Stated simply, a plan compliance review is examination of the design and administrative operation of the plan conducted to identify issues or errors that could put the plan fiduciaries and/or sponsor at risk. The goal is to identify and self-correct any issues before they grow and become more expensive — and, according to the analysis by Greensfelder Hemker & Gale PC, before a governmental agency or plaintiff makes claims against the plan for an unaddressed situation.
The Risks
There are consequences if a plan fails to comply with the Internal Revenue Code and ERISA. Plans that do not comply with the tax code can lose their tax-advantaged status, and those that do not meet ERISA requirements could face enforcement actions by the Department of Labor (DOL) and maybe even lawsuits for benefits and/or breaches of fiduciary duty.
And when there are compliance violations, plan sponsors and plan fiduciaries generally bear the financial burden, the analysis points out. “These are real risks. There are many real-world examples of plan sponsors and plan fiduciaries that have encountered problems” in these areas, it says.
The motivations for undertaking such a review are clear: failure to design and operate a plan in compliance with all applicable laws could result in the plan’s sponsor and/or fiduciaries having to pay losses, interest and penalties in connection with any errors — not to mention potential litigation risks.
How Often?
The analysis suggests that at least once a year plan sponsors should review their plans with legal counsel to ensure that any plan design changes the law requires (and any other design changes made during the plan year) have been incorporated into the plan documents properly. Other aspects should be performed regularly, but can be conducted less frequently.
Self-Detect and Self-Correct
“It’s always better to self-detect and self-correct — before outside parties discover an error,” the analysis says. Performing compliance reviews more often keeps errors from being outstanding for as long a time, and also lessens the magnitude and cost of errors that are detected. In addition, the analysis points out that many errors (especially those identified within a couple of years) can be addressed through self-correction without having to make a formal disclosure to a government authority, nor seeking the approval of one.
Self-correction also offers the advantage of it not entailing any fee or penalty. Such is not the case when the IRS or Department of Labor are involved — if they detect an error during an audit or enforcement action, they will seek to impose penalties. And those penalties can be very large.
Pre-emptive Strike
“The compliance review process itself raises awareness of all of the rules and requirements that apply to the plan,” says the analysis. And this heightened awareness, it argues, can serve as a preemptive strike that makes it less likely that an error will take place at all.
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