When you’ve reached the end of the Plan year, among other administrative tasks, it is time to compile the census. Assuming the Plan has been operating according to the Plan document throughout the year, the next step is to organize your information. Whether the Plan Sponsor prepares the census or a third party administrator organizes it on the sponsor’s behalf, it is important to review and verify that the census is complete and accurate. The following paragraphs will describe why the census is important, common problems we observe as auditors, and steps the plan sponsor can perform to take responsibility for it. 

Why is it important?

Data contained in the census is used for annual compliance testing required by both the IRS and Department of Labor. This analysis is essential to make sure the Plan remains qualified. The testing will identify any corrective actions needed in order for the Plan to comply with the provisions affecting it. Errors in the census could result in testing inaccuracies and lead to additional testing and corrective action. Issues that go uncovered could affect the Plan’s tax-exempt status. The census is also used by the Plan’s auditor. A smooth audit process starts with a strong census. 

What are common deficiencies to look for?

The information contained in the year-end census should cover the entire plan year, not just as of a point of time during the year. It should also include all employees with wages paid during the Plan year. This means that even if an employee is not employed at the end of the year, not yet eligible for participation, or not making deferrals, they should still be on the census if they received compensation. Although the format of the census and categories of data requested varies by Plan, ensure the census is complete and includes all of the required information.

How to ensure accuracy?

One way to identify potential issues in the census is to reconcile the compensation reported on the census to internal year-end payroll records or the W-3. This is a good check to determine if there are people missing. Keep in mind that only payrolls with pay dates that fall within your Plan year should be included. For example, for a December Plan year end, you would not include the payroll on the census that is paid in January even though the dates worked were in December. It is also recommended that the employee and employer deferral amounts be reconciled to contribution records. Demographic data such as birth dates, hire dates, and termination dates should also be reviewed for accuracy by comparing the information to employee files.

Please contact a member of the Hawkins Ash CPAs employee benefit plan team if you have any questions or need assistance regarding this topic.

Plan sponsors should verify that their administrative and payroll systems reflect the appropriate limits. Communications that specify benefit plan limits should be reviewed for accuracy before materials are given to participants.

View the Employee Benefit Plan and IRA Quick Reference Table.

On July 10, 2019, the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. SAS No. 136 is the result of an effort to improve the clarity of the auditor’s report for ERISA plan financial statements and to include performance requirements specific to auditing ERISA plans.

The SAS provides guidance on the following: 

SAS No. 136 creates a new AU-C Section 703 in the AICPA Professional Standards and creates new reporting requirements for ERISA financial statements when management elects to exclude from the audit certain investment information held and certified by a qualified institution, as permitted by ERISA. The new report format will apply to engagements that formerly were known as “limited-scope” audits. Those audits going forward will be called “ERISA Section 103(a)(3)(C)” audits.

New requirements in SAS No. 136 also include items related to:

SAS No. 136 applies to an audit of a complete set of general-purpose financial statements of employee benefit plans subject to ERISA. It is effective for audits of ERISA plan financial statements for periods ending on or after December 15, 2020 (this would be the December 31, 2021 audit for calendar year-end plans). Early adoption of this SAS is not permitted. 

Please contact a member of the Hawkins Ash CPAs employee benefit plan team if you have any questions or need assistance regarding this topic.

Does your plan correctly defer on compensation paid to your employees? The DOL has noted that plan compensation issues are one of the highest noted deficiencies found during inspections. Many employers do not subject all the required plan compensation to deferrals even though it is listed in the plan document.

Understanding the plan’s definition of compensation is one of the most important aspects of successfully operating your benefit plan. The most precise definition of plan compensation can be found in the Adoption Agreement. The Adoption Agreement is a check the box road map to every aspect of the plan, including what is included in “plan compensation.” Below is an example of a plan compensation definition in an adoption agreement.

The adoption agreement shown above has all W-2 wages as plan compensation. Is your payroll system set up to catch all W-2 compensation? What about the single bonus payroll run at the end of the year? Was it considered plan compensation? According to the definition above, the answer is yes. There are many other year-end amounts that may be paid which may get overlooked as compensation subject to plan deferrals. The following are some common examples:

a. S-corp health insurance

b. Christmas bonuses

c. Funeral allowances

d. Vacation

e. Shift adjustments

f. Bonus true-ups for past jobs

Remember, if it is going on the W-2 as taxable compensation to the employee, it is subject to deferral per the example definition as listed above.

If there is a desire to exclude some specific compensation, the plan document can be modified to include almost any exclusions. See the modified definition example below.

As shown above, the compensation subject to deferral is modified to exclude bonuses and holiday pay. Please consult your plan advisor to assist you with making any modifications to your plan documents.

There are some pitfalls to watch out for:

To help ensure your plan is operating correctly, the plan’s definition of compensation should be included in your company’s internal training for your payroll processors, human resources, and your overall workforce. You can also perform periodic internal checks of the plan operations by picking a small sample of employees periodically throughout the plan year and check their compensation and their elected deferral rate to confirm that deferrals are being withheld in accordance with the definition of the plan document. Take time to also double check those unique situations such as vacation payouts and bonuses as well to ensure that deferrals are handled properly. 

If you have any questions about plan compensation or any other aspects of your plan, please call Hawkins Ash CPAs.