What Happens During an Employee Benefit Plan Audit?

An employee benefit plan is considered a high-value benefit for many employees, and it’s an asset for companies looking to attract in-demand candidates.

While some small- and medium-sized companies choose not to offer a retirement plan as part of their benefits package, those that do enjoy certain benefits over their competitors that don’t offer such a plan.

The other side of the story, however, is that the employee benefit plan must be actively managed—and, in some cases, audited.

During an employee benefit plan audit, a third-party certified public accountant reviews plan documents to ensure that employee retirement funds are being appropriately handled by the plan’s service providers. Here’s what you can expect from the process.

The Three Phases of an Employee Benefit Plan Audit

This comprehensive review from the third-party auditor occurs in three phases.

• Preparation: The first, and most administratively heavy phase, requires the collection and delivery of a wide array of plan documents, investment statements and transaction support.
• Fieldwork: Next, the auditor completes the fieldwork, travels to a company’s location, if requested, and meets with the personnel responsible for oversight and administration of the plan. The auditor will review all relevant information.
• Report Delivery: After the fieldwork is completed, the auditor delivers the report and any findings.

Audit Phase One: Preparation

The largest and most administratively intensive piece of the employee benefit plan audit process is the preparation of the audit documentation requests. That’s why, for companies that haven’t maintained the proper documentation, prepared the proper schedules or met key disbursement and disclosure deadlines, the audit process can be challenging.

Proper preparation of documentation will help the audit itself go more smoothly and streamline both the fieldwork and completion phases.

At a minimum, you’ll likely need to prepare the following important documentation and statements to effectively complete the audit.

• Plan documents and all amendments, including trust documents and summary plan description
• Summary annual reports for the period under audit
• Fiduciary insurance and bond documentation
• Internal income and disbursement statements
• IRS determination letter
• Meeting minutes from committee or subcommittee meetings
• Plan financial records, including account statements and ledgers
• Service provider contracts
• Support for a sample of participant benefit payments
• Process narratives for hiring and paying plan professionals
• A draft of Form 5500
• All documents related to service provider fees, including fee schedules and compensation paid to professionals by the plan
• Contracts with fiduciaries and other service providers, including details and dates for services provided as agreed upon
• Any ERISA compliance policies or procedures adopted by the plan or sponsor
• All documents related to plan investment performance (which includes an investment policy statement)
• All documents related to administrative expenses (direct or indirect) related to the plan
• Documents showing the names and service times of Board members and officers of the plan sponsor
• Documents showing timeliness of employer contributions and support for authorization and payment of participant loans
• Documentation showing the procedures for handling participant loans, if applicable (because loan administration and repayment of loans is a frequent issue in audits)
• Various participant-related documentation to support a participant sample selected by the auditor
• In addition, the company itself must provide copies of reports from both payroll and human resources that relate to the plan participants, such as those showing employer contributions, process narratives and participant loan details and support.

Many of these items can be provided by your third-party administrator and/or the plan’s investment custodian.

Companies should pay particular attention to the completeness and detail of the information provided to the auditors to avoid issues and to minimize potential further investigation by the Department of Labor (DOL).

The most important filing, and the one that is the most frequently missed, is the submission of Form 5500, which must be filed by July 31. Extensions can be requested, which prolongs the filing deadline to October 15.

Audit Phase Two: Fieldwork

Once the auditor has all of the proper documentation, the fieldwork phase will be conducted.

Either on-site or remotely, the auditor will meet with company personnel responsible for the employee benefit plan and gain an understanding of the internal controls, accounting processes and risks. The auditor will also review a sampling of distributions, loans and employees and request the supporting files and documentation for the samples selected.

A few specific areas will be the focus of an auditor’s review during fieldwork:

• One of the greatest areas of focus among the EBP audit requirements relates to the plan administrator and their performance of their fiduciary duties on behalf of the plan participants. This goes beyond monitoring and reviewing fees and investment options to include reviewing the minutes from committee meetings where the benefit plan is reviewed. This provides evidence that the plan administrators are performing their fiduciary duties to the fullest extent.
• Distributions are another area of particular attention during an audit. Errors are known to frequently occur with both hardship distributions and the required minimum distributions made annually to participants after they turn 70 ½ years of age.
• Much like distributions, contributions are of note during an audit. Plan eligibility, compensation, deferral elections and deposits must all be accurately reported, must follow the plan’s documented processes and must be deposited into the plan in a timely manner.

In all, the fieldwork phase can take between a few days and one week.

Audit Phase Three: Audit Results, Reports and Financial Statements

Finally, once the fieldwork review is completed, the auditor will provide a draft of the financial statements, report and correspondence related to any internal control deficiencies uncovered during the review.

Once approved, the auditor will provide the company with a finalized report and audited financial statements to be attached to the Form 5500 that is submitted to the DOL.

Getting Help With Your Employee Benefit Plan Audit

To avoid surprises during an employee benefit plan audit, it helps to seek the expertise of professionals. Learn more about our Employee Benefit Plan Audit services.

This article was originally published on March 3, 2021 and most recently updated on May 20 2024.