In today’s world, Trustees are faced with a variety of challenges when administering multiemployer benefit plans. One of the most important challenges of a plan is funding. Multiemployer benefit plan funding is primarily accomplished through remittances from contributing employers as required by the terms of a collective bargaining agreement (CBA).
Section 405 of the Employee Retirement Income Security Act (ERISA) states that a trustee will not be liable for an act or omission if the trustee acted prudently and in the interest of participants and beneficiaries. This includes the responsibility to determine that the required contributions are being made by contributing employers and collected by the plan. Trustees of many multiemployer benefit plans establish guidelines for themselves, plan professionals and administrative staff to follow when monitoring and collecting contribution income. These guidelines are usually detailed in a written collection policy. The process of conducting payroll audits is an essential part of an effective collection policy.
Payroll auditing (sometimes referred to as compliance auditing) is the process of examining the records of a contributing employer to determine if that employer has made the contributions to the plan as required by the collective bargaining agreement. In addition to helping trustees fulfill their fiduciary duties to the plan, payroll audits can be relied on by the plan’s financial statement auditors to gain assurance that all required employer contributions have been remitted to the plan when conducting their audit.
Many multiemployer benefit plans currently conduct payroll audits of contributing employers. However, not all payroll audit programs are as effective as others. A few factors to consider when developing an effective payroll audit program are:
Role of Trustees
The trustees of a plan have the ultimate responsibility for conducting an effective payroll audit program. It is important that the trustees have a general understanding of the process of conducting a payroll audit and the procedures performed by the payroll auditor. The trustees often delegate the responsibility of administering a payroll audit program to the administrator of the plan. However, the trustees should receive regular reports from the payroll auditors, the administrator and legal counsel in charge of collections as to the status of the payroll audit program.
Payroll Audit Administration
As noted above, the trustees of a plan often delegate the responsibility of a payroll audit program to the administrator of the plan. In some instances, an administrator of the plan may not have the time or the background to manage a payroll audit program. The plan may employ a separate individual to manage the payroll audit program. Regardless of the individual responsible for the day to day administration of the payroll audit program, the individual should have a working knowledge of the CBA and some knowledge of the law that affects payroll audits and collections.
Internal or External Auditors
The decision of who will conduct payroll audits rests with the trustees of the plan. For some plans, it may be more advantageous to plan personnel to conduct payroll audits while other plans may contract with an external firm to conduct payroll audits. The external firm may be a CPA firm or another firm that specializes in payroll audits. Both arrangements have their advantages and disadvantages. There are many factors to consider when choosing between the use of internal or external auditors. These factors include the costs to conduct the audits, control of audit procedures and the training and turnover of individual payroll auditors.
Review of Plan Agreement and CBA
For a payroll audit to be effective, the individual conducting the payroll audit will need to review all pertinent records to verify that the correct contributions have been remitted to the plan. These records are not restricted to only payroll records. In many instances, the payroll auditor may need to review other employer records such as cash receipts, disbursement journals and the general ledgers to verify the accuracy of the employer’s remittances to the plan. The trustees should review the plan agreement and CBA to verify these documents allow the payroll auditor to gain access to the records necessary to conduct an effective payroll audit.
Payroll Audit Selection
The selection of which contributing employers to audit and how often they should be audited are common questions for many plan trustees. Unfortunately, the answers to these questions may be entirely different from one plan to another. The Department of Labor (DOL) has no specific established requirements for conducting payroll audits. The DOL only requires trustees to pursue delinquent or deficient employer contributions to the plan. The plan’s trustees have ultimately responsible for the selection and frequency of audits conducted.
For an effective payroll audit program, a portion of payroll audits conducted each year should be selected on a random basis to ensure that all contributing employers are being audited. The number of random audits conducted each year may vary from plan to plan. Some plans determine the number of random audits to be conducted each year to ensure that the entire population of contributing employers is audited over an established cycle. However, this may not be cost-effective based on the number and geographic location of contributing employers of a larger plan. In those instances, the trustees might require a set number of random audits each year be performed.
In addition, a contributing employer may be selected for a payroll audit outside of the random selection process due to certain circumstances. These circumstances include but are not limited to:
- Employers in which the plan has identified as delinquent in making contributions.
- Employers suspected of not making the appropriate contributions to the plan.
- Employers identified as going out of business or withdrawing from the plan.
- New employers.
As part of a plan’s overall collection policy, a payroll audit program can be a useful tool for trustees to prudently and in the interest of participants and beneficiaries determine that the required plan contributions are being made by contributing employers. Although there is no “one size fits all” when it comes to payroll auditing, with the proper up front planning and consideration, plan trustees can develop an effective payroll audit program.
Written by Andrew “Andy” J. Hein, CPA | Partner