently providing an employee benefit plan as part of your incentive package, you likely know certain items need to be completed annually — such as the annual tax form filing requirement, compliance testing, and various employee communications.

Often, these requirements are performed by third-party service providers as part of the current service package and, therefore, researching and selecting good third-party service providers is half the battle.

However, ultimate responsibility for the plan’s compliance with applicable rules and regulations lies with the employer as the plan sponsor. This responsibility is not likely to be outsourced.

Audit requirements

The Department of Labor (DOL) places additional requirements on employee benefit plans as they grow, such as the audit requirement for certain plans with over 100 participant balances.

However, most other requirements and expectations related to the successful operation of employee benefit plans apply regardless of your plan size. Just because your plan doesn’t require an audit doesn’t mean you have less responsibility over the daily operations.

For new plans, you may be surprised by some of the questions posed by your auditors during the initial procedures, such as:

• How do you review fees for reasonableness and investment performance?
• How often do you reconcile payroll records to your plan’s trust reports?
• When was the last time you reviewed the specific plan provisions in your plan document to confirm you are calculating eligible compensation appropriately?

It’s not uncommon for management to say “we rely on our third-party service providers to do that.” While service providers may be used to increase efficiency and effectiveness or assist in the process, the responsibility to oversee, review, and reconcile the activity or information is ultimately yours as the plan sponsor.

Common errors in benefit plan administration

In a lot of these instances, plan management’s current processes may need improvement. Automated processes can help, but regular reviews are necessary to catch errors promptly. A good example is the remittance of employee 401(k) deferrals at each paycheck date.

As required by the DOL, remittances must be made as soon as administratively feasibly after the pay date. You may currently have a setup in which your payroll provider will communicate directly with the plan’s third-party administrator (TPA) and an automatic electronic fund transfer is taken. So, until you’re reconciling your bank accounts at month-end, you may not know for what amount or when the remittance was made.

Some questions to consider:

• Would you ever look at plan trust reporting to verify the amount from your bank account matched the amount received into participants’ accounts?
• What about that retro-adjustment you made a couple days after the paycheck date or the out-of-cycle payroll you ran for bonuses the week prior? Would those have been captured already?

Even if the process between your payroll provider and TPA isn’t automated, it’s a relatively consistent process of downloading a report from payroll with the information you need and uploading it to the TPA portal, then initiating the cash transfer. Consider:

• Have all employees been appropriately included on the report you uploaded?
• Did you upload the right payroll date or accidently the prior payroll date?
• Are there employees coded as a different division who were accidently excluded from the report?
• Did you copy and paste from one report into a different template and leave off a few lines?

The ideal scenario is having a policy or procedure in place to help prevent these types of errors. A close second is having a review process that identifies and promptly corrects these mistakes. Effective and efficient operation of the plan — including remaining in compliance with applicable DOL rules and regulations — is a crucial responsibility to every plan sponsor.

Case study: Benefit plan payroll errors

In the examples above, a simple error such as accidently uploading the wrong payroll-date information can drastically effect the plan’s successful operation. While the total amount may not have been significant enough to raise concerns during your month-end bank reconciliation, compliance requires a much deeper dive.

Say all of a sudden, an employee who terminated last month is now receiving someone else’s funds into their 401(k) account, and a new employee who contributed $150 this paycheck never received their money. If the error is found and corrected timely enough, it may just be a matter of re-allocating the funds to the correct participant accounts.

However, if delayed, the terminated employee may have withdrawn all funds. Now the plan sponsor is left with the debt and the obligation to make certain the new employee not only receives the missing $150 contribution but also appropriate consideration for lost earnings in the marketplace.

The error here is called a delinquent participant contribution and, when it occurs, requires correction and special disclosure on the plan’s Form 5500 tax form. This requirement stems from the degree and level of importance the DOL and the Employee Retirement Income Security Act of 1974 (ERISA) place on protecting participant assets.

Doing a quick reconciliation of the total upload file to the company-wide payroll records before submitting for funding could have prevented this simple error from occurring, potentially saving time and money for the plan sponsor.

Also, doing a review of the submission from the cash withdrawal on the bank statements to TPA records immediately following the transaction could have found the error and, if corrective action was taken quickly enough, may have also prevented loss of time, energy, and money.

Recent audit standards place a much more thorough emphasis on understanding the IT control environment related to the reporting and operating of Employee Benefit Plans — all the way from security and backup processes to automatic interfacing.

It might seem odd to need a control to monitor the automatic interfacing between different software, since the interface acts as a kind of “control” itself. However, it’s essential — overreliance on third parties or IT can result in significant deficiencies in the control environment of a plan. A strong control environment is vital, regardless of audit applicability.

Even with automated payroll and TPA systems, you must review the process promptly. DOL guidelines advise a review based on payroll dates, along with performing monthly, quarterly, or annual reconciliations to catch irregularities like retro-adjustments or out-of-cycle payroll runs.

While this may seem like a lot of work, the benefits of performing preventative checks and reviews likely outweigh the cost of plan errors, missed contributions, and potential noncompliance.

Plan sponsors must prioritize compliance and protection

It may be helpful to remember employee benefit plans are separate legal entities operating under a separate tax structure — and the money in the plan does not belong to the employer, it belongs to your employees within the Plan.

As an entity with significant compliance components associated with the plan sponsor role, what may seem insignificant to you or your company can be very material for the plan and its participants. While many custodial, recordkeeping, and compliance-related tasks can be outsourced to third parties, the ultimate responsibility for providing adequate protection and overseeing operations continues to lie with the plan sponsor.

How CLA can help with benefit plan administration

Effective oversight and maintenance of employee benefit plans are critical. By establishing strong policies and actively engaging in plan management, employers can safeguard their employees’ assets and maintain successful benefit plans.

Our experienced team is here to help with questions and insights on improving its management's role, including with their plans third party providers.

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