Understanding Employee Benefit Plan Audits – Top Five Commonly Asked Questions

By Lindsay Andrews, CPA
[email protected]

While employee benefit plan participants want to know that their retirement benefits are secure, plan sponsors have concerns about their fiduciary risks and responsibilities.

Thanks to complex regulatory requirements and constantly changing legislation, the challenges of managing employee benefit plans can be complicated and time-consuming.

That’s where an employee benefit plan audit comes in. Using an independent accounting firm to audit employee benefit plan financial statements ensures that plan sponsors are meeting their fiduciary requirements, giving peace of mind to plan participants.

At Louis Plung & Company, we perform almost 40 employee benefit plan audits, ranging in size from 100 participants to more than 14,000. Our benefit plan clients range in size from small, privately-owned businesses to multi-million-dollar global companies.

However, no matter what size or type of company we’re performing a benefit plan audit for, five questions continually arise. Here’s a look at the most frequently asked questions and our advice to clients.

1. When does a company first need a benefit plan audit?
   If a company’s 401(k) plan has 120 eligible participants on the first day of the plan year, an audit is required. Once an audit has occurred, the 401(k) plan must be audited every year after that until the eligible participant number drops below 100. Generally, when a 401(k) plan has 100 or more eligible participants, it requires an annual audit. The audited financial statements must be included with the Form 5500 filing when the participant threshold is met. This filing is due July 31st every year or by the extended due date of October 15th.
2. If our company has under 100 employees who are currently deferring, does that mean we don’t need an audit?
   That depends. The definition of eligible participants covers more than just who is currently deferring each payroll period into your 401(k) plan. There are three major categories covered in the definition of eligible participants:
   • Active Employees
     This category covers both employees currently covered under the plan as well as those who are eligible but who do not currently participate in the plan.
   • Retired or Separated Employees
     Includes plan participants who either receive plan benefits or are eligible to receive plan benefits. This includes participants who may no longer work at your company but have not yet transferred or rolled-over their money from your plan.
   • Deceased Employees
     Includes decreased former employees with one or more beneficiaries who receive plan benefits or are entitled to receive plan benefits.
3. Where do I get all the information for a plan audit, since a lot is managed online by other services providers?
   As a plan sponsor your role is to provide specific employee information, along with documentation of internal controls including how user controls in System and Organization Controls (SOC) 1 reports are implemented.

   Your auditor will work with your various plan service providers to gather the additional information needed for the audit. Typically, your auditor will work with the following providers:

   • Investment Company
     Information provided includes trust statements, various investment statements, lists of transactions including contributions and distributions, certifications, and SOC 1 reports.
   • Third Party Administrators (TPAs)
     They typically provide a Form 5500 draft, plan agreements and amendments, determination letter, and compliance testing.
   • Payroll Providers
     Documents provided include payroll registers, W-2s, and SOC 1 reports.
4. What are typical issues that you find in the plans you are auditing?
   The two most common errors noted in our plan audits are:
   • Late Deposit of 401(k) Deferrals
     Department of Labor (DOL) regulations require employers to deposit salary deferrals as soon as they can be segregated from the general assets of the employer.
   • Incorrect Compensation Definition used for Deferrals
5. How much do employee benefit plan audits cost?
   Audit costs range based on a number of factors. These can include whether your investments are certified and the specific provisions of your plan.

   We audit almost 40 plans that comply with DOL guidelines and have an entire department trained in benefit plan audits. Adhering to high industry standards, we are members of the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center.

We would be happy to provide a quote or answer your questions regarding your specific 401(k) plan. Reach out to the author of this article, Lindsay Andrews, at [email protected] or 412-281-8771.