Navigating Your First Employee Benefit Plan Audit: Key Steps and Strategies

Introduction

Embarking on your first employee benefit plan audit can feel like navigating uncharted waters. Between understanding complex regulations, gathering extensive documentation, and ensuring compliance with numerous requirements, it’s easy to feel overwhelmed. However, with the right preparation and knowledge, the audit process can become not only manageable but also a valuable opportunity to strengthen your plan’s operations and compliance. This guide will walk you through key steps and strategies to help you confidently navigate your first employee benefit plan audit.

Understanding the Employee Benefit Plan Audit

What Is an Employee Benefit Plan Audit?

An employee benefit plan audit is a thorough examination of your company’s employee benefit plan’s financial statements and operations by an independent certified public accountant (“CPA”). The purpose of the audit is to provide reasonable assurance that the plan’s financial statements are presented fairly and in conformity with generally accepted accounting principles (“GAAP”). The audit also assesses the plan’s compliance with the Employee Retirement Income Security Act (“ERISA”) and Department of Labor (“DOL”) regulations.

Why Are Audits Required?

Audits are essential for maintaining the integrity of employee benefit plans. They help ensure that the plan’s assets are properly safeguarded, contributions are timely and accurately recorded, and distributions are made in accordance with the plan’s terms. By identifying any operational errors or areas of non-compliance, audits protect both the plan participants and the plan sponsor. Additionally, the audit report is filed with the DOL along with Form 5500, fulfilling a regulatory requirement.

When Is an Audit Required?

Generally, an employee benefit plan audit is required if the plan has 100 or more participant account balances on the first day of the plan year. However, there’s an exception known as the 80-120 participant rule. If your plan has between 80 and 120 participant account balances on the first day of the plan year, you may have the option to file as a “small plan”, and avoid an audit, provided you filed as a small plan during the previous year. Understanding these thresholds is crucial to determine your audit requirements.

Preparing for Your First Audit

Selecting the Right Auditor

Choosing an experienced and knowledgeable auditor is a critical first step. Look for a CPA firm with a dedicated team specializing in employee benefit plan audits. Their expertise with ERISA regulations and familiarity with DOL requirements will be invaluable. A qualified auditor not only ensures compliance but can also provide insights to improve the plan’s operations and controls.

American Institute of Certified Public Accounts (“AICPA”) Audit Quality Center member firms show their commitment to providing quality audit services to ERISA plan by voluntarily adhering to higher standards of audit quality in their policies, procedures and training related to the performance of benefit plan audits. Those standards are the benchmark of their commitment to quality performance and client service. You can find a listing of audit firms in your area at the AICPA Audit Quality Center’s website at https://www.aicpa-cima.com/resources/download/ebpaqc-firm-members.

Determining Expected Costs

Understanding the costs associated with the audit helps in budgeting and planning. Audit fees can vary based on the size and complexity of your plan. Discuss the fee structure with potential auditors upfront, and inquire about any additional expenses that might arise during the process. Remember that while cost is an important factor, the auditor’s expertise and the quality of service are equally significant.

Gathering and Organizing Required Documentation

One of the most time-consuming aspects of preparing for an audit is gathering all the necessary documentation. Organizing these documents beforehand can streamline the audit process and reduce time spent answering follow-up questions. Key documents include:

• Plan Documents: The current plan document and any amendments, summary plan descriptions, and Internal Revenue Service (“IRS”) determination letters.
• Financial Statements: Prior year financial statements, trial balances, and trust reports.
• Participant Records: Detailed participant data, including eligibility, contributions, distributions, loans, and investment elections.
• Operational Documents: Meeting minutes from plan committee meetings, policies and procedures, and internal control narratives.
• Service Provider Agreements: Contracts with third-party administrators, investment managers, and other service providers, including fee schedules.
• Compliance Documentation: Form 5500 from prior years, nondiscrimination testing results, summary annual reports, and any correspondence with the DOL or IRS.

Ensuring that these documents are up-to-date and readily accessible not only aids the auditor but also demonstrates your commitment to good governance.

The Audit Process

Phase 1: Preparation

The preparation phase sets the foundation for the entire audit. During this stage, you’ll coordinate with your auditor to establish timelines, discuss the scope of the audit, and provide the requested documentation. Effective preparation involves:

• Initial Meeting: Schedule a planning meeting with your auditor to align on expectations, communication preferences, and key deadlines.
• Document Submission: Assemble and submit all requested documents in an organized manner. Utilize secure channels for transmitting sensitive information.
• Addressing Preliminary Questions: Be proactive in clarifying any uncertainties the auditor may have regarding plan operations or recent changes.
• Providing the auditor access to your third-party administrator’s (“TPA”) website: Providing the auditor direct access to your plan records through their own account with the TPA significantly reduces the initial documentation requests and administrative burden on your team.

By laying the groundwork effectively, you help ensure that the audit proceeds efficiently and stays on schedule.

Phase 2: Fieldwork

In the fieldwork phase, the auditor dives deep into examining the plan’s financial records and operational compliance. This may be done on-site or remotely, depending on your agreement. Key activities include:

Testing Transactions: The auditor will select samples of contributions, distributions, loans, and participant data to verify accuracy and compliance.

• Assessing Internal Controls: Evaluating the design and implementation of your internal controls.
• Compliance Review: Ensuring that the plan is operating in accordance with its terms and ERISA regulations.
• Interviews: Conducting discussions with personnel involved in plan administration to gain insights into procedures and controls.

Throughout this phase, open communication is vital. Promptly addressing any additional requests or questions can help keep the audit on track.

Phase 3: Report Delivery

Upon completion of fieldwork, the auditor will compile their findings and issue the audit report. This includes:

Audit Opinion: A statement on whether the financial statements present the plan’s financial status fairly and in accordance with GAAP.

• Management Letter: A report detailing any internal control deficiencies or areas for improvement, along with recommendations.
• Financial Statements: Audited financial statements to be attached to Form 5500.

Review the auditors’ findings carefully. Address any identified issues and consider implementing recommended improvements. Finally, ensure that the audit report and Form 5500 are filed with the DOL by the required deadline.

Communication with Your Auditor

Establishing a strong rapport with your auditor can make the audit process more productive and less stressful. Here are some tips for effective communication:

Be Responsive: Timely responses to information requests help prevent delays. If gathering certain documents will take time, let the auditor know.

• Ask Questions: Don’t hesitate to seek clarification on audit procedures or why specific information is needed. Understanding the process can alleviate concerns.
• Provide Updates: Inform the auditor of any significant events or changes in the plan since the last audit or during the audit period.
• Feedback Loop: After the audit, provide feedback on the process. This can help improve future audits and strengthen the professional relationship.

Remember, the auditor is not only assessing compliance but can also be a valuable resource for best practices and insights into plan administration.

Common Errors and How to Avoid Them

Being aware of common pitfalls can help you take preventive measures. Some frequent errors include:

Untimely Remittance of Contributions: The DOL requires employee contributions to be deposited into the plan as soon as they can be reasonably segregated from the employer’s assets. Delays can result in prohibited transactions and require corrective action. To avoid this, establish a consistent process for timely remittance and monitor compliance regularly.

Participant Eligibility Errors: Failing to enroll eligible employees or enrolling ineligible employees can lead to significant compliance issues. Maintain accurate records of employee eligibility and ensure that HR and payroll systems are updated with plan provisions.

Incorrect Calculation of Contributions and Matches: Mistakes in calculating employee deferrals or employer matching contributions can affect participants’ account balances. Implement validation checks in payroll systems and conduct periodic reconciliations to ensure accuracy.

Inadequate Documentation: Lack of proper documentation can hinder the audit process and lead to compliance concerns. Establish a document retention policy and keep organized records of all plan-related activities, transactions, and communications.

By addressing these common errors proactively, you can enhance compliance and improve the overall administration of your employee benefit plan.

Conclusion

While the prospect of your first employee benefit plan audit may seem challenging, thorough preparation and a clear understanding of the process can transform it into a positive experience. By selecting the right auditor, gathering and organizing documentation, fulfilling your fiduciary responsibilities, and maintaining open communication, you set the stage for a successful audit. Moreover, embracing the audit as an opportunity to enhance your plan’s operations can lead to lasting benefits for both your organization and your plan participants.

If you have questions or need assistance with your employee benefit plan audit, our team of experienced professionals is here to support you every step of the way. Together, we can navigate the complexities of the audit process and ensure the continued success and compliance of your benefit plan.

About the Author

Eric Ritz is an Assurance Director at GreerWalker. He has more than 19 years of professional assurance experience providing audit and assurance services to an array of closely held businesses. Eric specializes in serving clients in the manufacturing and distribution industries, many of which operate with international affiliates. His experience encompasses working with a diverse range of plans such as defined benefit plans, defined contribution plans, health and welfare plans, and ESOPs.