Prioritizing Internal Controls

Have you thought about the internal controls for your retirement plan lately?

While internal controls are often put into place to guard a company’s financial assets, sometimes the company’s retirement plan is overlooked. IRS agents have realized that by asking key questions of the plan sponsor up front, they can determine the probability of finding errors during an audit. Determining the strengths and weaknesses of internal controls allows the auditor to refine the focus of the audit to concentrate on areas where he is more likely to find problems.

Instituting internal procedures for administering the retirement plan that include checks and balances will help a company minimize the threat of both inadvertent errors and intentional theft. Errors involving retirement plans can be categorized into two main areas- financial mistakes and errors resulting from failure to follow plan provisions. Often more attention is paid to the financial side because it is easier to follow cash through the accounting system, but mistakes in following plan provisions can also be costly. Such mistakes run the gamut from not understanding what is required under the document to intentionally disregarding the document.  

Maintaining written procedures and checklists for key plan processes are the best practice. Since companies and retirement plans come in all shapes and sizes, the procedures must be tailored to fit the particular environment. A good place to start when establishing internal controls is the beginning - the plan’s eligibility requirements and communication to the new participants.

Eligibility and New Enrollees

Procedures surrounding eligibility should define:

  • The plan’s eligibility requirements and entry dates
  • The process to identify the newly eligible employees for each upcoming enrollment date
  • The process for monitoring unusual situations such as part-time employees who may not work enough to become eligible their first year and individuals who may need to wait longer due to an age requirement
  • The time and method of communicating the plan to the newly eligibles
  • A list of the items to be provided to newly eligibles including:
    • Summary Plan Description
    • Beneficiary Designation Form
    • Enrollment Form or information on the process
    • Investment information
    • Participant Fee Disclosure Notice
    • Qualified Default Investment Alternative Notice (if applicable)
    • Safe Harbor Notice (if applicable)
  • The person or department responsible for notifying the newly eligibles
  • A tracking mechanism to record the date the materials were furnished to newly eligibles
  • A process for tracking the deferral percent chosen and how it is set up on payroll
  • Confirmation that deferrals started properly by checking the first payroll after entry

We suggest maintaining an enrollment folder (electronic or paper) including the various forms and materials that are needed. The company should also keep records to prove that the employee was contacted and provided information. For a small company, the participant could sign an acknowledgement or return the 401(k) form with signature whether or not the employee chooses to defer. For larger companies where an outside vendor sends out enrollment packets, information on the packets sent should be stored on-line in the audit trail for the participant. The vendor may also have some type of enrollment report that can be downloaded.

Properly handling eligibility is important because the consequence for not allowing a participant to enter the plan on time can be costly. For example, in a 401(k) plan the usual correction for late enrollment is for the company to put in a fully vested contribution for the missed participant equal to 50% of the plan’s average deferral rate for the year.

Contribution Deposits

Once eligible participants are enrolled, the next task is to submit contributions. Deferral contributions for 401(k) plans for small companies (under 100 employees) must be deposited within 7 business days. While a guideline has not been provided for companies with more than 100 employees, it is presumed that this deadline will be less than 7 days.

Procedures related to contribution deposits should define:

  • Process for submitting deferrals to the vendor
  • A schedule of pay dates and the expected deposit dates
  • Process for balancing the deferrals submitted to the payroll records
  • Process for determining if new participants have been properly set up on payroll with their chosen deferral percentages
  • The individual with primary responsibility for making deposits
  • The back-up plan or person for contribution deposits
  • Process for handling manual checks and adjustments

One common problem we see is late deposits due to either unexpected absences or vacations. Payroll is a sensitive area and small companies may not have an assigned back-up person. However, if the key person is going on vacation it may be possible to submit the deferral file earlier than usual with a prospective processing date scheduled.

Timely depositing the deferrals is very important. Late deposits must be reported on the Form 5500. If deferrals are deposited late, the participants need to be made whole by crediting earnings to their account. The error is also reported on Form 5330 and an excise tax is assessed.

Other Areas

Some other areas where internal controls are important are:

  • Process for deferral percent changes
  • Monitoring deferral limits
  • Proper calculation of company contributions
  • Distribution procedures (notification and forms required and vesting confirmation)
  • Hardship withdrawal procedures (if applicable)
  • Loan procedures for new loans, loan set up, and monitoring (if applicable)
  • Forms and notices due dates

How RMS Can Help

The annual report that RMS prepares for your plan includes information that helps ensure that your plan operates according to the plan document. The Executive Plan Summary is a useful reference guide for your plan with plan specific information regarding eligibility, contributions, distributions, and other provisions. The Administrative Reminders section provides a list of the items that must be given to newly eligible employees as well as the compensation, deferral, catch-up, and contribution limits for the plan year and important annual deadlines. The Employee Census can be used to review employees hired in a prior year who have not yet met the plan’s eligibility requirements. We can also assist with questions you may have regarding the day-to-day operation of your plan.


Laura joined RMS as an Account Executive in January, 2008. She is a 1985 graduate of Bellarmine University with a Bachelor of Arts in Accounting. Laura is a Certified Public Accountant and a Qualified 401(k) Administrator. She started her career in public accounting at a local firm focusing on physician practices and their retirement plans. She then moved to Benefit Actuaries, where she was an Account Executive, and then to ADP Retirement Services as Director of Operations. Laura has over 30 years of experience working with the various aspects of defined contribution plans, including plan design, consulting, compliance testing and plan administration for plans of all sizes. She is a member of the Louisville Employee Benefits Council, the Kentucky Society of CPAs, the ESOP Association, and the American Society of Pension Professionals & Actuaries, and holds the Employee Stock Ownership Plan Administration certificate through ASPPA. Laura devotes most of her time to ESOP and defined contribution plan administration and consulting.

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