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benefits magazine august 2015

Avoiding Financial Holes in Plan Operations

A thorough re v ie w o f o p era tio n al procedures w ill help b e ne fit plan m anagers e lim in a te unnecessary spending and have a more e ffic ie n t plan, nipping problem s in th e bud.

by | Joseph A. R einhardt

C ontrolling the cost of benefits without sacrificing plan qual­ ity is a constant challenge. Many employee benefit plan

managers shop their plans, endeavor­ ing to get equal or better services for less cost. But plan managers also can enhance the financial health of their plan and increase overall efficiency by improving their control over opera­ tional procedures and plan costs.

This effort involves taking steps against inefficiency, unnecessary spending, undetected cost overruns, making decisions without sufficient

information and embezzlement. Plan trustees who initiate a thorough review of operational procedures will be able to detect and rectify small problems before they become big problems. This review should encompass:

• Participant files • Third-party administrators • Finance and internal controls • A dm inistrative expense alloca­

tions • Payroll and personnel policies • Purchasing policy • Technology • Plan management.

a u g u s t 2 0 1 5 benefits magazine

plan adm inistration

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Participant Files To help control benefit expenses,

participant files must be as accurate as possible. Procedures should be in place to correctly capture data and then to review and maintain the data going forward. This process includes proper security of electronic files to lessen the possibility of data being changed without proper authorization and to ensure compliance with federal regulations such as the Health Insur­ ance Portability and Accountability Act (HIPAA). Any discrepancies dis­ covered by the outside independent auditor during the course of benefit testing should be reviewed and re­ solved in a timely way.

The Internal Revenue Service (IRS) and D epartm ent of Labor (DOL) both require that accurate, up-to-date files be kept. Employers with missing files can be required to investigate and reconstruct data, often at greater ex­ pense than would have been needed to m aintain the files correctly in the first place.

Third-Party Administrators Use of a third-party administrator

(TPA) to manage the plan, handle a specific benefit or both requires regular

monitoring by the plan administrator of the following:

• A d m in is tr a tio n fees m u st be reviewed to make sure they are in com pliance w ith th e agree­ ment.

• TPA re p o rts need to be co m ­ pared with plan records and eli­ gibility confirmed.

• Benefit processing should com ­ ply with the plan document and/ or fee schedule.

• Bank accounts the TPA uses for benefit payments need to be rec­ onciled on a timely basis and dis­ crepancies promptly resolved.

• The annual Service Organization C ontrol (SOC) 1 re p o rt on the TPA should be reviewed to en ­ sure that TPA internal controls are sufficient.

• O n-site operational reviews by plan administrators should take place at TPAs.

Finance and Internal Controls Financial internal controls are im­

portant for three reasons: 1. To confirm that no one is skim ­

ming off plan assets 2. To reduce opportunities for h u ­

man error

3. To provide confidence in the ac­ curacy of the data.

Internal controls and procedures require periodic review to ensure they are being followed. They may require updating as the organization or its en­ vironment changes. For example, roles may change when funds merge, creating an overlap of duties or lapses in control that may go unnoticed. Computer con­ versions may also result in changing procedures, resulting in unanticipated weaknesses in internal controls. The plans financial records should be up­ dated monthly.

In addition, it is important to review the valuation techniques used to value plan investments. Moreover, it is vital that plan management understand the valuation. Accomplishing this may re­ quire the assistance of the plan’s invest­ ment managers and accountants.

Regular reviews of investment state­ ments help ensure that investment managers are following the plan invest­ ment guidelines and that investment income is being received properly. Ad­ ditionally, investment expenses should be reviewed to assure they are being calculated correctly, pursuant to the investment management contracts. For other administrative expenses, adm in­ istrative expense budgets and forecasts can isolate operational problems and identify when corrective steps are nec­ essary.

Administrative Expense Allocations

Cost-allocation studies—done cor­ rectly and updated at regular inter­ vals—can do much to protect a plan. Cost-allocation methodology should be well-documented in a formal cost­ sharing agreement and reviewed by the

benefits magazine august 2015

plan adm inistration

trustees on an annual basis. That documentation can also prove very useful should DOL make an inquiry.

The cost-allocation study consists of two components: the payroll allocation and the space allocation. The accu­ rate allocation of shared payroll expenses can be achieved by using an employee time-recording system. DOL will, in most cases, look to the underlying docum entation sup­ porting employees’ duties in evaluating the accuracy of the payroll allocation study. If the plan has not implemented an electronic time-recording system, then time sheets should be completed by all plan employees for a period of at least eight weeks. Those time sheets should be used in preparing the payroll allocation study. Remember, as duties change or are reassigned, payroll allocation studies should be u p ­ dated.

The allocation of space to specific employees is based on their payroll allocation. Com m on areas are allocated based on a variety of methodologies. For example, a con­ ference room may be allocated based on usage, while a restroom used by all employees may be allocated based on the payroll allocation study. Once again, when changes to the space occur, the space allocation study should be updated. Administrative expenses that can be allocated to a specific plan generally are paid by that plan. Shared expenses that pertain to the space, such as m aintenance supplies, generally are allocated using the space alloca­ tion. Shared expenses that pertain to the employees, such as the telephone expense, generally are allocated using the payroll allocations.

Payroll and Personnel Policies Most likely, payroll is an organization’s largest administra­

tive cost. To control it, plan managers will want to make sure plan employees:

• Work in the most productive m anner possible • Are properly supervised • Have regular personnel performance evaluations • Take regular vacations, rotating duties to ensure cover­

age. The system should include measures to make sure pay­

roll funds are properly accounted for, to guard against ex­ cess vacation or sick days, and to docum ent promotions and raises.

Developing and using a personnel practices manual is strongly recommended. Make sure it complies with applica­

ble regulations and its policies are being rigorously followed. Also consider employers’ insurance for protection against lawsuits for unfair labor practices, discriminatory behavior, or sexual harassment.

Purchasing Policy Scrutinizing the cost of doing business will often bring

measurable rewards. A vigilant purchasing department should always be on the lookout for ways to save. Here are some steps staff can take:

• Maintain an adequate number of vendors and alterna­ tives to help ensure that individual vendors don’t be­ come complacent and the plan does not become be­ holden to any single vendor.

• Remain open to new offers. • C onstantly shop for value, reliability and the m ost

competitive pricing. • Make sure there is a procedure in place for identifying

and taking advantage of vendors that offer discounts for prompt payment of invoices.

It is also critical to employ an appropriate system of checks and balances to limit opportunities for embezzlement. For example, the plan office should make sure the accounts pay­ able and purchasing functions are segregated. A purchase or­ der system should be in place, and vendor contracts should be reviewed on a periodic basis.

• IRS and DOL require plans to have accurate participant data on file.

• Financial internal controls need to be reviewed and follow ed to guard against embezzlement and human error and help ensure the accuracy of data. Records should be updated monthly.

• Regular studies of how payroll and space are allocated can help protect a plan. Adm inistrative expenses tha t can be allocated to a specific plan generally are paid by tha t plan.

• The cost of payroll, generally the largest administrative expense, can be better controlled by making sure employees are productive, properly supervised and evaluated regularly.

• A purchasing department should always be looking for ways to save.

• Sometimes it's w ise to have an outside consultant assist w ith operational reviews, upgrades and finding opportunities to control costs.

a u g u s t 2 0 1 5 benefits magazine

plan adm inistration

J o s e p h A . R e i n h a r d t , C P A , is an audit partner at Berdon LLP, a full-service accounting and advisory firm with offices in New York City and Jericho, New York. He has more than 30 years

of experience in public accounting. Reinhardt advises employee benefit plans and labor organiza­ tions on strengthening operations, meeting regulatory requirements and planning for growth and development. He graduated from Hofstra University with a bachelor of business administra­ tion degree in accounting. Reinhardt can be reached at [email protected].

T e c h n o l o g y Computer systems need to keep pace with an organiza­

tion’s growth. Does the current system produce accurate re­ ports that aid in decision making? Are plan managers able to extract the data needed to fulfill reporting requirements of governmental agencies?

Someone within the organization should be responsible for monitoring new applications and software packages that can increase efficiency, improve flexibility and meet antici­ pated needs.

A qualified information technology (IT) professional should regularly review disaster planning, data recovery and

security. The organization should be prepared for disaster by maintaining protected backup systems and securing an off- premises storage facility. Alternate resources for technical support must be able to take over during a breakdown or cri­ sis. The plan’s outside auditor should be asked for the results of its IT evaluation, which should have been performed in conjunction with its annual audit of the organization’s finan­ cial statements.

P l a n M a n a g e m e n t Plans require regular, unbiased operational and manage­

ment reviews to evaluate their performance. If “pride of au­ thorship” prevents plan administrators from stepping back and taking a fresh look, an outside consultant should be hired to assist with operational reviews, upgrades and finding op­ portunities to control costs. Also, plan managers should keep in mind that health and welfare plans need to review opera­ tions periodically to ensure compliance with Health Insur­ ance Portability and Affordability Act regulations.

Keeping a close eye on a plan’s operations will have short- and long-term payoffs, allowing managers to run a more efficient, cost-effective operation. It will give them the information needed to avoid rash or unwise decisions in hard times and help circumvent unnecessary spending for operational or infrastructure revamps. By staying on guard and applying a little internal medicine, plan managers will have more resources available to devote to benefits, now and in the future. ft

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