Employee benefit plan audits are crucial for ensuring the integrity and compliance of benefit plans offered by companies. These audits verify that the financial statements of the plans are accurate, the operations are in line with the law, and the participants’ benefits are safeguarded. Understanding the necessity, process, and benefits of these audits is essential for plan sponsors, administrators, and participants.
Employee benefit plan audits are financial examinations that assess the accuracy and compliance of the benefit plans offered by employers. They are vital for maintaining trust, ensuring regulatory compliance, and identifying areas for improvement within the plans. These audits provide valuable insights into the plan’s financial health and operational efficiency, benefiting both the organization and its employees.
What is an employee benefit plan audit?
An employee benefit plan audit is a detailed review conducted by an independent auditor to evaluate the financial statements and operations of a benefit plan. The primary purpose is to ensure that the plan’s financial information is presented fairly and accurately, and that the plan complies with the Employee Retirement Income Security Act (ERISA) and other relevant regulations. The audit helps protect the interests of plan participants by ensuring the proper management of their benefits.
What happens during an employee benefit plan audit?
An employee benefit plan audit is a thorough review of a retirement or health plan’s financial and operational processes to ensure compliance with regulatory requirements. The audit is typically performed by an independent qualified public accountant and includes:
- Reviewing financial statements for accuracy and completeness
- Evaluating internal controls related to plan transactions
- Testing participant data such as eligibility, contributions, distributions, and vesting
- Confirming compliance with Department of Labor (DOL) and IRS regulations
- Identifying any deficiencies or areas of noncompliance that need to be addressed
The goal of the audit is to protect plan participants and ensure the plan is being managed in accordance with ERISA requirements.
When is a plan audit due?
Plan audits are due seven months after the end of the plan year, with an option to file for a 2.5-month extension. For calendar-year plans, the typical deadline is July 31, or October 15 if an extension is filed using Form 5558. The audit must be attached to the plan’s Form 5500 filing. Missing the deadline can result in penalties from the DOL and IRS.
Why is an employee benefit plan audit necessary?
An audit is required for plans with 100 or more eligible participants at the beginning of the plan year. The primary purpose is to:
- Ensure the plan is operating in compliance with ERISA and IRS requirements
- Provide transparency into the plan’s financial condition and operations
- Help plan sponsors identify and correct errors before they become serious compliance issues
- Protect the interests of plan participants and beneficiaries
A well-executed audit can also serve as a valuable tool for improving plan administration and reducing risk for plan sponsors.
Necessity and requirements
Criteria for requiring an employee benefit plan audit
Not all employee benefit plans require an audit. Generally, the need for an audit depends on the size and type of the plan. For instance, plans with 100 or more participants at the beginning of the plan year are typically required to have an audit. However, the 80-120 rule allows plans with between 80 and 120 participants to follow the previous year’s filing status, potentially exempting them from the audit requirement.
ERISA’s audit requirements and exemptions
ERISA mandates audits for large plans to ensure the accurate reporting and safeguarding of plan assets. However, certain exemptions exist, such as for small plans with fewer than 100 participants or plans that only provide health or welfare benefits. Additionally, plans that exclusively invest in certain secure assets, like individual insurance policies, may also be exempt.
Determining if you need to conduct an employee benefit plan audit
To determine whether your plan requires an audit, consider the number of participants, the type of plan, and the nature of the investments. Consulting with a qualified auditor or ERISA attorney can help clarify these requirements and ensure compliance.
Roles and responsibilities
Who is responsible for an employee benefit plan audit
The plan sponsor, typically the employer, is responsible for ensuring that the audit is conducted. They must select and appoint a qualified auditor to perform the audit and oversee the process.
Qualifications for auditors
Auditors conducting employee benefit plan audits must have specific qualifications, including expertise in ERISA and Department of Labor (DOL) regulations. They should also have experience with the specific types of benefit plans being audited. Selecting an auditor with the appropriate credentials, such as a CPA with specialized training in employee benefit plan audits, is crucial.
Roles of company departments and external auditors
Various company departments, including HR, finance, and benefits administration, play a role in the audit process. They provide the necessary documentation, assist in clarifying plan operations, and address auditor inquiries. External auditors, meanwhile, conduct the audit, assess compliance, and provide an independent opinion on the plan’s financial statements.
Audit process overview
What an employee benefit plan audit covers
An employee benefit plan audit typically covers a wide range of aspects, including the plan’s financial statements, participant data, and compliance with regulations. The audit ensures that contributions are accurately recorded; benefit payments are properly calculated, the dependent verification process is followed, investments are appropriately valued, and administrative expenses are justified.
Key areas of focus
Key areas of focus in an audit include:
- Benefit payments: Verifying that benefits are paid accurately and timely.
- Contributions: Ensuring contributions are correctly calculated and allocated.
- Investments: Reviewing the valuation and performance of plan investments.
- Administrative expenses: Assessing the reasonableness of plan expenses.
- Participant data: Confirming the accuracy of participant information.
- Loans and obligations: Evaluating the management of participant loans and other obligations.
Phases of an employee benefit plan audit
The audit process generally involves three main phases:
- Requirements: Gathering necessary documentation and understanding the plan’s structure and operations.
- Fieldwork: The auditor conducts detailed testing of the plan’s transactions and controls.
- Results: The auditor provides a report on the findings, highlighting any issues and providing recommendations for improvements.
Compliance and legal framework
ERISA and DOL regulations
Compliance with ERISA and DOL regulations is a critical component of employee benefit plan audits. These regulations set standards for plan management, fiduciary responsibilities, and reporting. Failure to comply can result in penalties and jeopardize the plan’s tax-qualified status.
What is Form 5500
Form 5500 is an essential filing requirement for most employee benefit plans. It includes detailed information about the plan’s financial condition, investments, and operations. Accurate and timely filing of Form 5500 is crucial, as it is a key document reviewed during the audit.
The 80-120 rule and the short-per-year rule
The 80-120 rule allows plans with 80 to 120 participants to elect to follow the filing requirements of either a large or small plan, potentially affecting the need for an audit. The short-plan year rule applies to plans with less than a 12-month plan year, affecting filing deadlines and audit requirements.
Preparing for an employee benefit plan audit
Organizing documents and understanding fiduciary responsibilities
Preparation is key to a smooth audit process. Plan sponsors should organize all relevant documents, including financial statements, participant records, and plan amendments. Understanding fiduciary responsibilities is also crucial, as fiduciaries are held to high standards of conduct under ERISA.
Operational compliance and internal controls review
Reviewing operational compliance and internal controls helps identify and address potential issues before the audit. This proactive approach can streamline the audit process and reduce the likelihood of findings that require corrective actions.
Benefits and outcomes of an employee benefit plan audit
Objectives and importance of the audit
The primary objective of an employee benefit plan audit is to ensure the financial integrity and regulatory compliance of the plan. Audits provide valuable insights into the plan’s operations and financial health, helping to safeguard the interests of participants.
Benefits to the company and plan participants
Audits can uncover areas for improvement in plan management, leading to better service for participants and potentially reducing costs. They also enhance transparency and accountability, fostering trust among employees and stakeholders.
Enhancing plan operations and efficiency
By identifying inefficiencies and areas for improvement, audits can help streamline plan operations and improve overall efficiency. This can lead to better plan performance and a more positive experience for participants.
Identify the type of EBP audit needed
Not all employee benefit plans are the same—and neither are their audit requirements. Identifying the right type of audit for your plan is the first step to ensuring compliance and avoiding unnecessary delays or penalties.
Types of employee benefit plan audits
The type of audit your organization needs will depend on the structure and purpose of your plan. Below are some of the most common types of employee benefit plan (EBP) audits:
Defined benefit pension plan audits
These audits are for traditional pension plans that promise a specified monthly benefit at retirement. Auditors review actuarial assumptions, funding levels, and participant data to ensure the plan meets both ERISA and IRS requirements.
403(b) plan audits
403(b) plans are retirement plans offered by public schools, nonprofits, and certain religious organizations. If the plan has 100 or more eligible participants, an audit is required. The audit focuses on plan operations, investment activities, and compliance with contribution limits.
Employee stock ownership plan (ESOP) audits
ESOPs are retirement plans that invest primarily in the employer’s stock. Because of their unique structure and valuation requirements, ESOP audits involve a detailed review of stock valuation procedures, share allocations, and fiduciary oversight.
Healthcare and wellness benefit audits
These audits focus on employer-sponsored health plans, wellness programs, and other non-retirement benefits. Auditors evaluate compliance with regulations such as ERISA, COBRA, HIPAA, and the ACA. They also assess how funds are being used to support plan participants.
