They are two of the most common questions that many businesses sponsoring an employee retirement plan ask: Do we need to have an annual audit performed on our plan? And if so, how can we best prepare for the audit?
If your plan is deemed a “large” employee benefit plan, then it is subject to the ERISA annual audit requirements. More specifically, if there are at least 100 eligible participants* in the plan, you must have an employee benefit plan audit conducted annually and attach it to Schedule H when filing Form 5500.
However, if there are fewer than 100 eligible plan participants, then you are exempt from the ERISA annual audit requirements (as long as investments are “qualified”). Note that you still have to file Schedule I along with Form 5500.
* Plan participants for purposes of Form 5500 include eligible employees (whether or not they are participating in the plan), retired or separated participants receiving benefits, other retired or separated participants entitled to future benefits, and deceased individuals who have beneficiaries who are either receiving or are entitled to future benefits.
The 80–120 Participant Rule
In deciding whether their plan is large or small when determining plan audit requirements, plan sponsors with slightly more or less than 100 participants may find themselves in a quandary.
Technically speaking, these sponsors should switch their categorization each year that the number of participants drops below or rises above 100. But a special DOL rule referred to as the “80–120 participation rule” eliminates this burden. If you have between 80 and 120 plan participants at the beginning of the current plan year, you can complete the current year filing using the same category you used the previous year.
Taking advantage of the 80–120 participation rule can help you avoid the inconvenience, disruptions, and additional cost associated with switching your plan categorization year after year due to minor fluctuations in the number of plan participants.
Purposes of an Audit
Employee benefit plan audits serve several purposes. Perhaps most importantly, they help provide reasonable assurance that a plan’s financial statements are being presented fairly and in accordance with generally accepted accounting principles (GAAP).
In addition, a plan audit will offer insight into the sponsor’s control environment. This may include uncovering potential operational errors and prohibited transactions, which in turn could result in plan remediation and corrections. The results of a plan audit can help you strengthen internal controls and fulfill your fiduciary compliance responsibilities.
An independent accounting professional should conduct your employee benefit plan audit and will work closely with a wide range of individuals. These typically include employees in your accounting and human resources departments, as well as your third-party administrator, actuary, legal counsel, custodian, and trustee.
In most situations, an audit will closely examine the following areas of your employee benefit plan:
- Plan contributions (both employee and employer) and benefits payments
- Plan investments and income (in a full scope audit only)
- Participant data including compensation
- Plan obligations and liabilities
- Plan distributions and participant loans
- Administrative expenses
Types of Plan Audits
There are two main types of employee benefit plan audits: full-scope audits and limited-scope audits. In a full-scope audit, everything in the plan is subject to testing—this includes contributions, benefit payments, and the valuation of investments and related earnings. The auditor then expresses an opinion on the plan’s financial statements, including supplemental schedules.
In a limited-scope audit, the auditor does not perform substantive auditing procedures on certified investment information (such as investment valuation and income) prepared by the custodian or trustee. Because investment information is provided by an outside party and not formally audited, the auditor does not express an unqualified opinion on the plan’s financial statements. Instead, the auditor issues a Disclaimer of Opinion that’s acceptable to the DOL.
If you opt for a limited-scope audit, you have a fiduciary duty to ensure that a qualified entity has certified the accuracy and completeness of the investment information. This certification must cover all plan investments—any investments and related income that aren’t covered must be subject to full-scope audit procedures.
Preparing for an Audit
The best way to prepare for an employee benefit plan audit is to have everything the audit team will need ready and waiting. For starters, have a finance department employee review the plan’s financial statements (Schedule H of Form 5500) and compare to trust statements ahead of time.
Pay particular attention to the contribution schedule reconciliation, because this is often the biggest reporting challenge in employee benefit plan audits. Be sure to reconcile contributions reported by the plan on Form 5500 Schedule H to total participant contributions reported on employees’ W-2 forms for the year (for calendar year plans).
Here are a few steps to take leading up to the audit that can help ensure everything runs smoothly:
- Make sure the employee census report is complete, accurate, and reconciled to your payroll reports. Prepare a schedule of contributions by pay date summary that is reconciled to W-2 totals, identifying any late or missed remittances during the year.
- Start gathering the plan documents, investment reports, and meeting minutes the auditor will need at least one month before the scheduled audit date. Also let the auditor know if there have been any significant changes to the plan, such as new investments, amendments to plan documents, or changes in third-party service providers.
- Perform an internal audit of the plan prior to the independent audit. Perform test calculations of contributions for a few participants to uncover obvious deficiencies.
- Review SOC 1 reports from outside service organizations. The idea here is to determine whether the controls relevant to your plan ensure complete and accurate financial reporting.
As the audit progresses, you should request weekly status updates. This will ensure that open items or pending requests are clearly communicated and can be addressed timely.
It’s Your Fiduciary Duty
As a plan sponsor, you have a fiduciary duty to hire an auditor with specialized knowledge and experience. Be prepared to perform thorough due diligence in your search for a qualified independent auditor for your employee benefit plan.
Our firm specializes in providing employee benefit plan audits. Give us a call to discuss your auditing needs in more detail.