I Went ESOP. When Should I Expect our DOL Audit?

Charlie Metzig

There is a high likelihood that if you are an ESOP, then you will be visited by the DOL (Department of Labor).  This is different than an IRS audit.  The chances from my experience is 20%.  IRS audits are much lower, more like 2%.

Keep all or your formation documents handy, because the audit notice will come 3 years after formation, just when you start to think you’re in the clear.  Notify your attorney, TPA and accountant right away.  If you have engaged professionals in the industry you have nothing to worry about.

One of the main items the DOL will be focusing on is the valuation at the time of the purchase transaction.  This is for obvious reasons, the DOL’s concern is that a former owner sold shares at an inflated price to his employees.  That is the risk, and having a fairness opinion and an outside trustee as part of the transaction decreases your exposure dramatically.

There will be numerous other document requests and the DOL can find other operation defects that need to be addressed, but they are correctable.  Their primary job is being an advocate for participants and they are going to approach the audit of you plan in that light – is this in the best interest of the participants?  They are not concerned about how much work it is for you, but instead protecting participants.  If you also approach the audit understanding that, it will be a much easier process.


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