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Preparing for an Employee Benefit Plan Audit

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Not all Employee Benefit Plans are created equal and not every plan requires an audit. An employee benefit plan audit (EBP) is an audit of the plan’s financial statement. The audit reports the plan’s financial standing and general information about the plan. First, you’ll need to determine if an audit is required for the current plan year. Additional benefits from an audit can highlight strengths and weakness of the plan, specifically on plan operations, efficiency, controls, and how well the plan complies with IRS and Department of Labor regulations.

Whether your employee benefit plan is being audited for the first time or the 20th, below are some helpful tips to prepare for your audit.

Does my plan need an audit?

Generally, plans with 100 eligible participants at the beginning of the plan year are required to submit audited financial statements with their Form 5500. Defined contribution plans (401(k), 403(b), and employee stock ownership plans), defined benefit pension plans, and health plans, meeting the participant requirement are all subject to Employee Retirement Income Security Act 1974 (ERISA).

How to select an independent auditor.

Once the conditions are met for an audit of the plan, you’ll need to select an auditor. EBP audits have unique characteristics. Only an independent public accountant is qualified to perform a plan audit. It is important to choose an auditor with specific training and experience performing the specialized EBP audits. An auditor who provides guidance for any deficiencies that may be discovered is a critical element of the service. The independent auditor will review internal controls to identify weaknesses and be looking out for the best interest of the participants.

Some key questions to ask when considering an auditor are: How many employee benefit plan audits do they perform each year? Does the audit firm have a dedicated team that focuses on employee benefit plan audits? Is there specialized employee benefit plan audit training?

Key Plan Provisions

Now that the independent auditor has been selected, it is time to familiarize (or refamiliarize) yourself with the plan provisions. It is helpful for the Plan Administrator to read the Plan document and any amendments to the Plan before the audit begins and provide those documents to the auditor. Ultimately, the auditor will perform tests to ensure the Plan operations are in line with the provisions in the plan documents. Key plan provisions areas to review and areas where common deficiencies are:

  • Definition of eligible compensation
  • Eligibility to defer and any differences in match or profit sharing
  • IRS limits
  • Vesting
  • Timely remittance of contributions to the Plan

Third-Party Administrator

If possible, provide the auditor with access to the third-party administrator, most likely through an online portal. This will help improve the efficiency of the audit because the auditor can pull reports directly from the third-party administrator and request any additional support. This will also save plan administration and management time in fulfilling any auditor’s requests for information.

Record Keeping

It is advisable throughout the year, to keep notes and accurate records to help gather information requested by the auditor. Plan administrators should also be forthcoming with any issues encountered during the plan year, whether they were resolved or are still outstanding. It is not uncommon for the audit to occur a year after an issue was identified so keeping notes is helpful when recalling details about the situation.

The Audit

An audit will verify the eligibility of participants, current employees of the plan sponsor and terminated or retired employees that still have assets in the plan. The auditor will likely provide a list of requested documents at the beginning of the audit. It is important to communicate expectations for when the documents will be available to the auditor for adequate planning and scheduling. Likewise, the auditor should communicate expected deadlines for when the draft and final audit report is to be provided. Your 5500 and the audit report filing is due seven months after the plan year ends. Extension can be applied for and the extension will grant you an additional two and half months to file the return and audit. A quality audit will help the Plan Administrator fulfill the responsibility to file an accurate Form 5500 tax return for the plan. Penalties can be assessed for incomplete returns or untimely audit report, but these can be avoided by selecting an experienced and reliable independent auditor.

Communication, detail record keeping, and record retention are key when it comes to planning and preparing for the independent audit of your employee benefit plan.

At Maner Costerisan, we understand the complex challenges plan administrators face and are committed to providing quality EBP audits. We help our clients through a EBP audit process, while offering the advisory tools necessary to stay complaint. We know employee benefit plans and we can help.

Dave Henson, Business Development Manager - Maner Costerisan

Dave Henson

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