The initial stages of Department of Labor field audits are intended to inform the auditor/ investigator concerning the background of the subject plan. After establishing this foundation of fundamental knowledge, the auditor/investigator may then go forward with the investigation and focus on those areas that had been initially targeted for review. The following is a brief outline of the initial areas of inquiry normally undertaken during the initial on-site investigation of an employee benefit plan. Although it is an informal outline, it is routinely relied upon by field auditors and investigators. (This outline is covered in more detail in Q 760 through Q 769.) In addition to all of the necessary background information, it was designed to identify indicators of potential violations which would then be reviewed in detail.
The general areas of initial inquiry during a field audit are:
1. The background of the plan sponsor and key employees;
2. The background of the plan (type, benefits offered, participants, fiduciaries, etc.);
3. The related parties to the subject plan;
4. The reporting and disclosure obligations;
5. The investment of plan assets;
6. The plan service providers;
7. The receipts, expenses and disbursements;
8. The non-income producing assets;
9. The accounting records and annual review; and
10. Bonding and insurance.
The areas of initial inquiry are not representative of a complete DOL investigation. It is merely a review of the initial steps taken when a plan has been targeted for an audit. Once all of the above areas have been reviewed by the auditor/investigator, close attention should be paid to the remaining areas of inquiry. More often than not, these are the areas of interest that have been identified for review. All DOL investigative reports are required to review bonding, reporting, and disclosure procedures of a plan. Inquiries into these areas are routine and, most likely, are not the reason the plan has been targeted for an audit.
760. What are some of the background areas of initial inquiry during an initial onsite investigation by the Department of Labor?
The first areas of plan information to be reviewed during an initial on-site investigation by a Department of Labor auditor/investigator are likely to be those detailed below:
1. Background information, including:
(a) The name or title of the person interviewed;
(b) The business address and background of the subject (to establish a foundation of competence); and
(c) The name or background of the plan sponsor.
2. Plan information, including:
(a) The name and type of plan (i.e., defined benefit, defined contribution, health and welfare);
(b) The basic benefits offered under the plan;
(c) The number of participants, total assets, and annual contributions;
(d) The plan administrator (both currently and over the past five years);
(e) Named fiduciaries (both currently and over the past five years);
(f) A list of other plans sponsored;
(g) Any functioning committees and the method in which members are selected; and
(h) Current investments of the plan.
3. Information regarding related parties, including:
(a) Unions connected with the plan, if any;
(b) The names of all stockholders who own a 10% or more share of the sponsor;
(c) The names of any principal officers or employees who own 10% or more of any business with which the plan does business; and
(d) Any pending legal proceedings that involve the plan or plan fiduciaries.
This information is intended to provide the auditor/investigator with a detailed overview of the plan, its sponsor and any related parties who may be involved in the issues under investigation.
761. What are the initial DOL inquiries regarding Summary Plan Descriptions, Summary of Material Modifications, and Summary Annual Reports?
When beginning a review of the subject plan's reporting and disclosure obligations under ERISA, the auditor/investigator will review the following questions regarding the plan's Summary Plan Description, Summary of Material Modifications, and Summary Annual Reports:
1. Is the plan exempt from reporting requirements? If so, why?
2. Does the SPD meet the style, format and content requirements of the DOL?1
3. Has the SPD been provided to participants and beneficiaries receiving benefits within 120 days after the plan is subject to ERISA or 90 days after new participants become eligible to participate in the plan? (2)
4. Is the SPD more than five years old? (3)
5. If material modifications have occurred, has a Summary of Material Modifications been filed with the DOL and disclosed to participants and beneficiaries within 210 days after the end of the plan year in which the change was made? (Note that for plan years beginning after August 6, 1997, plans are no longer required to provide the Department of Labor with copies of the Summary of Material Modifications.) (4)
6. Has the Summary Annual Report ("SAR") been disclosed to participants and beneficiaries within nine months after the close of the plan year? (5)
762. What are the initial DOL inquiries regarding Annual Report Forms 5500 and PBGC forms?
When continuing a review of a subject plan's reporting and disclosure obligations under ERISA, the auditor/investigator will review the following items to determine if the plan has satisfied the applicable requirements:
1. Have Annual Report Forms 5500 been filed with the DOL or IRS within 270 days after the close of the plan year? (1)
2. If applicable, have Schedule A (Insurance Information), Schedule B (Actuarial Information), an Opinion of Qualified Public Accountant, an Actuarial Statement, or Financial Statements been included with the Annual Report Forms 5500? (2)
3. If applicable, has Form 5310 (Application for Determination upon Termination; Notice of Merger, Consolidation or Transfer of Plan Assets or Liabilities; Notice of Intent to Terminate) been filed with the IRS or the PBGC?
4. If applicable, has a "Final AR 5500" been filed with the IRS upon complete distribution of assets?
5. If applicable, has the PBGC been notified of a merger, transfer of assets or liabilities or the termination of a multiemployer plan covered by the PBGC Insurance Program?
6. For defined benefit plans, has Form PBGC-1 been filed?
763. What are the initial DOL inquiries regarding participant disclosure requirements?
ERISA mandates that plans must disclose certain materials to plan participants under certain circumstances. The following questions were designed to assist field auditors/investigators in determining whether a plan subject to an investigation has satisfied those participant disclosure requirements:
1. Are copies of the plan, Summary Plan Description, latest annual report, and governing documents (under which the plan was established and is operating) made available to plan participants at the principal office of the administrator? (3))
2. For plans that make a charge for documents, is the charge reasonable (generally, up to 15 cents per page)? (4)
3. Does the plan respond to written disclosure requests within 30 days? (5)
4. For those plans to which vesting standards apply, has a statement concerning the nature, amount, and form of deferred vested benefits been provided to those participants that have terminated employment or had a 1-year break in service? (1)
5. For those applicable plans, has a written explanation been provided to participants before the annuity starting date of the terms and conditions of any joint and survivor annuity and the effect of electing against such options? (2)
6. For participants or beneficiaries with claim denials, does the plan provide notice of denial within 90 days?3
764. What are the initial DOL inquiries regarding plan investments?
In an initial on-site investigation, the auditor/investigator will review the following questions in order to identify the plan's basic asset investment holdings, procedures, philosophies and objectives:
1. Does the plan now hold for investment, or has it held for investment in the last six years, any of the following: (a) participant loans; (b) diamonds; (c) gold or other nonincome producing assets; (d) mortgages; (e) loans other than mortgages; (f) limited partnership interests; (g) employer stocks or securities; or (h) stock of a closely held corporation?
2. Who makes the decisions on plan investments, and what criteria are used?
3. What outside advice is obtained to help in investment decisions, and how often is it relied upon?
4. If and when stocks are purchased, who makes the decision and through whom is the transaction executed?
5. What criteria are used in making this decision?
6. Are commissions negotiated, and how?
7. What are the plan's basic investment philosophies and objectives?
765. What are the initial DOL inquiries regarding persons or entities providing services to a subject plan?
In reviewing the background information of a plan under investigation, the auditor/investigator will review the following items to identify the service providers who are involved in the ongoing administration of the plan and the management of the plan's assets. The review will require that the name, functions performed, and contracts of the following service providers be furnished:
* Insurance agents;
* Investment advisors;
* Banks; and
* All other service providers not identified above.
766. What are the initial DOL inquiries regarding plan receipts, expenses and disbursements?
In an initial on-site investigation, the DOL auditor/investigator will want to ascertain the following information regarding plan receipts, expenses and disbursements in an effort to establish the protocol utilized by the plan and the persons responsible for these tasks.
1. Regarding receipts, the auditor/investigator will ask:
(a) Who makes the decision regarding the amount of contributions and when they are made?
(b) What are the plan document's basic funding requirements (within the knowledge of the interviewee)?
(c) How often are contributions received?
(d) If receipts are received by mail, what procedures are used for processing mail receipts?
(e) What is the percentage of receipts received through the mail?
(f) Are contributions received in cash? If so, who handles cash contributions, and how is the accounting for such contributions handled?
(g) What procedures are used to collect delinquent contributions?
(h) Are receipt books used and, if so, are they pre-numbered?
(i) Does the plan maintain a petty cash fund? If so, on what basis is it maintained?
(j) Are all receipts deposited intact? Who makes these deposits?
2. Regarding expenses and disbursements, the auditor/investigator will ask:
(a) What expenses, other than benefits, are paid by the plan?
(b) What are the basic procedures for making disbursements on service provider invoices?
(c) Are all invoice disbursements made by check? How many signatures are required? Who can sign checks? Are the plan checks ever pre-signed?
(d) What is the basic procedure used to process and approve benefit disbursements?
(e) Are any salaries paid from the plan assets?
(f) If so, who determines salaries, and how is basic payroll accounting set up?
767. What are the initial DOL inquiries regarding non-income producing assets that may be held by the plan?
During the initial on-site investigation, the DOL auditor/investigator is likely to inquire whether the subject plan holds any of the following non-income producing assets as plan investments, and what procedures are involved in making such investments. The auditor/investigator may ask the following questions:
1. What equipment (e.g., cars, office furniture, fixtures, buildings, etc.) is owned by the plan?
2. What controls are set up to maintain proper safeguards of the assets and to prevent their misuse?
3. Who approves purchases of any capital item (i.e., purchases over $100 with a useful life in excess of one year); and
4. Are bids sought on major purchases in order to obtain the best price?
768. What are the initial DOL inquiries regarding the accounting records of a subject plan?
During the initial on-site investigation, the DOL auditor/investigator will want to determine what accounting records are maintained by the subject plan, who maintains them, and who (if anyone) is charged with reviewing them on an annual basis. In order to make this determination, the auditor/investigator may ask the following questions:
1. Are any of the following accounting records maintained, and who maintains them?
(a) Bank accounts,
(b) Receipts and disbursements journals,
(c) Vouchers, vendors and invoices,
(d) Broker confirmations,
(e) Receipt books,
(f) Investment acquisition and disposition records, and
(g) Annual Report Forms 5500.
2. How often and by whom are these records reviewed or audited (internally and externally)?
769. What are the initial DOL inquiries regarding the bonding and insurance coverage of a subject plan?
During the initial on-site investigation, the DOL auditor/ investigator will conduct an extensive review of the subject plan's bonding and insurance coverage. This is because the final investigative report that the auditor/investigator will prepare and submit on the case must provide a detailed analysis of these items. Consequently, the auditor/investigator may ask the following questions:
1. Does a separate trust fund exist?
2. Are there insurance or annuity contracts?
3. Are there separate accounts in the books of the employer or do separate funds or other properties exist in the name of the plan? (Note: If the answer to items (1) or (3) is "yes," bonding is usually required. It should be determined whether insurance dividends belong to the plan or the plan sponsor. If they belong to the plan, bonding is required. If cash surrender values exist and the plan can obtain those values, bonding is required. See Chapter VIII for additional bonding rules.)
4. Are benefits paid from the general assets of the plan sponsor?
5. Is there any segregation of the plan funds?
6. Are there separate accounts on the books or are there separate books of account for the plan? (Note: If item (4) is answered "yes" and items (5) and (6) are answered "no," the Plan is unfunded and no bonding is required.)
7. Do any trustees or plan employees have:
(a) Physical possession of plan assets?
(b) Power to obtain physical possession of plan assets?
(c) Power to transfer assets?
(d) Authority to disburse plan funds directly or indirectly?
(e) Authority to sign or endorse checks and/or the authority to make investments?
(Note: If any of the items under (7) are answered "yes," handling of plan funds is indicated and bonding is required for each individual who has such authority. If a corporate trustee holds the plan assets, but the plan trustees can direct the payment of benefits by the corporate trustee or direct the investments to be made by the corporate trustee, the plan trustees are "handling" funds and bonding is required.)
8. Does the bond provide for payment to the plan in the event of loss? (The plan must be named as an "insured" and the pay-over rider must be attached unless the plan is the sole insured under the bond. The definition of "employee" in the bond must cover all persons who "handle" funds.)
9. How many plans are covered by the bond?
10. How many non-plan entities are covered by the bond?
11. Is the bonding company listed in the Department of the Treasury Circular 570 as an approved surety provider? (The auditor/investigator will require the name and the policy lapse date.)
12. Is the plan named as the insured?
13. If there is more than one plan, or the plan and the plan sponsor are covered, is a payover rider attached?
14. If the bond contains a deductible, is an elimination of the deductible rider attached with respect to the plan?
15. Does the bond protect against fraud and dishonesty?
16. Does the bond have a 1-year discovery period?
17. Does the bond provide coverage of 10% of the funds handled with a maximum amount of $500,000?
18. If the plan or plan sponsor maintains fiduciary liability insurance coverage, what is the name of the company and the amount of coverage?
In its semiannual agenda of regulations issued in November, 2000, the Employee Benefits Security Administration announced that it is undertaking a review of the temporary bonding regulations under ERISA Sec. 412 for the purpose of developing a regulation that exempts certain investment advisors and broker-dealers from the definition of "plan officials" required to be bonded under ERISA Section 412(a). (1)
Practitioner's Pointer: These queries would be an excellent place to begin a due diligence audit or a "pre-audit" prior to the date of an initial on-site visit from a Department of Labor representative. If any "red flags" have been identified through the application of the inquiries (see Q 760 through Q 769), plan counsel should conduct a thorough investigation into problem areas prior to the initial onsite investigation. This would allow for sufficient time to prepare documentation, explanations, and if necessary, correction of violations or an adequate defense.
If a blatant prohibited transaction is identified for which there is no adequate explanation, plan counsel should consider reversing the transaction prior to the receipt of official notification from the Department of Labor. The Department of Labor will not impose ERISA Section 502(l) penalties on a reversed prohibited transaction unless the reversal was the result of a Department of Labor "official notification" of an outstanding violation that the subject plan has been ordered to correct (usually through voluntary compliance).
(1.) Labor Regs. [subsection] 2520.102-2, 2520.102-3.
(2.) Labor Reg. [section] 2520.104b-2.
(3.) Labor Reg. [section] 2520.104b-2.
(4.) Labor Reg. [section] 2520.104a-7.
(5.) Labor Reg. [section] 2520.104b-10.
(1.) Labor Reg. [section] 2520.104a-5.
(2.) Labor Reg. [section] 2520.103-1.
(3.) Labor Reg. [section] 2520.104b-1.
(4.) Labor Reg. [section] 2520.104b-30.
(5.) ERISA Sec. 502(c).
(1.) ERISA Sec. 105(c).
(2.) Treas. Reg [section] 1.40l(a)-(11)(c)(3).
(3.) Labor Reg. [section] 2560.503-1(e).
(1.) 65 Fed. Reg. 74071 (11-30-2000).