As seen in the March 2019 issue of PEO Insider magazine. PEO Insider is published by NAPEO (The National Association of Professional Employer Organizations) and is the leading publication dedicated solely to the PEO industry. 

When will your PEO Health Plan or Retirement Plan be Audited?

Is it time for your PEO health plan or retirement plan to be audited? This is something you thought would never happen – when do these things ever happen to us - but don’t be so sure. It only takes one participant complaint call to put the audit process in motion. Also, the Department of Labor has yearly metrics, just like you do. These metrics serve two purposes. First, they ensure health plans and retirement plans operate as they should and second, achievement of these metrics pays their bonuses, determines annual budgets, makes them eligible for promotion, and determines their office performance ranking at the end of the year. You need to be prepared, and to do so, you need to know two things: how not to be targeted for an audit, but if you are, how to survive.

Before we talk doomsday, let’s start from the beginning. The Employee Retirement Income Security Act (ERISA) of 1974 is the federal law that covers fiduciary responsibility, tax compliance and insurance for Defined Benefit Plans.ERISA is separated into four titles, and the responsibility for the enforcement of those titles falls to three different government agencies.

  • Title I covers fiduciary responsibility, and its enforcement is covered by the US Department of Labor, Employee Benefit Security Administration (EBSA).
  • Title II and III cover the tax qualifications of Plans, and its enforcement is handled by the Internal Revenue Service Employee Plans Division.
  • Title IV covers Plan termination insurance of Defined Benefit Plans, and its enforcement is handled by the Pension Benefit Guarantee Corporation.

On to your audit prevention plan.

How do you not get audited? We’ll get back to the yearly metrics that drive the EBSA’s focus, but let’s start with other audit triggers (non, metric-based audits). Why might your plan be targeted for an audit? It’s simple.

  • A participant / employee complaint or allegation.It only takes one call.
  • Test target – randomly assigned projects that come from the national EBSA office to all of the regional offices.Each office must investigate a certain percentage of plans that meet these criteria.
  • Reviews of Form 5500 - when investigators are not working active cases, they review Form 5500’s to identify questions that may have been answered incorrectly or for items that they believe may be a problem.
  • Referrals from other government agencies - the IRS Employee Plans Division and EBSA have a mandatory referral agreement that states if an investigation reveals a problem, it must be referred to the other agency for review.
  • Media attention – this could be newspaper or TV stories about the financial health of a company or its ownership, because there is usually a correlation between company problems and Plan problems.

Drilling down into more specific EBSA triggers, coming directly from our clients and their plans that have been flagged for audit by the DOL:

  • Commissions being received by PEO-owned insurance agencies that are reported on Form 5500 Schedule A
  • Fees received by the PEO that are reported on Form 5500 Schedule C
  • Affirmative answers to Form 5500 questions regarding transactions with a party-in-interest
  • Inability of the Plan to pay benefits when they are due
  • Late contributions
  • Excessive fees to service providers

Next, the metrics. What most people don’t know or understand is that the EBSA has budget metrics that are used to rank each EBSA office for productivity. This is important for you to know because it can lead you to being audited. An important side note is that EBSA has criminal and civil powers that they can enforce in a court of law, which tie directly back into their metrics.

Let’s discuss the specific metrics for both civil and criminal cases.

For civil cases, the metrics are:

  • Number of cases opened (this is concerning)
  • Number of cased referred to litigation (more concerning)
  • Cases closed without results (great outcome, still expensive on your part)
  • Cases closed with monetary results (good for them, bad for you)

For criminal cases, the metrics are:

  • Number of cases opened (again – this is concerning)
  • Number of individuals indicted (ouch!)
  • Number of cases closed (more is better – for them)

The outcomes from criminal or civil trials are important. As a trustee or a fiduciary of a Plan, YOU have personal liability. If EBSA finds that a fiduciary is in violation of ERISA, they can, and will, go after the fiduciary personally. This personal responsibility means that you may have to pay fines out of your pocket. In addition to the monetary fines, EBSA has the power to ban individuals from being a fiduciary to an ERISA plan. All of the potential EBSA remedies are stressful and can lead to large fines and big headaches.

The EBSA national office reviews these metrics each year (ten regional and five district offices), and as mentioned, they are used to determine several things. Most importantly for the regional and district offices, meeting these metrics are the critical performance factor for Regional Directors and Mangers. This means bonuses paid and promotions awarded. Meeting the office metrics also determines the number of investigators that are hired. The more money recovered, the more investigators that may be hired. This should be a self-fulfilling prophecy, where more investigators could equal even more money recovered.

Along with the yearly metrics, the EBSA also establishes national enforcement projects to highlight specific Plans for potential audit. There are currently five national enforcement programs that EBSA is enforcing:

1. Rapid ERISA Action Team (REACT)

Media reporting regarding company financial trouble, criminal indictments or bankruptcy triggers an audit.

2. Major Case Enforcement

EBSA has said that it will focus more investigative resources on fiduciaries and service providers with the greatest impact on the protection of plan assets and participant benefits.That means fiduciaries and service providers that have large amounts of plan assets or that administer a large value of benefits.

In 2015 and 2016, EBSA rolled out a pilot, investigative audit program where they focused on both Master Health Plans and Retirement Plans.Of the 10 plans audited, EBSA found a 100% violation rate in the area of fiduciary compliance.Based on this result, EBSA added PEO’s to the audit program.

3. Health Benefit Security Project (HBSP)

This program combines the former comprehensive national health enforcement project with the affordable care act provisions. EBSA is focusing its efforts on returning money to plans and their participants adversely affected by improper administrative practices or the mishandling of plan funds. EBSA continues its ongoing efforts to detect and correct violations found in Part 7 of ERISA.

4. Multiple Employer Welfare Arrangements (MEWAs)

EBSA has devoted significant resources to investigating and litigating issues connected with abusive MEWAs. Many times, these problems are created by unscrupulous promoters who sell the promise of inexpensive health benefits but default on their obligations.EBSA has put particular emphasis on identifying abusive and fraudulent MEWAs.

5. Contributory Plans Criminal Project (CPCP)

The CPCP began in FY2010 as EBSA’s first solely national criminal project. In recognition that millions of American workers who share in the costs of employee benefits by contributing to employer-sponsored retirement and health benefit plans are vulnerable to criminal abuse, the CPCP is designed to address the full panoply of criminal violations relating to contributory plans.

It is much easier to identify and correct fiduciary violations of ERISA prior to an audit by the EBSA. Be sure to utilize the proper experts to guide the operation of your Plans and to identify and correct any potential defects. Once the EBSA gets involved, the process is much longer, with more time required from you and your team, as well as a much greater outlay of costs.

If you would like to speak with one of our consultants about anything discussed in this PEO Insider article please contact us. We’d like to hear from you!

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