Many companies offer employee benefit plans (EBP) that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) and are subject to an employee benefit plan audit. These plans typically include defined contribution plans, which include 401(k), 403(b), and employee stock ownership plans, as well as defined benefit pension plans and health plans.
An employee benefit plan audit is a periodic and independent examination of a company’s benefit plans that are subject to ERISA. Its objectives are to ensure the financial integrity of the plan and to assess whether the plan complies with applicable laws. The audit can also be used to streamline the plan and improve efficiency by identifying strengths and weaknesses of the internal controls involved in financial reporting.
The EBP audit also plays an important role in protecting the interests of employees by ensuring that their benefits are being used appropriately and that their rights are being safeguarded. It’s also an integral component of your company’s responsibility to file an accurate Form 5500.
What is an Employee Benefit Plan Audit?
An EBP audit is an examination of a company’s employee benefit plan financial statements and supporting documentation by an independent accounting firm. The purpose of the audit is to express an opinion on whether the financial statements accurately present the plan’s financial position and results of operations in conformity with generally accepted accounting principles. In addition, the auditor will test compliance with certain provisions of ERISA that apply to the plan. The results of the audit will be reported to the plan sponsors.
Who Needs an Audit?
Generally speaking, a company’s 401(k) plan must be audited every year if it has 120 eligible participants on the first day of the plan year.
Eligible participants include:
- Active employees eligible for the plan (even if they don’t participate),
- Separated or retired employees (including those who have not yet transferred or rolled over their money), and
- Deceased employees with beneficiaries who are entitled to receive plan benefits.
If the number of eligible participants drops below 100, the plan does not require an annual audit but may continue to have one if the reduction in eligible participants is deemed to be temporary.
Audit Deadline and Form 5500
Any employer maintaining a plan covered by ERISA must file a Form 5500 with the Department of Labor (DOL) annually. Form 5500 is part of the reporting and disclosure framework of ERISA, which is designed to ensure all benefit plans are managed according to applicable standards and practices. Form 5500 is due the last day of the seventh month after the plan year ends or on July 31 for calendar year plans. A two-and-a-half-month extension may be filed if necessary.
As part of the Form 5500 filing process, plan sponsors must have their employee benefit plan audited by an independent CPA. The audit helps to ensure that Form 5500 is complete and accurate and that the employee benefit plan is being managed in compliance with ERISA. Audited financial statements must be included with the plan sponsor’s Form 5500 filing, or the filing may not be considered complete and accurate. If the Form 5500 filing is rejected for being incomplete or inaccurate, the plan sponsor may be subject to fines until the filing is corrected.
Plan sponsors need to engage an independent auditor to conduct the EBP audit well in advance of the Form 5500 filing deadline; otherwise, they could face significant fines.
What Must ERISA Audits Include?
The audit report must include, at a minimum, sections detailing the following:
- The nature and scope of the audit,
- The auditor’s opinion on the financial statements and their basis for the said opinion,
- Responsibilities of plan management, including a going concern evaluation,
- Auditor responsibilities, and
- Any supplemental schedules required by ERISA.
Plan Manager Responsibilities
Multiple parties have varying responsibilities during an EBP audit.
Plan managers must acknowledge responsibility for:
- Maintaining a current plan instrument, including amendments;
- Administering the plan and determining the plan’s transactions conform with plan provisions;
- Maintaining participant records to determine benefits due; and
- Providing the auditor with a substantially complete Form 5500 before the auditor’s report.
Plan managers are also responsible for determining if an ERISA audit is required.
The auditor also has important responsibilities. Namely, the auditor must communicate, in writing, any reportable findings concerning the benefit plan’s provisions. Reportable findings include:
- Noncompliance or suspected noncompliance with laws under AU-C Section 250, Consideration of Laws and Regulations in an Audit of Financial Statements;
- Any finding that, in the auditor’s judgment, is significant to those charged with governance of the benefit plan regarding their responsibility to oversee the financial reporting process; and
- Any deficiencies in internal controls that are sufficient to merit management’s attention according to AU-C Section 265, Communicating Internal Control Related Matters Identified in an Audit.
For example, auditors should report any findings that indicate misapplication of the benefit plan’s provisions (e.g., covered compensation, vesting, eligibility, or non-timely contributions). They should also report a failure to perform applicable IRC compliance tests or misstatements in financial reports or disclosures.
That said, it is relatively common for an auditor to discover reportable findings. Fortunately, the IRS and DOL have voluntary corrections programs in place that will allow plan administrators time to correct the issue.
Our Firm Can Assist
Managing employee benefit plans and complying with auditing standards can be complicated and time-consuming. By working with an independent accounting firm, you can ensure you’re meeting all requirements. It’s even more important that you work with a CPA who knows and understands the applicable rules and the responsibilities that accompany them.
This article is intended to provide a brief overview of employee benefit plan audits under ERISA and is not a substitute for speaking with one of our expert advisors. If you’d like to learn more, please contact us.