News & Insights

Employee benefit plans come with plenty of terminology, deadlines, rules, and reporting requirements. For plan sponsors, understanding what is required can feel like learning a whole new language.  

To make things a little easier, we’ve compiled answers to some of the most common questions about employee benefit plan audits, ERISA, the Department of Labor (DOL), Form 5500, 401(k) plans, and 403(b) plans.  

What Does ERISA Stand For?  

ERISA stands for the Employee Retirement Income Security Act of 1974. ERISA sets standards for how most private-sector employee benefit plans operate and protects individuals participating in those plans.  

What Does DOL Stand For?  

DOL stands for the U.S. Department of Labor, which is one of the federal agencies responsible for overseeing employee benefit plans and enforcing ERISA requirements.  

Retirement plans are also subject to requirements administered by the Internal Revenue Service (IRS). In general, the DOL focuses on fiduciary responsibilities, reporting, and disclosure, while the IRS oversees many tax-related requirements applicable to retirement plans.  

When is an Employee Benefit Plan Required to Have an Audit?  

Generally, an employee benefit plan is subject to an annual audit when it is considered a large plan for Form 5500 reporting purposes.  

For plan years beginning on or after January 1, 2023, a plan generally uses the number of participants with account balances at the beginning of the plan year to determine whether it is a large plan. Generally, a plan with more than 100 participants with account balances at the beginning of the plan year is subject to the large-plan filing requirements and may need an audit.  

For a new plan, the participant count is generally determined based on the number of participants with account balances as of the end of the initial plan year.  

Plan sponsors can find the participant count used for this determination on Form 5500, Schedule H or I, as applicable. Because participant-count rules can be nuanced, plan sponsors should consult their plan administrator, auditor, or other qualified professional when determining whether an audit is required.  

What is the Difference Between a 401(k) and a 403(b) Plan?  

Both 401(k) and 403(b) plans are employer-sponsored retirement plans that allow employees to save for retirement, but they generally serve different types of employers and have some important differences.  

401(k) Plans  

For-profit employers generally offer a 401(k) plan, although certain tax-exempt organizations may also sponsor 401(k) plans.  

Common characteristics include:  

• A broad range of potential investment options  

• Employee pre-tax and Roth contributions  

• Potential employer contributions, such as matching or nonelective contributions  

• IRS limits on employee and employer contributions  

• Annual nondiscrimination testing requirements, including ADP and ACP testing, unless an applicable exemption applies  

• Potential top-heavy testing  

• Form 5500 reporting and, when applicable, an annual plan audit  

403(b) Plans  

Tax-exempt organizations, public schools, and certain other eligible employers generally offer a 403(b) plan.  

Common characteristics include:  

• Employee pre-tax and Roth contributions  

• Potential employer contributions  

• Investments generally consisting of annuity contracts or mutual funds  

• Special catch-up contribution provisions, including a potential 15-year service catch-up for eligible employees  

• The Universal Availability Rule, which generally requires eligible employees to be allowed to make elective deferrals  

• Certain exemptions from nondiscrimination testing that may apply  

• Form 5500 reporting and the same general audit threshold as other defined contribution plans  

While 401(k) and 403(b) plans differ in important ways, both are subject to applicable IRS contribution limits, reporting requirements, and fiduciary responsibilities.  

What is Form 5500, and When is It Due?  

Form 5500, Annual Return/Report of Employee Benefit Plan, is used to report information about employee benefit plans to the federal government.  

For most plans, Form 5500 is due on the last day of the seventh month following the end of the plan year. A plan generally may request an extension of up to 2½ months. For example, a calendar-year plan with a December 31 year-end generally has a Form 5500 filing deadline of July 31, with an extension potentially moving the deadline to October 15.  

Because filing requirements and deadlines can vary by plan and circumstances, plan sponsors should confirm the applicable deadline for their specific plan.  

How is the Form 5500 Related to an Employee Benefit Plan Audit?  

The Form 5500 and the employee benefit plan audit are closely connected.  

When a plan is subject to the large-plan filing requirements, the Form 5500 generally must include an independent qualified public accountant’s report on the plan’s financial statements. That report is the final deliverable from the employee benefit plan audit.  

In other words, the audit is not a separate exercise from the Form 5500 process. The audit report is an important component of the plan’s annual reporting requirements.  

What is a Section 103(a)(3)(C) Audit?  

A Section 103(a)(3)(C) audit is a type of employee benefit plan audit that allows the plan auditor to rely on a certification of investment information from a qualified institution.  

It was formerly known as a limited-scope audit. The name may have changed, but the concept remains important for plans whose investments meet the applicable requirements.  

Under a Section 103(a)(3)(C) audit, the auditor may exclude certain investment information from the audit procedures when the investments are covered by a certification from a qualified institution, such as a bank, trust company, insurance company, or similar institution that meets the applicable requirements.  

Not every investment certification qualifies, so plan sponsors should work with their auditor to determine whether a Section 103(a)(3)(C) audit is appropriate for their plan.  

What Are Some Common Issues Found During a Retirement Plan Audit?  

An employee benefit plan audit identifies whether a plan operates in accordance with its governing documents and applicable requirements. Several issues recur during retirement plan audits.  

Untimely Employee Contributions  

Employee contributions generally must be deposited into the plan as soon as they can reasonably be segregated from the employer’s general assets. Delays or inconsistent contribution practices can create compliance concerns.  

Missing Documentation of Fiduciary Activities  

Plan fiduciaries must make prudent decisions and act in the best interest of plan participants and beneficiaries. Plan sponsors should maintain appropriate documentation of activities such as investment committee or board meetings, including meeting minutes and records of significant decisions.  

Incorrect Compensation Definitions  

The plan document determines which compensation is used to calculate employee deferrals and employer contributions. If the definition of compensation is not applied correctly, contributions may be calculated incorrectly.  

These issues do not necessarily mean a plan is fundamentally flawed, but they can indicate areas where stronger processes, documentation, or controls may be needed.  

What Does an Employee Benefit Plan Audit Cover?  

An employee benefit plan audit involves much more than simply reviewing investment balances.  

Auditors evaluate whether the plan is operating in accordance with its plan document, amendments, and key plan provisions. Depending on the plan, an audit may include areas such as:  

• Eligibility requirements  

• Definition of compensation  

• Employee contributions and deferrals  

• Employer matching or other employer contributions  

• Benefit payments and distributions  

• Participant loans  

• Investment earnings and investment classifications  

• Prohibited transactions  

• Compliance with applicable plan provisions  

• Participant data and account balances  

• Internal controls over key plan processes  

The specific procedures performed depend on the plan type, its structure, and applicable auditing requirements.  

What Can Plan Sponsors Do to Prepare for an Employee Benefit Plan Audit?  

Good preparation can make the audit process more efficient and help identify potential issues before the audit begins.  

Plan sponsors should consider:  

• Reviewing the plan document and recent amendments  

• Confirming that employee eligibility is being applied correctly  

• Reviewing the timing of employee contribution deposits  

• Verifying that compensation is being calculated according to the plan’s definition  

• Maintaining documentation of fiduciary and investment committee meetings  

• Gathering records related to employee contributions, employer contributions, distributions, and loans  

• Reviewing prior-year audit findings and confirming that any identified issues have been addressed  

• Communicating with the plan’s third-party administrator and auditor early in the process  

A proactive approach can help reduce surprises and make it easier to address questions that arise during the audit.  

Have More Questions about Employee Benefit Plan Audits?  

Employee benefit plan requirements can be complex, and the answers aren’t always as straightforward as they may seem. Understanding ERISA compliance requirements, Form 5500 reporting, retirement plan audits, and fiduciary responsibilities can help plan sponsors stay organized and address potential issues before they become larger problems.  

Maner Costerisan works with organizations on employee benefit plan audits and can help plan sponsors navigate the audit process, understand reporting requirements, and identify opportunities to strengthen plan processes and controls.  

If a plan sponsor has questions about an upcoming audit, Maner’s employee benefit plan audit team is available if you contact us.