What Is an Eligibility Audit in a DC Retirement Plan?

An eligibility audit within a Defined Contribution (DC) retirement plan is an essential process designed to verify that all eligible employees are correctly identified and enrolled in the plan according to the established eligibility criteria. This audit helps ensure that the retirement plan is administered in full compliance with its governing documents and relevant regulations, thereby protecting both the employer and the employees.

The key objective of an eligibility audit is to review and confirm that the eligibility criteria—such as minimum age, length of service, and employment status—are being properly applied. For example, if a plan stipulates that employees must be at least 21 years old and have completed one year of service to participate, the audit would involve verifying that all employees meeting these criteria are indeed enrolled and that no ineligible employees have been mistakenly included [1]. This thorough examination helps to catch and correct any discrepancies, such as employees being wrongly excluded from participation or others being improperly enrolled.

One of the most significant reasons for conducting an eligibility audit is to avoid potential compliance issues under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Incorrect application of eligibility rules can lead to significant compliance risks, including plan disqualification or penalties. For instance, failing to enroll eligible employees in a timely manner could result in missed contributions, which the employer may be required to make up, potentially with interest or penalties [2]. Regular audits help to minimize these risks by ensuring that eligibility criteria are consistently and accurately applied.

Beyond compliance, an eligibility audit also supports the employer's fiduciary responsibility to act in the best interests of the plan participants. Ensuring that all eligible employees are included in the plan maximizes their opportunity to save for retirement, which is a key aspect of the employer's duty as a plan sponsor. Moreover, a well-conducted eligibility audit reinforces employee confidence in the plan, as it demonstrates the employer’s commitment to managing the plan fairly and equitably.

Eligibility audits typically involve reviewing various documents and records, including employee census data, payroll records, and plan enrollment forms. Auditors will cross-check this information against the plan’s eligibility requirements to identify any inconsistencies. Any issues found during the audit should be promptly corrected, and measures should be put in place to prevent similar errors in the future [3].

In summary, an eligibility audit is a critical practice for maintaining the integrity and compliance of a DC retirement plan. By ensuring that all eligible employees are properly enrolled according to the plan’s terms, employers can fulfill their fiduciary duties, avoid compliance pitfalls, and provide employees with the full benefits of participation in the retirement plan.

References:

 [1] U.S. Department of Labor. (n.d.). Selecting and Monitoring Service Providers. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/selecting-and-monitoring-service-providers.pdf

 [2] Internal Revenue Service. (2023). 401(k) Plan Fix-It Guide. Retrieved from https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide 

 [3] Society for Human Resource Management (SHRM). (2023). Conducting an Eligibility Audit for Retirement Plans. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/how-to-guides/pages/how-to-conduct-an-eligibility-audit-for-retirement-plans.aspx 

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