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Internal Controls For Employee Benefit Plans

The plan sponsor and its trustees must institute internal controls to help ensure that the Plan meets its goals and objectives. The goals and objectives include administration of the plan in accordance with regulations and the plan document, and having accurate and complete financial statements prepared in compliance with DOL and IRS regulations.

Some general controls over financial reporting are:

  1. Accounting procedures that provide for appropriate segregation of duties to reduce the likelihood that fraud can occur.
  2. An internal control system that ensures proper authorization and recording procedures for financial transactions.
  3. Assign personnel that are qualified to perform their duties.
  4. Sound accounting practices to be followed by personnel in performing their functions and duties.

Significant internal controls at the entity level include:

  1. Formation of an employee benefit plan committee designated by the Board of Directors or owners of the Company.
  2. Regular employee benefit plan committee meetings and preparation of minutes.
  3. Familiarity and compliance with plan documents for items such as the definition of plan compensation, inclusion of all eligible groups in the plan, and the proper handling of participation loan requests and benefit payments, including hardship withdrawals.
  4. A written investment policy statement.
  5. Segregation of duties in payroll and plan operations performed by plan administrator and Human Resource Department.
  6. Monitor compliance with laws and regulations.
  7. Monitoring and safeguarding of plan assets.
  8. Review of plan investment choices.
  9. Regular meetings by plan custodian with eligible participants to review account balances and investment options.

Significant internal control activities at the transaction level should include:

  1. Participant enrollments and election forms are complete, accurate and enrollment or changes are applied timely.
  2. Participant data in personnel files and sent to custodian has been approved and maintained securely.
  3. Contributions are deposited timely, as soon as it can be reasonably segregated by sponsor, and applied accurately to participants and their selected investments.
  4. Employee and employer contributions are calculated correctly for each participant, included in that participant’s account and are not in violation of the plan document or IRS limits.
  5. Distribution and loans are approved, calculated accurately and in compliance with the plan document and regulations.
  6. Income is allocated to participant’s accounts accurately, completely and timely and included in correct participant’s account.

The trustees of the plan have a fiduciary responsibility to make sure the plan has implemented effective internal controls. Although, they can make use of third party service providers such as actuaries, third party administrators, investments advisors, custodians and record-keepers to help them in the implementation of these controls, the final responsibility lies with the trustee. This requires continuous oversight of the third party service providers. Trustees of the plan can be penalized for not carrying out their duties and noncompliance can cause significant penalties and potential disqualification of the plan.

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