Payroll Auditing 101 for Trustees of Multiemployer Plans
by Kyle S. Whittemore, Partner
November 6, 2008

The Department of Labor has clearly stated plan fiduciaries have a responsibility to verify the accuracy of employer reporting of contributions to a trust; this fiduciary responsibility goes further than annually auditing administrator records or reconciling cash.  A payroll audit program is a defined schedule of procedures designed to test employer payroll records to verify employers are accurately reporting and contributing to the trust.  When administered properly, payroll audits are an effective and efficient method to ensure trustees meet their fiduciary responsibility.  Trustees' failure to meet this fiduciary responsibility can result in fines or other sanctions.

In addition to helping trustees fulfill their fiduciary responsibility, payroll audits benefit members, employers and administrators.  Payroll audits benefit members by verifying participants are receiving contractual benefits.  Employers benefit by ensuring everyone is competing on a level playing field.  Administrators (and the trust) benefit from third-party review of the administrator's processes, such as verification of contribution rates and completeness of trust documentation, including employer subscriber and participation agreements.

A payroll audit program also enables a plan's certified public accountant to verify the plan's income and accuracy of participant data in order to render an unqualified opinion on the audit of its financial statements and Form 5500 filing.

Components of an Effective Payroll Audit Program

Although programs vary, effective programs include procedures for selection, testing and reporting to the Board of Trustees. 

Selection
The selection process should be designed to provide for testing of: 

• All employers contributing to the trust on a three- to five-year cycle.  When an employer knows the plan will audit its records, it will be less likely to consciously report inaccurately.
• All employers terminating from the trust.  Terminating employers are tested to ensure the accuracy of member benefits and that the employer has paid in full prior to leaving the trust.  Payroll audits of terminating employers can also provide support to ensure accuracy of withdrawal liability calculations. 
• New employers, to ensure they get off on the right foot and have effective trust reporting processes.
• Employers based on direction from the Board of Trustees.  These "for-cause" or "special request" audits can be initiated based on chronic delinquencies, suspicion from Trustees, locals, members, or other employers, or as support for legal proceedings.  It is important to note only Trustees have the authority to request a payroll audit.

Testing
Effective payroll audit programs include procedures to review:

• Labor management contracts (collective bargaining agreements, memoranda and letters of understanding, project agreements, etc.);
• Trust documents (subscribers agreements, participation agreements); and
• Employer records. 

The objective of the payroll audit is to review the employer's reporting processes and procedures to assess the accuracy of the trust reporting.  However, effectively designed and executed payroll audits also include steps to identify bargaining unit work performed by non-union labor that is not reported to the trust.  It is important to note an effective payroll audit program should not be limited to a review of union payroll records.

Finally, a payroll audit should review the contributions for non-bargaining unit employees under special agreements.  In addition to verifying employers are meeting trust rules ("all or none" hours requirements) the payroll audit should confirm non-bargained participants are bona-fide employees and therefore eligible for participation.

Reporting
The final step of an effective payroll audit program involves reporting to the Board of Trustees: 

• The results of testing of individual employers;
• An overview of the status of the testing program; and
• Trust-level issues that require review of the trustees. 

Individual employer reports should be structured to provide the Board a summary of any issues found and a calculation of discrepancies due, including liquidated damages and interest, if part of the trust collection policy. 

Conclusion

Payroll audits are a critical tool for plan fiduciaries to ensure their trust is operating effectively.  Effective payroll audit programs assist trustees in meeting their fiduciary responsibilities, support the annual financial statement audit and help the plan to ensure members are receiving contractual benefits.

Kyle S. Whittemore is the partner-in-charge of Lindquist LLP's payroll compliance department.  He is responsible for the department processes, policies, procedures and quality control systems implemented to meet agreed-upon procedure requirements and efficient compliance testing work standards.  Please contact him at (925) 498-1569 or kwhittemore@lindquistcpa.com with questions. 


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