Benefit Plan Audit Basics

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For employee benefit plans that have recently crossed the 100-participant threshold, many new compliance requirements must be met – one of them is to have an annual benefit plan audit. Since these regulations are often complicated and difficult to understand, they can leave many with more questions than answers. The reality is the timing, process, steps involved and reporting outcomes are often brand-new, requiring benefit plan managers to quickly become familiar with essential topics. In addition, time and attention need to be given to selecting a qualified firm to conduct the plan audit. To help clients, prospects, and others, JLK Rosenberger has provided a summary of plan audit basics below.

What is an employee benefit plan audit?

Large plans, those with more than 100 participants, are required to undergo an annual audit. The audit is required to ensure the benefit plan operates in compliance with the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL), and IRS rules and guidelines. The plan audit is conducted by an independent certified public accountant (CPA), whose purpose is to ensure the plan’s current and future financial stability and compliance with government rules and regulations. The audit will have to be attached to the filing of the IRS Form 5500, which is due July 31 (for a calendar year plan).

Though annual benefit plan audits are required above the 100 participant threshold, the value of the audit lies in protecting plan participants and the company from unnecessary risk from misallocated participant funds or other accounting errors. Audits also help by evaluating the internal controls of plan operations, and the CPA gets a front-row seat to see that those controls are in compliance.

Two types of audits are offered by CPAs for compliance, depending on the needs of the plan.  Most audits are known as “limited-scope,” where the auditors accept the investment balances certified by the custodian and spend most of the time focusing on compliance with the plan document and Department of Labor (DOL) ERISA rules. A full-scope audit would also include the verification of assets held by the organization and the related fair values in the plan.

Which plans are subject to ERISA (and therefore have an audit requirement)?
  • Pension plans, including defined benefit and defined contribution. Examples include 401(k), ESOP, and 403(b) plans.
  • Welfare benefit plans that provide insurance covering health, group life, long-term disability income, severance pay, vacation, and more.
  • Health Reimbursement Accounts (HRAs)
  • Flexible Spending Accounts (FSAs)

It is important to note that ERISA does not cover governmental plans and certain types of 403(b) plans.

When am I required to have a plan audit?

A plan audit is only required for so-called ‘large’ plans with 100 or more eligible participants. An eligible participant is an employee who is eligible to participate in the plan, whether or not that employee actually elects to participate in the plan.

What is examined in a plan audit?

An independent audit will usually evaluate the following:

  • Employee and employer contributions
  • Benefit payments
  • Plan investments and investment income (with full-scope audits)
  • Participant data and allocations
  • Liabilities and plan obligations
  • Participant loans
  • Administrative expenses
  • The Form 5500
  • Other considerations, such as parties-in-interest, prohibited transactions, and the plan’s tax status.
Are there different types of plan audits?

Yes. There are full-scope and limited scope audits for now.

  • A limited-scope audit does not attest to certified investment information, which is usually the most substantial plan assets and the CPA accepts the certification of the plan’s custodian. Limited scope audits still test participant data, allocation of investment income to participant accounts, contributions, benefit payments, and any other information not otherwise addressed in the certification. However, because the auditor is precluded from seeing (auditing) the investments, the auditor will not express (or disclaims) an opinion on the condition of the plan’s financial statements in the audit report.
  • A full-scope audit examines all the same areas as a limited scope audit but does not rely on the outside certification of investment information. In other words, the scope of audit also includes examining the information not covered in a limited scope audit so the auditor will express an opinion on the condition of the plans financial statements in the audit report
We’re Here to Help

The rules and regulations governing the first-time 401k, 403b, or other benefit plan audits can seem overwhelming. The good news is that there are several resources available to make the process easier. If you have questions about the information outlined above or need assistance with your benefit plan audit, JLK Rosenberger can help. For additional information, call us at 972-931-6803 or click here to contact us. We look forward to speaking with you soon.