Preparing for a Compliance Audit: A Guide for Labor Unions and Employee Benefit Plans

Larry Beebe, CPA

In addition to your financial statement audit, your union and/or benefit plan may be selected for an audit by the Department of Labor (DOL), the Internal Revenue Service (IRS), or the Employee Benefit Security Administration (EBSA). While these audits originate from different governmental departments, they often review and scrutinize many of the same areas.

Before we look at how to prepare for a compliance audit, let’s look at the different types:

Union Compliance Audits
The Office of Labor Management Standards (OLMS) of the DOL conducts compliance audits of unions with the purpose of:

  • Ensuring that the union is complying with the conduct provisions of the Labor Management Reporting and Disclosure Act (LMRDA);
  • Investigating potential violations of the law;
  • Providing assistance to help unions meet statutory requirements.

Benefit Plan Compliance Audits
The IRS is responsible for ensuring that plan sponsors comply with the tax laws governing retirement plans and will audit your retirement plan accordingly. Since the EBSA is responsible for administering and enforcing the provisions of the Employee Retirement Income Security Act (ERISA), which provides protection for participants and beneficiaries of employee benefit plans, and EBSA compliance audit will review your operations and processes to ensure that your plan follows all ERISA statutes and legislations.

What Triggers a Compliance Audit?
An audit can be triggered by anything from a participant complaint to a late Form 5500 or LM-2 filing. Obvious discrepancies within your IRS and DOL filings are also a red flag and will trigger scrutiny. Finally, the DOL does conduct random audits, and your union or benefit plan could be selected by chance, not due to any mistake, complaint or glaring oversight.

Preparing for a Compliance Audit
Regardless of who is conducting the audit and what entity is under review, there are three key steps you can take to prepare:

  1. Establish and update written procedures. Your union and all associated benefit plans should have written procedures that are followed to implement internal controls and to establish goals and objectives. Types of recommended written policies include:
    ~Investment
    ~Conflict of interest
    ~Whistlebower
    ~Record retention
    ~Disaster recovery plan
    ~Expense reimbursement
    These are just a few of the types of policies you need (more comprehensive information is available in the Trustee Handbook, published by the International Foundation of Employee Benefit Plans). The absence of policies or poorly written policies are indicators to the regulators that you do not have adequate documentation for your plan or union and that you may not be adhering to all governmental regulations.
  2. Ensure that internal control systems are in place and operating properly. You must establish internal control systems – segregation of duties, appropriate levels of review, necessary reconciliations – to ensure that assets are protected from loss and theft. Not only is it import to establish internal controls, it is also essential to have a system to periodically test your controls to make sure they are operating as designed.
  3. Conduct an internal audit. The primary way you can be sure you are ready for a DOL or IRS compliance audit is to actually do an audit. This can be done by an insider or it can be done by an external party, such as a CPA or attorney who is familiar with the appropriate regulations.  The party performing the audit can review and test the areas the regulators are likely to review and provide suggestions for modifications for your plan or union to help you prepare for any potential future compliance audits.

Work with your accountant to make sure your IRS and DOL filings are accurate and submitted on time in order to help prevent a compliance audit, and work with your CPA and your legal counsel to establish and implement proper operations in order to maintain compliance. If you do find yourself under regulatory scrutiny, utilize the steps above to get your operations in top shape and to help ensure that you will come away from the audit with no fines, back payments, or other disciplinary actions.

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