What Is an Employee Benefit Plan Audit? (The Basics)
If your employee benefit plan has 100 or more participants with account balances, you’ll need an audit to comply with DOL regulations.
But, what actually is an employee benefit plan audit anyway? What areas does it cover? Why is it necessary in the first place?
Familiarity with these aspects of an employee benefit plan audit can help make the process a success for your organization. Here, we’ve outlined what an employee benefit plan audit entails and why it’s a crucial step in satisfying your company’s responsibility of filing a complete and accurate Form 5500—and thereby avoiding potential costly penalties for your company.
What Is an Employee Benefit Plan Audit?
An employee benefit plan audit is designed to establish credibility and offer assurance that your plan is in compliance with applicable laws and regulations.
An employee benefit plan audit involves the examination of financial statements provided by a third party to the DOL, plan management and plan participants. The conclusion of the audit will provide credibility that your plan will have the funds available to pay benefits to respective participants when they become due.
An employee benefit plan audit can be a complex undertaking. The plan’s financial reporting and the audit environment both provide unique factors and can make this process much more involved than a standard audit.
These unique factors may include:
- Regulations of the Internal Revenue Service (IRS) and Department of Labor (DOL)
- Federal and state laws
- Special reporting and audit requirements
- Nature of the plan operations
Who Is Responsible for a Company’s Employee Benefit Plan Audit?
In general, the employee benefit plan sponsor’s human resources and financial accounting departments, an actuary, a third-party administrator, Employee Retirement Security Act of 1974 (ERISA) legal counsel, investment trustees and administrators, as well as an independent auditor, may all play a significant role in the audit process, as applicable.
Hiring an independent certified public accountant (CPA) to audit your employee benefit plan’s financial statements to ensure your plan is adhering to relevant legislation is standard practice when your plan meets certain criteria.
What Areas Does an Employee Benefit Plan Audit Cover?
The American Institute of Certified Public Accountants (AICPA) states that all employee benefit plan audits should typically cover the following areas:
- Benefit payments
- Employer and employee contributions
- Investments and investment income of the EBP (in a full scope audit)
- Administrative expenses
- Data of participants
- Loans to participants
- Allocation of participants, if applicable
- Plan obligations and liabilities
What Happens During an Employee Benefit Plan Audit?
Your engaged audit firm examines whether the financial statements contain any material misstatement that may result from fraudulent reporting or unintentional errors. The findings from the audit provide the basis for which the auditor reports on the financial statements concerning the employee benefit plan.
In addition to these aims, the DOL looks to the auditor to provide their judgment on the accuracy and material fairness of information submitted as part of the Form 5500.
This process also includes highlighting areas of weakness or operational errors which can be addressed to enhance the operations of the employee benefit plan. Lastly, an employee benefit plan audit assists the sponsor of the plan in carrying out the legal requirement to file the Form 5500.
Why Is an Employee Benefit Plan Audit Necessary?
An employee benefit plan audit is necessary to assess a plan’s accuracy and viability due to the multiple stakeholders who are part of the financial reporting process.
The primary objective of ERISA is to protect participants and their benefits in an employee benefit plan. ERISA ensures that employee benefit planss abide by guidelines that prevent any misuse of plan assets on the part of the administrators.
Specifically, an employee benefit plan audit is part of the process for all sponsors to file a Form 5500, which is a required annual report filed with the DOL. This form assesses investments, operations and 401(k) financial conditions, and provides the IRS and DOL important information concerning compliance and operations of the employee benefit plan.
Form 5500 is a part of the overall reporting and disclosure framework of ERISA that is designed to ensure that plans are managed and operated according to relevant standards and practices. The chief aim of this system is to provide participants, beneficiaries and regulators with important information to protect the rights of beneficiaries and participants.
It’s key to go through each step in this process with care. If the Form 5500 filing is rejected, a fine may be imposed until the filing has been corrected.
Who Is Required to Have an Audit?
Generally, employee benefit plans that have at least 100 participants with account balances must have an independent audit of the plan’s financial statements.
What Are the Benefits of an Employee Benefit Plan Audit?
The employee benefit plan audit is meant to safeguard the financial integrity of the plan to provide health, retirement and other associated benefits to participants over the term of payments.
An employee benefit plan audit may also provide benefits to a company in streamlining and making the operations of the plan more efficient by identifying the strengths of the internal controls involved in financial reporting.
Companies also benefit from identifying areas of weakness or operational errors and with assistance in carrying out the legal requirements of Form 5500.
Find Your Employee Benefit Plan Audit Partner
Whether your employee benefit plan has been audited by the same firm for 10-plus years, or your plan has just met the initial audit threshold, Warren Averett is here to help.
Manage your employee benefit plans with the utmost credibility and confidence. Contact us today for more information about employee benefit plan audits.
This was originally published on November 12, 2020 and most recently updated on May 26, 2023.