If your company offers a 401(k), profit-sharing, or other employee benefit plan, you may be required to have an annual audit. While this can feel like just another compliance box to check, understanding the requirements, and how to manage them efficiently, can protect your organization and your employees.
Why Employee Benefit Plan Audits Exist
Employee benefit plan audits are required to ensure that plan financial statements are fairly presented and that the plan complies with federal regulations, particularly the Employee Retirement Income Security Act of 1974 (ERISA), overseen by the U.S. Department of Labor (DOL). The DOL’s goal is to safeguard employee retirement assets by ensuring plans are properly managed and reported. Audits help verify that contributions are being deposited on time, participant data is accurate, and plan operations match the provisions in the plan document.
Who Needs an Audit?
Not every plan is subject to audit. The key factor is the number of eligible participants at the beginning of the plan year.
- Large Plan: Generally, if your plan has 100 or more participants with account balances, you are required to have an audit.
- Small Plan: Plans with fewer than 100 participants with account balances typically do not require an audit and can file as a small plan on Form 5500.
There is also an “80–120 participant rule” that allows plans fluctuating around this threshold to maintain their previous filing status, helping employers avoid unnecessary audit requirements from year to year.
What the Audit Covers
An employee benefit plan audit focuses on the plan’s financial statements and the internal controls related to plan administration. The audit typically includes:
- Reviewing participant data: Eligibility, contributions, distributions, and vesting.
- Testing plan transactions: Payroll deductions, employer matches, rollovers, loans, and distributions.
- Confirming plan investments: Valuation, fair presentation, and existence of plan assets.
- Evaluating compliance: Ensuring the plan operates in accordance with ERISA and its own plan document.
Auditors also examine the accuracy and timeliness of employee contribution deposits—a common area where the DOL finds compliance issues.
The Form 5500 Connection
The audit report is filed as part of the plan’s Form 5500 submission to the DOL. A complete and accurate audited financial statement must accompany the filing of a large plan 5500 filing. Missing or deficient audits can trigger penalties or even plan disqualification, which can have significant financial consequences for both the employer and participants.
Selecting a Qualified Auditor
The DOL has emphasized that audit quality matters. Poor-quality audits can lead to enforcement actions and potential penalties. When selecting a CPA firm, employers should look for:
- Specialized experience in employee benefit plan audits.
- Membership in the AICPA Employee Benefit Plan Audit Quality Center.
- A clear understanding of ERISA and Form 5500 requirements.
Working with a qualified auditor not only ensures compliance but can also reveal valuable insights into internal processes, plan operations, and fiduciary responsibilities.
How to Prepare for Your Audit
A successful audit starts with preparation. Employers can streamline the process by:
- Gathering key plan documents: Plan document, trust statements, payroll records, and prior audits.
- Ensuring data accuracy: Verify participant information, contributions, and investment activity.
- Reviewing internal processes: Confirm that payroll deductions and contributions are being deposited promptly.
- Communicating early: Coordinate timelines with your auditor and third-party administrator (TPA).
Proper planning reduces delays and helps prevent costly findings or rework.
Why This Matters
Beyond compliance, a benefit plan audit helps confirm that your company is fulfilling its fiduciary duty to employees. It reinforces the integrity of your retirement plan and provides assurance to participants that their hard-earned savings are being properly managed. A good auditor can provide more than just the audited financial statements. They can provide advice on best practices related to Plan administration which can save time and provide better controls related to your retirement Plan.
Final Thoughts
Employee benefit plan audits may seem complex, but with the right guidance, they can be managed smoothly and efficiently. Understanding when an audit is required, what it involves, and how to prepare can make the process far less daunting.
If your organization is approaching the audit threshold or unsure of your filing requirements, contact us at info@myboyum.com or visit our service page at https://myboyum.com/services/audit-and-assurance/employee-benefit-plan-audits/