Understanding Benefit Plan Audit- Comprehensive Guide | OH IN KY

Understanding Benefit Plan Audits – A Comprehensive Guide

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Table of Contents

 

  • Types of Plans Requiring an Audit

    Several different retirement plan types may require an annual audit under certain circumstances. Below is a summary of the most common plan types, including:

    401(k) Plans

    A 401(k) plan is a popular type of defined contribution retirement plan that allows employees to save and invest a portion of their paycheck before taxes are taken out. Employers often match contributions up to a certain percentage, enhancing the employee’s savings. These plans are subject to strict regulatory oversight, and those with 100 or more eligible participants generally require an annual audit. The audit ensures that contributions, distributions, and other transactions are correctly handled and that the plan complies with the Employee Retirement Income Security Act (ERISA) and other applicable laws.

    403(b) Plans

    Like 401(k) plans, 403(b) plans are retirement savings plans designed primarily for employees of public schools, certain non-profit organizations, and other tax-exempt entities. Participants can contribute a portion of their salary to the plan, often with employer matching. Like 401(k) plans, 403(b) plans with 100 or more eligible participants usually require an annual audit. The audit process for 403(b) plans involves verifying contributions, ensuring compliance with plan terms, and confirming that the plan operates according to federal regulations.

    Pension Plans

    Pension plans, also known as defined benefit plans, promise participants a specific monthly benefit upon retirement, usually based on factors such as salary history and years of service. These plans are more complex than defined contribution plans like 401(k)s and are subject to rigorous audit requirements. The audit of a pension plan includes verifying that the plan is adequately funded to meet future obligations, ensuring that benefits are calculated and distributed correctly, and confirming that the plan complies with ERISA and other regulatory requirements.

    Profit Sharing Plans

    Profit-sharing plans are a type of defined contribution plan where employers share a portion of their profits with employees, typically through contributions to retirement accounts. These plans offer flexibility, as contributions are based on the company’s profitability. Like other large benefit plans, profit-sharing plans with 100 or more eligible participants are generally subject to an annual audit. The audit ensures that contributions are correctly allocated according to the plan’s terms and that the plan complies with regulatory requirements.

    ESOPs (Employee Stock Ownership Plans)

    Employee Stock Ownership Plans (ESOPs) are unique benefit plans that give employees an ownership interest in the company through stock. Companies use ESOPs as a tool for employee motivation and retirement savings. Due to the complex nature of these plans, which involve company stock valuation and compliance with ERISA and tax laws, ESOPs with 100 or more eligible participants typically require an annual audit. The audit process for an ESOP includes reviewing the valuation of the company stock, ensuring that transactions are conducted at fair market value, and verifying that the plan is managed in the best interest of the participants.

    In summary, various types of employee benefit plans may require annual audits, depending on the number of participants and other factors. These audits ensure compliance with federal regulations, accurate financial reporting, and protection of participant interests.

    Regulatory and Legal Framework

    Navigating the regulatory and legal framework is crucial for successfully administrating and complying employee benefit plans. Understanding the key regulations and guidelines can help ensure that your benefit plans meet all legal requirements and avoid potential penalties. Here are the main components of the regulatory and legal framework:

    ERISA (Employee Retirement Income Security Act)

    ERISA is a federal law that sets minimum standards for most voluntarily established retirement and health plans in the private industry to protect individuals in these plans. Enacted in 1974, ERISA requires plans to provide participants with plan information, including essential facts about plan features and funding. The law also sets minimum participation, vesting, benefit accrual, and funding standards. ERISA establishes fiduciary responsibilities for those who manage and control plan assets and grants participants the right to sue for benefits and breaches of fiduciary duty.

    Department of Labor (DOL) Regulations

    The DOL plays a critical role in enforcing ERISA and other related regulations. The Employee Benefits Security Administration (EBSA), a DOL division, oversees ERISA’s administration and enforcement. DOL regulations require plan administrators to give participants information about their plans, including a summary plan description (SPD), annual reports, and other disclosures. The DOL also sets standards for plan audits, ensuring they are conducted by independent, qualified public accountants.

    Internal Revenue Service (IRS) Guidelines

    The IRS provides additional regulatory oversight for employee benefit plans, focusing primarily on tax qualification requirements. The IRS sets rules regarding the tax benefits of retirement plans and enforces compliance through its guidelines and regulations. Plans must meet certain requirements to be considered tax-qualified, including contribution limits, distribution rules, and non-discrimination tests to ensure that plans do not favor highly compensated employees over others. Compliance with IRS guidelines is essential to maintain the tax-advantaged status of retirement plans.

    Form 5500 and Its Relevance

    Form 5500 is an annual report filed with the DOL, IRS, and Pension Benefit Guaranty Corporation (PBGC) that provides information about a plan’s financial condition, investments, and operations. The form is a critical tool for the DOL and IRS to monitor compliance with ERISA and the Internal Revenue Code. Filing Form 5500 accurately and on time is essential to avoid penalties and ensure that the plan remains in good standing. The form must include a financial statement and an opinion from an independent qualified public accountant, making the audit process a vital component of the overall compliance effort.

     

    By adhering to these regulatory and legal requirements, plan administrators can ensure their employee benefit plans are compliant, thus protecting the interests of plan participants and avoiding costly penalties.

    Understanding the Audit Process

    Conducting benefit plan audits is essential to ensure compliance with various regulatory requirements and to maintain the integrity of the plan. However, several common issues and errors can arise during these audits. Identifying and addressing these problems is crucial for the smooth operation and compliance of the benefit plan. Here are some of the most frequent issues encountered in benefit plan audits:

    • Non-compliance with Plan Documents – One of the most common issues is failing to adhere to the provisions outlined in the plan documents. This can include discrepancies between the plan’s written terms and its actual operation. Examples include not following the plan’s eligibility criteria, incorrect application of vesting schedules, or improper handling of loans and distributions. Ensuring that the plan operates according to its terms is essential to maintain compliance.
    • Incorrect Contribution Limits and Handling Excess Contributions – Plans often face challenges in managing contribution limits. Errors can occur when participant contributions exceed the legal limits set by the IRS, leading to excess contributions. Such errors need to be corrected promptly to avoid tax penalties. Accurate tracking and monitoring of contributions are vital to ensure compliance with contribution limits.
    • Distribution Errors—Processing distribution errors can significantly impact participants and the plan’s compliance status. These errors can include incorrect calculation of distribution amounts, failure to follow required minimum distribution rules, or improper tax withholding. Ensuring accurate and timely distributions according to the plan’s terms and regulatory requirements is crucial to avoiding penalties and participant dissatisfaction.
    • Reporting and Disclosure Deficiencies—Failure to meet reporting and disclosure requirements is another common issue. This can include inaccuracies or omissions in Form 5500 filings, not providing participants with required notices and disclosures, or failing to disclose important plan changes. Compliance with reporting and disclosure requirements is essential to maintaining transparency and trust with plan participants and regulatory bodies.
    • Plan Operational Errors – Operational errors can occur in various aspects of plan management, such as failure to deposit participant contributions promptly, incorrect allocation of investment earnings, or mishandling plan expenses. These errors can compromise the plan’s compliance and financial health. Implementing robust operational controls and regular audits can help prevent and correct these errors.

    Preparing for the First Plan Audit

    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 covers a couple of different groups. First, there are those who are eligible but not participating—you do have to count those. Second, there are those who are eligible, who are participating, and who are 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 cost money, sponsor employers should avoid the audit requirement for as long as possible.

    What’s involved in an employee benefit plan audit?

    An EBP audit involves two aspects: compliance and financial reporting. As auditors, we spend the majority of our time on compliance—we examine Department of Labor (DOL) rules and regulations, Internal Revenue Service (IRS) rules and regulations, and the plan document and ensure that the plan adheres to all these rules.

    The second piece is the financial reporting—we’re going to issue a financial statement covering the period under audit, and that statement will 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 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 existed 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 correctly.

    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, and 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 for the first EBP audit.

    Common Issues and Errors in Benefit Plan Audits

    There are several common issues and errors frequently emerge, which can significantly impact the compliance and effectiveness of the plan. These issues often necessitate corrective measures to avoid penalties and ensure the plan remains in good standing.

    Non-compliance with Plan Documents

    • Non-compliance with plan documents is one of the most critical issues uncovered during benefit plan audits. Plan documents serve as the blueprint for the operation of the benefit plan, detailing eligibility criteria, contribution levels, vesting schedules, distribution processes, and more. When a plan is not operated according to these established rules, it constitutes non-compliance. This can occur in various forms, such as failing to adhere to the eligibility requirements, improperly calculating contributions based on outdated formulas, or ignoring the prescribed vesting schedule. Non-compliance can lead to significant penalties and may require corrective actions to bring the plan back into alignment with the governing documents.

    Incorrect Contribution Limits and Handling Excess Contributions

    • The IRS imposes annual contribution limits for retirement plans, and adherence to these limits is crucial. Errors in contribution limits often arise when the employer or plan administrator miscalculates the amount that participants can contribute, leading to excess contributions. Mishandling excess contributions—either by failing to return them within the allowable time frame or by not following the proper procedures—can result in tax consequences for participants and penalties for the plan. Corrective measures typically involve refunding excess contributions to participants and filing appropriate correction notices.

    Participant Eligibility and Contribution Errors

    • Determining participant eligibility and accurately calculating contributions are fundamental aspects of benefit plan administration. However, errors in these areas are common. Eligibility errors occur when participants who do not meet the plan’s criteria are allowed to contribute or when eligible participants are mistakenly excluded. Contribution errors happen when the amounts contributed on behalf of participants are either too high or too low, due to misinterpretation of compensation definitions, incorrect application of matching formulas, or simple administrative mistakes. These errors can lead to discrepancies in participant accounts, requiring corrections and potential financial adjustments.

    Distribution Errors

    • Distribution errors involve mistakes in the process of disbursing funds from the plan to participants. These errors can take various forms, such as incorrect calculations of the distribution amount, improper tax withholding, or failure to distribute funds in a timely manner. Errors in distributions can have serious tax implications for participants and may require the plan to undertake corrective distributions or adjustments. In some cases, the plan may need to file corrected tax forms and issue new 1099-Rs to participants.

    Reporting and Disclosure Deficiencies

    • Accurate and timely reporting and disclosure are essential components of benefit plan compliance. Reporting deficiencies often arise when plans fail to file required forms, such as Form 5500, within the specified deadlines or when they submit incomplete or inaccurate information. Disclosure deficiencies occur when participants are not provided with the required information about the plan, such as summary plan descriptions (SPDs), annual reports, or fee disclosures. These deficiencies can lead to penalties from regulatory agencies and may undermine participants’ understanding of their benefits. Corrective actions typically involve submitting corrected filings, issuing the appropriate disclosures to participants, and implementing procedures to ensure future compliance.

    These are the common issues and errors in benefit plan audits which underscore the importance of meticulous plan administration and adherence to regulatory requirements. Addressing these issues promptly and implementing robust compliance practices can help avoid costly penalties and ensure that the plan operates effectively and in the best interest of its participants.

    Choosing the Right Auditor

    A qualified benefit plan is designed to help guard and protect an employee’s retirement benefits, whether that be a defined contribution, benefit, or health and welfare plan. Generally, most employee benefit plans with more than 100 eligible participants are required to submit an audited financial statement with their Form 5500. One of the employer or plan sponsor’s most important fiduciary duties is to hire a qualified independent certified public accountant to perform the audit.

    Why is selecting a qualified auditor so important?

    The auditor’s job is to test the plan’s activity at the plan level and at the participant account level to determine if there are any issues with the administration of the plan. The auditor performs various tests to find these issues and helps the plan sponsor correct them. The auditor also issues an audit opinion attached to the Form 5500 and will assist the plan sponsor in reviewing the Form 5500 prior to submittal to the Department of Labor. A qualified auditor will help submit a sufficient Form 5500, audit report, and financial statement, providing the plan sponsor with an established process  – not to mention peace of mind.

    What happens if the auditor doesn’t conduct a sufficient audit?

    If the plan sponsor chooses an auditor who is not complying with professional standards and does not perform a quality audit, it can leave the plan open to scrutiny from the Department of Labor (DOL). Further, errors within the plan can go undetected, causing costly corrective actions to be taken by the plan sponsor, fines or penalties from the Department of Labor, or even loss of the plan’s tax-exempt status. That’s why it’s critical to research and interview your auditor regularly and ensure that DOL standards are being met.

    What should you look for in a qualified auditor?

    1. How much experience does the auditor have? The Department of Labor’s Audit Quality Study Report concluded that auditors who perform the fewest audits annually had a 76% deficiency rate, whereas those firms performing the most audits (over 100 annually) had a deficiency rate of only 12%.
    2. Is cost an important factor? It is crucial the plan sponsor look at value, not cost. The complexity and size of the plan are significant factors in determining the cost of the audit. However, not identifying issues and providing value to the plan sponsor could result in unforeseen costs that far exceed the cost of the audit, such as late contributions, errors in deferral or match calculations, and errors in vesting. Additionally, many plans allow for the cost of the audit to be paid by plan forfeitures, alleviating the cost burden to the plan sponsor while also providing value to the plan.
    3. Are plan audits and important area of the firm’s practice? The American Institute of Certified Public Accountants has established the Employee Benefit Audit Quality Center, a firm-based voluntary membership center for firms that audit employee benefit plans. Firms that join this group and comply with its requirements have taken steps to put a focus on audit quality. Also, a firm’s internal training focus is a key area of driving quality audits.

    Where should I start my search for a qualified plan auditor?

    A reliable benefit plan auditor helps the plan sponsor and management team sleep at night, knowing that the auditor has sufficient experience auditing benefit plans, is focused on helping the plan stay compliant with rules and regulations, and has the necessary resources and training to perform a quality audit. The DOL’s Employee Benefits Security Administration (EBSA) has developed a booklet titled Selecting an Auditor for Your Employee Benefit Plan to assist plan administrators in selecting an auditor.

    Plan Audit Cost Considerations

    Benefit plan audits are essential for maintaining compliance and ensuring the integrity of retirement and health benefit plans. However, they come with associated costs that can vary significantly depending on several factors. Understanding these cost considerations can help plan sponsors manage expenses effectively while ensuring a thorough and compliant audit.

    Factors that Influence the Cost of an Audit

    The cost of a benefit plan audit is influenced by a variety of factors:

    • Plan Size and Complexity- The number of participants in the plan and the complexity of the plan structure significantly impact the audit cost. Larger plans with more participants require more extensive testing and data analysis, leading to higher audit fees. Complexity factors include the types of investments held by the plan, the number of different plan features (such as loans, profit-sharing components, or multiple investment options), and the plan’s administrative structure.
    • Recordkeeping and Data Quality- The ease of access to accurate and organized records can also affect the audit cost. If the plan’s records are well-organized and readily accessible, the audit process can be more efficient, reducing the time and cost involved. Conversely, poorly maintained or incomplete records may require additional audit work, increasing costs.
    • Prior Audit Findings and Issues – If a plan has had prior compliance issues or audit findings, additional work may be needed to follow up on these areas, increasing the audit scope and cost. Reoccurring or unresolved issues may require more detailed examination and documentation.
    • Geographic Location and Auditor Expertise – The geographic location of the audit firm and the expertise of the auditors can also influence costs. Auditors in regions with higher costs of living or those with specialized expertise in benefit plans may charge higher fees.
    • Regulatory Changes – Ongoing changes in regulations affecting benefit plans can require auditors to perform additional procedures or stay updated with new requirements, which can add to the overall cost.

    Strategies to Manage and Reduce Audit Costs

    While benefit plan audits are necessary, there are several strategies that plan sponsors can employ to manage and potentially reduce audit costs:

    1. Maintain Organized and Accurate Records – Ensuring that all plan records are well-organized, accurate, and readily accessible can significantly reduce the time auditors spend gathering and verifying information. This efficiency can lead to lower audit fees.
    2. Early Preparation and Communication – Begin preparing for the audit early and maintain clear and open communication with the audit firm. Understanding the auditors’ needs and expectations ahead of time can help avoid last-minute issues that could increase costs.
    3. Negotiate Fixed Fees or Fee Caps – Consider negotiating a fixed fee or a fee cap with the audit firm. This can provide predictability in budgeting and help avoid unexpected cost overruns
    4. Consider Multi-Year Contracts – Establishing a multi-year engagement with an audit firm can sometimes result in lower fees, as the auditors become more familiar with the plan over time, reducing the learning curve and increasing efficiency.
    5. Select an Experienced Auditor – Choosing an auditor with specific experience in benefit plan audits can be cost-effective in the long run. Experienced auditors are likely to be more efficient, potentially reducing the time required for the audit and thus the associated costs.
    6. Leverage Technology – Utilize technology to streamline the audit process. Tools that allow for secure electronic submission of documents, data analytics, and automated testing can reduce the manual effort required in an audit, thereby lowering costs.

    By understanding the factors that influence audit costs and implementing strategies to manage these expenses, plan sponsors can effectively control the financial impact of benefit plan audits while ensuring they meet their compliance obligations.

    Pricing FAQs

    Q: What do you take into account when pricing a project?

    A: For any given job, our pricing may be based upon a number of factors, including:

    • The complexity of the work
    • The scope of services involved
    • The level of staff expertise required
    • The amount of time it will take

    Q: Will you charge me every time I call you with a question?

    A: Absolutely not. Certainly not every call.  The value we bring is directly linked to how well we know you and that requires an investment of time on our part.  Maybe you’re calling us to ask a specific question, troubleshoot, or get our advice about something. Maybe we’re calling you to share an idea or just to check in. It all leads to the transformational breakthroughs that will really help your organization thrive.  As issues arise that require a deeper dive, we’ll discuss the need to invest time to develop thoughtful recommendations and we’ll be clear when fees will be generated.

    Q: Do you offer any free resources to your clients?

    A: Yes. We love giving our clients all kinds of industry, operational, tax, and accounting insights they can use to grow their operations.

    Every year, we conduct original research studies you can access anytime at no charge. And we’ll keep you connected and informed with a constant stream of:

    • Live webinars
    • Live hybrid events for industry leaders and clients
    • On-demand events
    • Blogs\ posts (multiple times a month)
    • Ask the Experts videos (multiple times a month)
    • QuickTest tax credit surveys

    Additional Resources and References

    For comprehensive information on the regulations governing employee benefit plans, the following links provide direct access to key government agencies and their guidelines:

    • Department of Labor (DOL) -: The DOL oversees the enforcement of the Employee Retirement Income Security Act (ERISA) and provides resources on compliance, reporting requirements, and plan management. In addition, the agency develops regulations, educates and assists workers and plan sponsors, and works with other agencies to enforce regulations.
    • Internal Revenue Service (IRS) – The IRS provides guidance on the tax aspects of employee benefit plans, including retirement plan compliance and filing requirements. All plans are required to follow the provisions in the plan documents that satisfy the requirements of IRS code. The agency also establishes the tax rules and regulations that must be followed.
    • Pension Benefit Guaranty Corporation (PBGC) – The PBGC protects the retirement incomes of American workers in private-sector defined benefit plans. Created as a federal department by ERISA, the agency exists to provide support to plans which undergo termination without sufficient funding to pay participants. In this case, the PBGC’s insurance program will pay for the benefit’s as promised by the plan.

    Educational Articles, Guides, and Whitepapers

    For those looking to deepen their understanding of employee benefit plan audits and related topics, the following resources offer valuable insights:

    Professional Organizations and Industry Groups

    Joining professional organizations and industry groups can provide additional resources, networking opportunities, and continuing education related to employee benefit plan audits:

    These resources, guides, and organizations offer valuable support for understanding and managing employee benefit plan audits, helping you stay compliant and informed in this complex area.

     

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