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What Is an Employee Benefit Plan Audit, and Why Is It Important?

Written by Dana Canterbury and Missy Herbert on November 12, 2020

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An audit is a critical feature in the process of establishing credibility and assurance that your employee benefit plan is in compliance with applicable laws and regulations.

Hiring an independent certified public accountant (CPA) to audit your financial statements to ensure your plan is adhering to relevant legislation is standard practice when your plan reaches certain participant count thresholds. The conclusion of the audit will provide credibility that your plan will have the funds available to pay benefits to respective participants when these benefits become due.

Generally, if your plan has more than 100 eligible participants, an audit requirement is triggered. It’s important to understand what an employee benefit plan (EBP) audit entails and why it’s a crucial step in satisfying your company’s responsibility of filing a complete and accurate Form 5500—thus, avoiding potential costly penalties for your company.

What Is an Employee Benefit Plan Audit?

An audit of an employee benefit plan involves the examination of financial statements provided by a third party to the DOL, plan management and plan participants. The primary focus of an EBP audit is to accurately gauge the ability of the plan to cover current and future benefits and payments.

In general, the 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 this process, as applicable.

An EBP audit can be a complex undertaking. The plan’s financial reporting and the audit environment both provide unique factors in an EBP audit and can make this process much more complex 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

What Areas Does an EBP Audit Cover?

The American Institute of Certified Public Accountants (AICPA) states that financial statement audits for all employee benefit plans should typically cover the following areas:

  1. Benefit payments
  2. Employer and employee contributions
  3. Investments and investment income of the EBP (in a full scope audit)
  4. Administrative expenses
  5. Data of participants
  6. Loans to participants
  7. Allocation of participants, if applicable
  8. Plan obligations and liabilities

What Happens During an EBP Audit?

Your engaged audit firm examines whether the financial statements contain any material misstatement that may result from fraudulent reporting or due to unintentional errors. The findings from the audit provide the basis on which the auditor reports on the financial statements concerning the EBP.

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 EBP. Lastly, an EBP audit assists the sponsor of the EBP in carrying out the legal requirement to file the Form 5500.

Why Is an EBP 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.

Generally, EBPs that involve at least 100 eligible participants must have an independent audit of financial statements. The primary objective of ERISA is to protect participants and their benefits in an EBP. ERISA ensures that EBPs abide by guidelines that prevent any misuse of plan assets on the part of the administrators of the employee benefit plan.

Specifically, an EBP 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 EBP.

Form 5500 is a part of the overall reporting and disclosure framework of ERISA that is designed to ensure EBPs 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.

What Are the Benefits of an EBP Audit?

The audit of the financial statements of an employee benefit plan is meant to safeguard the financial integrity of the plan to provide health, retirement and other associated benefits of the plan to participants over the term of payments.

An EBP 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.

What Impact Will New Audit Standards Have?

In May 2019, the American Institute of CPAs (AICPA) Auditing Standards Board (ASB) introduced an update to the Statement on Auditing Standards (SAS). The new SAS, named the Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, seeks to enhance the effectiveness of audits in a number of key areas that include communication, transparency and risk assessment.

Changes in the reporting and auditing requirements in the SAS will increase the scrutiny on management, as well as auditors. The new rules of the SAS will apply to a financial statement audit terminating on or after the December 15, 2021 cutoff date.

Under the new rules of the SAS, there are five principal changes that will result:

  1. The relevance and the degree of communication concerning the reports from employee benefit auditors are improved. These factors address compliance implications for the audit report that are made public through the filing of the Form 5500.
  2. The audit election is not considered as part of the scope limitation. Furthermore, a limited scope audit is now referred to as an ERISA 103(a)(3)(C) audit.
  3. The limited scope report will aim to reflect the purpose of the auditor in various reports.
  4. The reporting for supplement schedules required by ERISA will now differentiate between schedules that are required by ERISA and additional schedules, which are included but not required.
  5. Reports on specific provisions of plans will address both risk response and risk assessment from the perspective of both the auditor as well as the plan management. An effect of these changes will result in increased documentation in financial statements.

How Warren Averett Can Help

Whether your plan has been audited by the same firm for 10-plus years or whether your plan has just met the initial audit threshold, Warren Averett is here to help. Reviewing and assessing your auditor’s qualifications is an important part of the audit process as well as a fiduciary function.  Warren Averett conducts audits for more than 300 employee benefit plans on an annual basis. Our team members are experts in auditing standards, the Securities and Exchange Commission (SEC) regulations, and the Department of Labor and Employee Retirement Income Security Act filing requirements.

We are committed to helping clients manage their employee benefit plans with the utmost credibility and confidence. Contact us today for more information on how we can help your business.

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