1. When is vacation paid to employees? The employer may state that vacation is paid the pay period prior or after the employee’s vacation or it may be paid in the period the employee is on vacation.  It may be paid on the employee’s anniversary date with the company, or on a date stated in the CBA.
   
2. When is vacation being reported – when taken or when paid? The employer may answer that it is reported when taken, that it is reported when paid to the employee, or that it does not report vacation time.

Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

In an article entitled “Fiduciary Duties Created by Project Labor Agreements” in the International Foundation of Benefit Plans’ August 2011 Benefits Magazine, Paul Moorhead of Laquer, Urban, Clifford & Hodge, LLP provides useful guidance for Trustees whose participants work under a project labor agreement.  On the specific nuances of payroll auditing issues involved when nonunion contractors are bound to a Collective Bargaining Agreement, Moorhead states:

The courts have held that trustees may rely on certified payroll records (CPRs) to determine the amount of fringe benefit contributions owed by a contractor.  In Trs. Of the S. Cal. IBEW-NECA Pension Plan v. Tri Signal Integration, trustees audited three years’ worth of the contractors CPRs on construction projects covered by the Los Angeles United School District’s Protection Stabilization Agreement.  The audit resulted in a claim for over $230,000 in unpaid contributions.  The contractor disputed the audit by claiming that the CPRs inaccurately classified the work performed by the employees.  The court rejected this claim, ruling that a contractor cannot escape the admissions made in contemporaneously prepared records by simply denying, after the fact, the accuracy of the CPRs.

To read the full article, click here.

1. How are disputes between the payroll auditors and the employer resolved?
2. Do you have a collection policy?
3. Do you have a Collection Committee, and if so, how does it function?
4. How do you select employers for audit?
5. Do you routinely audit the records of companies of employer trustees?
6. What records do your agreement and declaration of trust allow you to request in the audit?
7. Can the payroll records have real time access to plan records?  How about union records?
8. Who does the audit firm call to receive an immediate decision on a problem with an employer?
9. What is the process if an employer refuses to allow the audit or access to requested records?
10. Are there different Collective Bargaining Agreements (CBAs) or participation agreements?  Are there any standard forms of agreement that override the CBA provisions?
11. Do all employers pay based on hours, weeks, months paid?
12. Do any employers remit only for hours worked?
13. Are employers required to remit for all hours paid or are the hours capped?
14. Are bonuses considered hours paid?
15. Do we send draft reports to the employers after completion of our audit?
16. Do you evaluate your entire payroll audit program annually?

Written by Kurt Needles
Needles & Associates
P: 303.430.4225 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it This e-mail address is being protected from spambots. You need JavaScript enabled to view it

You have completed the audit sample, turned in the results to the fund office [i.e., the Third Party Administrator (TPA)] – now what?  How does the payroll audit program relate to the annual audit?  What procedures should you perform at the Plan level before you issue?  Following are my suggestions:

The Basics
Let me start with the basics.  Some clerks, not knowing what to do when they see a payroll audit, may “file” the report when it hits their desk; literally, they just stick it in the file cabinet and they are done.  The hours may have not been keyed and the employer was not billed for the hours due.

Other times the clerk may have sent the employer a bill, but since the discrepancy is generated outside of the TPA’s normal employer contribution system, a computer-generated follow-up may not happen.  They forget and nothing else happens.  Therefore, the annual auditor should track a sample of payroll audits to ensure they are being keyed and collected.

Can Payroll Audits Serve Any Other Purpose for the Annual Auditor?
I was in a TPA office last year and another CPA firm’s staff auditor was in the file room on a footstool with employer reports spread out on her lap, checking them to the eligibility report.  If the payroll auditor instead uses audit workpapers that are set up using the Plan’s computer-generated reports, the above step becomes obsolete.  Let me explain:

Every Employer Report Form (ERF) is keyed by the Plan’s clerk, and this keypunching is the heart of any employee benefit plan.  If the keyed hours / shifts / dollars are wrong, eligibility is wrong, the actuarial data are wrong, hour / dollar banks are wrong and benefits paid could be wrong.  You could then have a complete disaster.

Instead of getting photocopies of the employer’s remittance, you can ask for the computer-generated output of the keypunched ERF, essentially getting the same data that the staff auditor on the footstool was looking at.  When using this data for your payroll audit workpapers, you test the hours in the system against the employer’s payroll.  You could then jump over the company’s preparation of the ERF and the TPA keypunching of the ERF, and test employer payroll to Plan data.  When you find discrepancies between the two, then you can document who entered the data incorrectly.  I recognize that 99.9% of the time it is the employer, but if you document the accuracy of the Plan’s keypunching, you can keep your fanny off the footstools and save some time.

Typically, you would only find the type of discrepancies where “Joe Sr.” was given “Joe Jr.’s” hours or vice versa, or an employee was set up twice because of a SSN error.  No matter what, these must be corrected.  We have discovered several times where the report was keyed properly, but under the wrong employer, which is not a big deal unless they ask for a withdrawal liability calculation.  If you see more than one small keypunch error in a plan year, it should be treated seriously.  If the little errors go on too long, after a while how can you trust anything in the system?  Also, any keypunch error by the Plan should be documented in the completed payroll audit report.  We include notation of these errors in the quarterly payroll audit report to the Trustees.

How Do I Document the Completed Payroll Audits in My Annual Workpaper Files?
When a payroll audit is completed, the payroll auditor documents the employer, number of participants, hours audited, months audited and discrepancies noted.  Then the annual auditor uses this information to project any error noted in the payroll audits to the contributions taken as a whole.  My Firm documents this using a simple Excel spreadsheet we have named the “Tracking Sheet.”

The Tracking Sheet shows the number of actives from the prior year’s Form 5500.  It multiplies out the sample needed to achieve the audit coverage of 20% to 33%.  It assumes that every active employee worked all 12 months; we multiply that out to get the number of persons the Plan’s clerks keyed for the year.  It calculates the number of man months audited.  This is the documentation for testing the accuracy of data keypunching.  (I don’t think the staff auditor on the footstool tested 4,462 participants back to the report forms.)

This sample Tracking Sheet shows we have audited more than the minimum number of participants needed.  We would need a few more payroll audits to be completed if we wanted to achieve our minimum 20% testing for all 12 months.  Auditing 20% of the people for one month may satisfy your firm’s sampling needs.  You may want to sample 20% for the entire year – that is a decision for the individual firms or audit managers.  The Tracking Sheet also provides access to prior years’ data (tabs in Excel) to document what type of error pattern the group is showing.  That may add to or end the need for additional payroll audits for the year.

I believe this simple Tracking Sheet in the annual workpaper file achieves the documentation necessary to conclude various aspects of the Plan’s audit program.

After the completion of your next payroll audit, implement these basic procedures; they provide a helpful and thorough conclusion for your payroll audit and will allow your findings to provide useful information for future audits and other financial endeavors.

Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Let’s say the trustees of a Plan have decided to request proposals from firms to conduct payroll audits.  What questions should be asked of the payroll audit firms during the proposal process?

This list of 20 questions should be asked of every firm responding to the proposal.  Ideally, these questions should be asked during the proposal process and the firms should be asked to respond to each of the questions in writing.  Those firms selected to present to the trustees should then be asked to comment further on their responses during their oral presentations. 

Following are the 20 questions the trustees should ask; these questions will each be discussed in future blog posts:

1. How many years have you (the primary auditor who would be doing the audit) been doing payroll audits?  How many years has your firm been doing payroll audits?
2. How many audits do you do annually?
3. What percent of your payroll audits have findings?
4. What is the relationship of your audit findings to your audit costs?
5. Do you audit all employees 100% or do you test employees?
6. How long does your typical audit take if the employer has 30 employees?  100 employees?  500 employees?
7. What are the qualifications of your payroll audit staff?
8. Do you charge for travel time?
9. Do you charge a flat fee per audit or an hourly rate?
10. Have you done payroll audits for our industry or for similar industries?
11. What is a typical time period between the assignment of an audit and delivery of the audit report?
12. Will we receive progress reports?
13. Should we have a three or four year cycle to audit all employers?
14. Should all employers be selected randomly for audit?
15. Should we ever change the time period between audits for a given employer?
16. How long does it take to issue a report on a no findings audit?
17. Do you discuss your findings with the employer when you complete your field work?
18. How do you schedule a payroll audit?
19. Do you have a dedicated payroll audit staff?
20. What is the experience level of your payroll audit staff?

Asking these questions early in the search process will allow you to see the depth of the respondents and their ability to have a ready answer for many situations, and will help avert unwelcome surprises during the audit process.

Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

A US District Court in the Eastern District of New York, in the case of Finkel v. Lite Tron Ltd., ruled that a plan administrator can continue with his claim to hold the owner of union and non-union companies liable for unpaid company contribution obligations.

The BNA Pension and Benefits Reporter (www.bna.com), in its November 9, 2010 Issue, summarized the findings of the case:

“According to the court, a controlling corporate officer can be held individually liable under ERISA if he or she defrauds or conspires to defraud a benefit fund of required contributions.  A court must determine if a controlling corporate official’s conduct rose to the level of common law fraud, which requires a showing of: (1) a material false representation or omission of fact, (2) made with the knowledge of its falsity, (3) with the intent to defraud, (4) reasonable reliance, and (5) that damages the plaintiff.”

In this case the judge ruled that the elements cited had been met and the corporate official could be held liable.  There have been many court cases on whether a corporate officer can be held personally liable for employer contributions.  In this case the judge concluded that fraud by the officer could be taken into account in determining whether the officer was personally liable.

For more information on this case, visit www.bna.com.