Benefit Plan Audits: Answering Some Common Questions
Sponsors of employee benefit plans often have questions about many aspects of benefit plan audits. Here are a few of the most common plan audit questions and answers:
Q: What is the purpose of an employee benefit plan audit?
A: An audit provides insight into the plan sponsor’s control environment, which may uncover operational errors or prohibited transactions. This, in turn, may result in plan remediation and corrections. Plan sponsors can also use audit results to strengthen internal controls, improve processes and fulfill their fiduciary compliance responsibilities.
Q: What do auditors generally look at when auditing an employee benefit plan?
A: Using their knowledge of the plan’s nature and control environment, auditors will examine such areas as participant data; employee and employer plan contributions; plan distributions and participant loans; plan expenses, investments and income; the valuation of plan assets; and the timeliness of plan contributions, among other factors.
Q: Does our plan have to be audited?
A: It depends on whether your plan is a “large” or a “small” plan. If there are at least 100 eligible participants, your plan is considered to be a large plan and thus subject to ERISA annual audit requirements. Specifically, you must file Schedule H with your Form 5500 annual report — and Schedule H requires the attachment of an auditor’s report.
However, if there are fewer than 100 eligible participants, your plan is considered to be a small plan and is not subject to ERISA annual audit requirements. You still must file Schedule I along with your Form 5500, but this schedule does not require the attachment of an auditor’s report.
Q: Are there any exceptions to the 100-employee threshold rule?
A: Yes. According to the 80-120 Rule, if your plan has between 80 and 120 participants on the first day of the plan year, you can file Form 5500 in the same plan size category that you did on your most recent filing. So if you filed as a small plan last year and meet this criteria, you can file as a small plan again this year and avoid ERISA annual audit requirements.
Q: What is a limited scope audit?
A: This is a less-extensive audit in which the auditor may rely on the certification of an institutional asset trustee or custodian to limit the scope of testing on any investment information.
A limited scope audit reduces the amount of audit testing and work required on behalf of plan management to complete the audit, which generally makes it less expensive. Note that limited scope audits can only be applied to investment information, not other audit areas like participant data, contributions or distributions.
Q: When must an audit be completed?
The audit report is subject to the same filing deadlines as Form 5500, which is due seven months after the last day of the plan year, or July 31 for calendar year-end plans. It may be extended for an additional 2½ months, or Oct. 15 for calendar year-end plans.
Q: What can we do to best prepare for an audit?
A: Consider taking such steps as preparing a complete and accurate census report for your third-party administrator, reviewing plan performance and reconciling financial reports to underlying payroll and accounting records, identifying and correcting plan operational and compliance errors, and providing your third-party administrator and auditor with all DOL and IRS plan correspondence as soon as you receive it.
Our team at Holtzman Partners can help answer your questions about employee benefit plans. To learn more, please give us a call at 512.610.7200 or send us a message via our Contact page.