Employee Benefit Plan Audit Checklist: Your Guide to Preparing For an Audit
For businesses preparing for an employee benefit plan audit, having all the necessary documentation in order can be daunting. This is especially true if it's the first year your business requires an audit. To make the process simpler, we've outlined some of the basics on who is eligible, as well as what businesses should prepare to be ready for an audit. You can download our checklist or keep reading for more information.
What is an Employee Benefit Plan Audit?
An employee benefit plan is a 401(k) plan, pension, or profit-sharing plan that is distributed to eligible employees at a company. An employee benefit plan audit analyzes how viable the current plan is in terms of its ability to cover future payments and benefits as part of the plan.
Performing an employee benefit plan audit can be more complicated than another type of audit because the plans need to meet the regulations of both the Internal Revenue Service (IRS) and the Department of Labor (DOL). They also need to abide by state and federal laws and satisfy other special reporting and audit requirements.
Do You Need an Employee Benefit Plan Audit?
Not all companies need to have an employee benefit plan (EBP) audit. While this answer can depend on a few different factors, the general rule of thumb is that companies with 100 eligible participants or more have to get an EBP audit.
This used to apply to all eligible employees, but in 2023, the DOL amended requirements to only count participants who had account balances at the start of the plan year. This allowed some smaller plans to be exempt from the audit requirement.
If you have questions about whether your plan is required to obtain an audit, reach out to us today.
Preparing for an Employee Benefit Plan Audit
How you prepare for an EBP audit will depend on whether it is your first time receiving an audit or not. If it is your first time, ensure you have answers to the following:
Who is your third-party administrator or record keeper?
This can significantly impact your auditor's experience. For instance, certain administrators tend to be more accessible and easier to work with than others. Some have user-friendly platforms that simplify the auditor's navigation and data retrieval process.
Another example of an effective third-party administrator would be those specializing in HR and benefit plans, as they often collaborate efficiently with auditors to ensure a smooth process.
If you’re seeking recommendations for HR and benefit plan specialists who can streamline this process and work seamlessly with your auditor, feel free to reach out to us. We’d be happy to provide a referral tailored to your needs.
What is the number of participants on the plan?
This can help an auditor determine eligibility and can help determine how long it will take to work on the audit. For example, if the number is too high, the sample will need to be higher and the audit will take more time to work on.
How many employees are eligible for the plan?
While audits are now required based on participating employees, it's still important to know the number of employees who are eligible for the plan.
Setting the fee agreement
From there, the auditor and client can set a fee agreement, which is the scope of the audit, and any associated fees that the client can expect to incur. From there, the auditor will request an audit package from the record keeper. This audit package includes essential documents including participant data, contribution records, and investment information.
After receiving the audit package back, the auditor will review it and select specific data points for further examination. The selection will be sent back to the client, who has to communicate with the third-party administrator or record keeper to provide additional supporting documentation as requested by the auditor. These steps can take 3-4 months for the client to complete. It's important to keep this timeline in mind when you're thinking about when you'd like the audit to be completed. For example, if you are looking to complete the audit in mid-June, the auditor needs to start working on it by mid-March at the latest.
Form 5500 Basics
A Form 5500 is a document that is required by the Employee Retirement Income Security Act (ERISA). This is a form that must be filed annually by most employee benefit plans. Form 5500 provides information about the plan's operations and financial status.
Clients who didn't file their 5500 in a previous year on time (by October 15) may be seeking an auditor for a few reasons.
1. Penalty Avoidance
Organizations that file late can incur significant penalties from the IRS. Working with an auditor to prepare and file Form 5500 can help businesses avoid or minimize penalties.
2. Complex Plan
Complex plans that have multiple investment options or even employers can require specialized expertise to ensure filing is done accurately. Auditors can help navigate these complex structures to help plans avoid penalties from filing incorrectly.
3. Previous Issues With Other Auditors
Sometimes, clients are looking to work with a new auditor because they had negative experiences with an old one. This could include not being able to reach the auditor in critical moments, high fees with no explanation, or missed desired deadlines.
4. Regulatory Compliance
Working with an auditor can help ensure that plans are compliant with ERISA regulations, keeping legal issues and other penalties at bay.
If you are looking to work with an auditor who can get your filing done on your timeline, and you are looking for a more communicative CPA, OAK Advisors is here to help. We don't call ourselves the Most Reachable Firm for nothing.
The EBP Audit Process
Providing Documents and Resources
First, you'll need to provide documents and resources to the auditor with sufficient detail so that the audit can be completed in a timely manner. This can also help prevent plans from being investigated by the DOL.
Fieldwork
Once the documents have been provided, the auditor can do the fieldwork, learning more about the internal controls of the plan, as well as the accounting processes involved in the plan. This can uncover any potential risks associated with the EBP plan. The auditor will review a sample of documentation and ask for supporting documentation and files for the selected samples.
Drafted Results and Finalized Report
After completing the fieldwork review of the EBP audit, the auditor will provide a draft of the financial statements, report, and any correspondence regarding internal control issues. From there, the EBP plan audit results will be delivered after approval.
The approved audit report will then be attached to Form 5500 and submitted to the Department of Labor (DOL) by the Plan Administrator, ensuring compliance with regulatory requirements. This streamlined process is designed to deliver accurate and timely results while meeting all necessary filing obligations.
Download Our Employee Benefit Plan Audit Checklist Today
If you want to make sure you're prepared for your audit, download our employee benefit plan audit checklist today. It can serve as your guide to preparing the audit package needed for everything to go smoothly.