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Prepping for Your First Employee Benefit Plan Audit

Published on by Dan Holthaus in Benefit Plan Audits, Consulting

Prepping for Your First Employee Benefit Plan Audit

As organizations grow, requirements change rapidly – and one of the biggest challenges for many growing companies and not-for-profits is the need for an employee benefit plan (EBP) audit. In this Q&A, we’ll unpack key requirements, how to prepare for your first EBP audit, what documents you’ll need to collect, and some common mistakes we see.

At what point is an employee benefit plan audit required?

Employee benefit plan audits are required once you reach the milestone of over 100 eligible participants in your plan. However, in the first year, there’s a rule called the 80-120 rule, which allows sponsors to not eclipse the audit requirement until they get over 120 eligible participants.

Once they reach that threshold, they would not get out of that audit requirement until they went back under 100 eligible participants. This allows a plan sponsor to either stay in the audit requirement or out of the audit requirement for a longer period of time so that they’re not flipping in and out, having to do a plan audit one year and not the next year and so on – it allows for flexibility.

Who is an eligible participant?

An eligible participant is going to cover a couple of different groups. First, those who are eligible but not participating – you do have to count those. Second, those who are eligible, who are participating and actively contributing to the plan. The third group is a little surprising to some – you must also count those who are still in the plan, even though they’re no longer employed by the company.

That third requirement makes it very important for a company or organization with a growing plan to get former employees out of the plan, especially as you approach the 120 mark – because you don’t want them counted in that number and triggering the audit requirement.

Since EBP audits can be burdensome and do have a cost associated with them, it benefits sponsor employers to stay out of the audit requirement for as long as they can.

What’s involved in an employee benefit plan audit?

An EBP audit involves two aspects. The first is compliance and the second is financial reporting. Compliance is where we spend the majority of our time as auditors – we’re looking at Department of Labor (DOL) rules and regulations, Internal Revenue Services (IRS) rules and regulations, and the plan document, and, as auditors, ensuring that the plan is adhering to all these rules.

The second piece is the financial reporting – we’re going to issue a financial statement that covers the period under audit, and that statement is going to be attached to the Form 5500 that the plan sponsor files with the IRS and the DOL. The financial reporting is important and has to be done, but it doesn’t require nearly as much time as the compliance aspect of the EBP audit.

What are the main steps in preparing for your EBP audit?

As a plan sponsor, the first step is to start gathering all the documents that are important to the plan, including:

  • plan document
  • adoption agreement
  • any amendments to the plan
  • any correspondence with the IRS or DOL related to the plan
  • summary plan description
  • any administrative documents
  • meeting minutes related to the plan

The meeting minutes are very important to document that you’ve adhered to your fiduciary duty, fidelity bond, fee agreements, and any other sorts of agreements related to the plan.

What are some of the most common plan errors?

Employers may pay their employees many different types of compensation, however, their plan document governs what is considered to be eligible compensation. As auditors, we have to dig in and determine what that eligible compensation is and ensure the employee deferrals and any match or profit-sharing is being computed properly.

Timely remittance of employee deferrals is a hot topic – it’s a key area of focus for the Department of Labor, and they want employers to remit employee dollars as soon as administratively feasible – and that could be as soon as one or two days after the payroll period. Failure to comply with this requirement can incur some steep penalties, so we take a very close look at this as well as the other areas where we often see errors.

What is buildup testing, and how does it work?

One of the unique things that happen in a first-year plan audit is what we refer to as buildup testing. By the time a plan triggers the audit requirement, it’s presumably been in existence for 5 or 10 years and has just never eclipsed the audit requirement of 120 participants. But, in the first year an audit is required, we have to go back and audit some of the data from previous years to ensure that the building up of the total plan balances and the balances in each participant’s account has been done properly.

So, on a sample basis, we’ll go back a number of years and recalculate employee deferrals, employer match, or profit-sharing. We’ll also look at eligibility, some distributions, loans (if the plan allows for loans). Buildup testing provides a comfort level with the beginning-of-the-year balances so that we can audit the current year and years going forward with a high degree of confidence. The good news is that buildup testing is only needed in the first-time EBP audit.

Get started

Planning for your first EBP audit or have questions about what you’re reading? Contact our team of EBP professionals – we’re happy to answer your questions and help you ensure you’re on the right path. We’re here to help.



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