We recently witnessed the DOL’s 401K audit priorities first hand. 

In auditing 401K plans, the U.S. Department of Labor previously focused on determining how quickly employers could deposit employee deferral contributions into the plan’s trust. For small plans (fewer than 100 participants), deferral contributions must be deposited within seven business days from the date they are withheld from payroll (generally, the payroll date). For large plans (100 or more participants), DOL rules require employee deferral contributions to be deposited as soon as it is “administratively feasible” to separate the contributions from the employer’s general assets. 

What does this mean? In prior audits, the DOL has taken the position that if the company deposited deferral contributions one time within one business day and the rest of the time within two business days, then all deposits should be made within one business day. Some employers even make the deposit to the trust before the paycheck is issued to be sure they are meeting DOL’s elusive deadline. Employers are wise to be sure procedures are in place to comply with the DOL’s rules.

New emphasis: Distribution

Now, although the DOL still audits the timing of contributions, DOL audit activity shows the agency is focusing heavily on the distribution process – making sure that participants can be found to ensure that they receive the money in their accounts when they terminate employment. Specifically, the DOL believes it is a fiduciary responsibility to have written procedures that will assure, to the extent possible, actual payment of benefits to participants who may have left employment in years before the minimum distribution date. 

Plan sponsors should have written procedures in place to cash out participants with account values of $5,000 or less (if your plan provides for small account cash-outs). The procedures should include notifying participants when their accounts are rolled over to an Individual Retirement Account when they do not elect a distribution. Procedures also need to be in place to notify terminated participants who will be age 70 ½ in the following year, so that they can elect that their benefits begin to be distributed and avoid the 50 percent excise tax. In an age where automatic contributions are prevalent and participants may or may not know that they have 401(k) plan accounts when they leave employment, plan sponsors must do what they can to educate participants on the need to keep their addresses current and to help participants complete what paperwork is necessary to receive their money.

DOL’s prescribed procedures

The procedures that the DOL prescribes are not difficult. First, the DOL instructs that plan sponsors should use certified mail when mailing distribution checks. This will tell the employer whether the participant received the check or not. If a participant’s distribution check is returned, employers must conduct a reasonable search for the participant. The DOL instructs that plan sponsors should first search plan and employer records to determine whether the employee registered a change of address. If this search is unfruitful, the DOL says that the employer should contact the plan beneficiary to see whether he or she knows of the participant’s whereabouts. Finally, the plan sponsor should use a search service that does not charge a fee, as these on-line services can often produce results without costing the participant’s account. If all else fails and if the account balance warrants it, the plan sponsor should use a commercial search service. The cost of this service can be charged to the participant’s account as an administrative expense. Determining whether to use a commercial search service is a fiduciary function, and the pros and cons of using the service must be weighed. For example, if the service costs $200 and the account has only $150, it would be imprudent to use the service.

Many plan sponsors rely on vendors to provide distribution services. This is fine, provided the plan sponsor has oversight authority, an important fiduciary function. Be sure to review the vendor’s agreement to provide these services, as well as its written procedures to perform the services. Also, it is best to audit the vendor at least yearly to assure that the vendor is distributing small account balances (under $5,000), sending communications about IRA rollovers, searching for lost participants, and notifying terminated participants (and 5 percent owners) who are turning 70 ½. Doing these things will ensure a smooth audit if the DOL calls on you.


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