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When do you need an employee benefit plan audit and who should do it?


You know you need to file a Form 5500—and what else?
The Employee Retirement Income Security Act of 1974 (ERISA) requires that an annual report be filed with the Department of Labor (DOL) by defined contribution plans, defined benefit plans, and certain welfare benefit plans. The annual report consists of the Form 5500 and appropriate schedules, financial statements, and auditor’s reports, as applicable.

That’s the big question: When does the auditor’s report become applicable?

100 participants, give or take—now do you need an ERISA audit?
Generally speaking, if your plan has more than 100 participants at the beginning of the plan year, you will be required to attach separate audited financial statements to your Form 5500.

For retirement plans, it is not as straightforward as counting the number of people who have a balance in the plan to determine the number of participants. Employees who are eligible to participate in the plan and have elected not to contribute to the plan are considered a “participant” for this rule. As a result, it is possible to have a plan with fewer than 100 participants with account balances and still need to include audited financial statements with your annual Form 5500 filing.

If your plan is even smaller, you are still not necessarily off the hook. Some plans with fewer than 100 participants may be required to have an audit if certain conditions relating to the plan, such as plan investments, bonding, and disclosure requirements, are not met.

Get help crunching the numbers
This is when it is a good idea to talk to a professional. Your attorney, plan advisor, or employee benefit (EB) audit consultant can walk you through the sometimes complex calculations to arrive at the definitive number that triggers whether you need an EB audit.

The DOL and EBSA are paying attention
All Forms 5500 undergo a computerized line-by-line check designed to identify errors or omissions. If deficiencies are found, the DOL can reject the filing and will notify the plan administrator. The DOL can fine plan administrators penalties up to $300 per day (up to a maximum of $30,000) if the deficiencies are not corrected in a timely period.

In addition, the Employee Benefits Security Administration (EBSA) reviews the audit workpapers of selected plans as part of an ongoing quality review program designed to ensure the quality of ERISA audits. If the EBSA believes a substandard audit has been performed, it may reject the plan's Form 5500 filing. Under ERISA, the plan administrators are responsible for ensuring that the financial statements are audited in accordance with U.S. generally accepted auditing standards.

Getting it wrong can be costly
The cost of an audit failure can be significant. The DOL can assess penalties on plan sponsors of up to $1,100 a day (generally limited to a maximum of $50,000) per annual report filing if the auditor’s report is missing or deemed to be deficient.

A few years ago, we helped out an organization that had a Form 5500 filing rejected by the DOL because the audit performed by another CPA firm was deemed to be inadequate by the DOL. The organization was assessed a $50,000 penalty. Our firm was engaged to help the client reduce the assessed penalty and perform an adequate audit for the year that was rejected and the subsequent years. We were able to get the penalty reduced to around $6,000.

100 audits (or more): Reduce your risk of getting a substandard audit
According to ERISA, there are currently over 80,000 employee benefit plans that file audited financial statements with their annual Forms 5500. There are 7330 CPA firms currently performing these audits. Approximately 1% of the CPA firms perform more than 100 audits of ERISA audits. The recent DOL study drew strong conclusions that the firms that perform more than 100 audits a year provide consistently higher quality audits, with fewer errors and potential fines.

When you are looking for an EB auditor, the first question to ask is how many other ERISA audits the CPA firm performs for the type of employee benefit plan that you have. It doesn’t end there. Don’t be shy to ask for references to have an opportunity to discuss the CPA firm’s work for other employee benefit plans. In addition, check to see if the CPA firm is included on the AICPA’s Employee Benefit Plans Audit Quality Center directory of firms. These firms have agreed to meet specific experience, training, and practice monitoring requirements.

You may also want to consider the CPA firm’s ability to provide value-added services that can help you understand and address your fiduciary responsibility as a plan sponsor. Does the CPA firm have consultants that can provide expertise on plan design, plan error correction, plan document preparation, internal training, and representation before the IRS and DOL (if needed)?

Don’t wait…Try to catch errors before the audit
If you wait for errors to be found during an audit, you run the risk that multiple plan years will be affected. You could end up dealing with more complicated corrective actions. Five common operational errors that both the IRS and DOL reference at conferences are:

  1. Untimely remittance of participant contributions
  2. Incorrect definition of compensation used to calculated contributions
  3. Improper match allocations
  4. Incorrect application of the participant eligibility terms of the plan
  5. Improper determination of vesting for participant distributions

By understanding what the common mistakes are and implementing internal controls to prevent, detect, and correct these potential mistakes in a timely manner, you will reduce the risk that operational errors will impact your participants and result in penalties to your organization as a plan sponsor.

If you would like to gain control over your employee benefit audits, contact Bill Enck or Mark LaPrade.

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  • William Enck
    Financial Services, Insurance Agencies
    T 207.541.2300