Understanding Payroll Audits in DC Retirement Plans

A payroll audit within a Defined Contribution (DC) retirement plan plays a crucial role in maintaining the integrity and compliance of the plan. Essentially, it is a detailed examination of the payroll records to confirm that all contributions—whether employee deferrals, employer matches, or any other type of deferrals—are correctly calculated and remitted in accordance with the plan's terms and relevant regulations. Payroll audits are not just routine checks; they are vital processes that protect both plan participants and the employer from potential issues that could arise from errors or non-compliance.

The primary goal of a payroll audit is to ensure that contributions to the retirement plan are accurate and timely. This involves verifying that the correct amounts are being withheld from employees’ paychecks and that these amounts, along with any employer contributions, are deposited into the plan on schedule. The audit will typically look at a range of data points, including payroll reports, plan documents, and remittance schedules, to identify any discrepancies or mistakes. Common errors that a payroll audit may uncover include incorrect salary deferral percentages, missed contributions, or miscalculations of employer match amounts [1].

Beyond the verification of contributions, payroll audits also serve as a compliance check. Defined Contribution plans are subject to numerous regulatory requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). A payroll audit helps to ensure that the plan adheres to these rules, reducing the risk of fiduciary breaches. For instance, failing to deposit employee contributions in a timely manner can lead to significant penalties. By regularly conducting payroll audits, plan sponsors can identify and correct issues before they escalate into compliance violations or legal challenges [2].

Moreover, payroll audits are instrumental in safeguarding the financial well-being of plan participants. Errors in payroll processing can directly impact participants’ retirement savings, potentially reducing their future benefits. A thorough audit helps to prevent such outcomes by ensuring that each participant’s account accurately reflects their contributions and earnings. In doing so, employers not only fulfill their fiduciary duties but also build trust and confidence among their employees in the retirement plan offered [3].

In summary, a payroll audit is a critical component of managing a DC retirement plan. It ensures the accuracy and compliance of contributions, mitigates risks of fiduciary breaches, and ultimately protects the retirement savings of participants. Regular audits should be part of every plan sponsor’s fiduciary process to maintain the health and reliability of their retirement plan.

References:

 [1] U.S. Department of Labor. (n.d.). Compliance Assistance Guide - 401(k) Plan. Retrieved from https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance/401k 

 [2] Internal Revenue Service. (2021). Retirement Plans Compliance Resolution System (EPCRS). Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-correction-programs 

 [3] Society for Human Resource Management (SHRM). (2023). Conducting a Payroll Audit. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/how-to-guides/pages/how-to-conduct-a-payroll-audit.aspx 

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