I've served labor union clients and multiemployer plans for as long as ERISA has been law, so I have as much experience with DOL audits as anyone. I have always cooperated with DOL auditors, and have found them reasonable and friendly, and the audit process has been routine. And, unless someone filed a complaint against you, you could go years without seeing a DOL auditor.
Not any more!
The Department of Labor has stepped up its enforcement activities dramatically. By one account, DOL wants to audit every union once each three years. (Although, in my experience, they are still not even close to that goal.) And reports from the field are that the auditors are coming in very aggressive and very adversarial.
Areas they scrutinize very carefully are shared expenses, trustee/officer expenses, and meeting/travel reimbursements. Since DOL will be looking, you should make sure now that you've got proper policies and documentation.
1. Shared Expenses. When a fund shares office space, personnel, equipment, and other expenses with other funds and/or a labor union, it is common for certain expenses to be allocated among the funds and union. ERISA §408(b)(2) and PT Exemptions 76-1 and 77-10 allow these transactions to avoid prohibited transaction penalties if certain criteria are met, including:
a. the costs of securing shared office space, services, and goods are assessed and paid on a pro rata basis with respect to each party's use of the space, services and goods, and
b. the plan maintains appropriate records.
On audit, DOL will look at those records, and challenge whether the allocation of expenses is reasonable and in proportion to each fund's use of the space, goods, and services. Avoid problems by reviewing these areas now!
For each category of shared expense, measure how much benefit each fund receives. Allocate payroll and related expenses based on how each person's time is spent. Allocate rent and occupancy based on floorspace used exclusively by each fund. Keep a log at the postage meter, or estimate postage allocations based on approximate volume handled by each fund. Allocate compute rental, and compute operators' costs based on CPU statistics, or other reasonable estimates. No specific allocation method is required, so long as the results are reasonable and defensible. The key is to do the work now, and support your allocation policy is writing, with appropriate workpapers and statistics. Secondly, review the allocation methods periodically, as the plans' operations change. If your last allocation study was more than two years ago, update it now, and adopt a written allocation agreement
2. Travel and Meeting Expenses: DOL is closely scrutinizing expense reimbursements to officers and trustees. Cover yourselves by adopting a formal reimbursement policy, require documentation of all reimbursed costs, and require appropriate review of all expense reports for compliance with the policy. Document trustee approval for all out of town travel expenses. If the fund advances money before the travel, make sure that a complete accounting is made, and that any monies not supported by receipts are reimbursed to the funds. Be sure that fund assets are only used for fund purposes. Especially watch for costs of spousal travel; in most cases, DOL will not allow any payment of spousal costs from fund assets.
[Whether such costs can be paid from union assets is less clear. It would appear that reasonable costs might be justified if the spouse is a necessary participant in an event, and if such expenses are approved by the membership. However, document your case very carefully, because you can be sure this is one cost you will be called upon to defend.]
Trustee/officer Expenses: True War Stories
In one recent DOL audit, the Trustees took the position that an annual out-of town board meeting was justified because the work of the trustees could not be done in a one day meeting." However, DOL claims that the records show the trustees actually met for only three half-day sessions at the out of town location. "There is no basis", DOL claimed, "for concluding that the expenses associated with these meetings were necessary for the operation of the Funds. To the contrary, such expenditures were imprudent and prohibited transactions under ERISA." DOL went on to reject any costs incurred one or more days prior to the start or after the end of the meetings, and all costs related to wives or children of the trustees.
In another case, outside the NY area, DOL insisted that the funds had spent too much money to install a new computer system; the DOL auditor contended that the trustees had been imprudent to incur this cost, because a network of PC's could do the same job a lot cheaper. To settle the case, the trustees were forced to "restore" to the funds the difference in cost between the two options. (If your funds are considering a major equipment acquisition, you should document your consideration of alternative equipment that might be appropriate.)
IRS is also looking closely at expenses. In one case, IRS challenged whether the fund was imprudent in providing a vehicle for the fund administrator's use.
Expect DOL to Challenge You
The lesson is clear: sooner or later, a government auditor will be looking very closely at your trustee/officer expenses, and he will not be reasonable about it. He will challenge expenses that would be considered routine, ordinary and necessary in a business environment. ERISA funds must be used exclusively for the benefit of the participants, so the auditor he will require you to justify how your trustee/officer expenses benefitted the participants, and why they were necessary for the operation of the fund.
