For many plan sponsors, it starts with a letter.
You receive a notice that your retirement plan now has 100 participants, and you’re required to have an independent audit.
This may be the first you’ve ever heard of an employee benefit plan audit, and here’s what you need to know:
Who needs an employee benefit plan audit?
The Department of Labor (DOL) requires audited financial statements for any retirement plan with 100 or more eligible participants at the beginning of the plan year. Eligible refers to anyone who qualifies to participate, whether or not they’ve actually enrolled in the plan.
Why does the DOL require this?
Your retirement plan holds your employees’ money. And an independent audit ensures that your plan is healthy, having the funds to pay benefits to your participants.
It provides assurance that plan assets are being handled properly, contributions are going in correctly, distributions are being processed and nothing is slipping through the cracks.
What can you expect during the process?
During the audit, a CPA will examine the plan’s financial statements to:
- Confirm that plan sponsors are fulfilling their fiduciary duty to plan participants
- Evaluate internal controls and identify any weaknesses
- Verify that contributions, distributions and loans are being processed in accordance with plan documents and regulations
- Flag operational errors, compliance issues or potential fraud risks
What happens if you skip an audit?
If your plan qualifies as a large plan (100 or more participants), you cannot file your Form 5500 without an audited financial statement attached.
Miss the filing deadline? DOL penalties start at $2,259 per day. Beyond the financial hit, failing to comply can also expose your company to fiduciary breach claims from participants, meaning personal liability, not just penalties assessed against the plan.
Keep in mind, you may not know you need an audit until after the plan year has already started. For example, your plan year begins January 1st with 105 eligible participants. That triggers the audit requirement — but the audit itself can’t begin until after the plan year closes on December 31st. Your Form 5500 is due July 31st (or October 15th with an extension). If you’re approaching 100 participants, we recommend that you start the conversation with your CPA before you cross that threshold.
If your plan had fewer than 100 eligible participants at the beginning of the prior plan year and filed as a small plan, you may be able to continue filing as a small plan even if you’ve crossed 100, as long as you don’t exceed 120.
This transition period gives growing businesses a little more leeway, but it has specific conditions that you should also discuss with your CPA.
Ensuring a smooth process
Your first employee benefit plan audit may seem daunting, but here are a few things you can do to make go smoothly:
- Get organized. Pull together your plan documents, investment review records, contribution calculations and any other supporting documentation. More importantly, make sure your plan is operating the way those documents say it should. We’ve found that discrepancies between the written plan and actual practice are one of the most common audit issues.
- Know what will be tested. Auditors will typically cover contributions, participant data, payroll records, loans, distributions, non-discrimination testing and any prohibited transactions. Have the relevant documentation ready before they ask for it.
- Loop in your third-party administrator (TPA) and recordkeeper. The audit team will need data from them too, and getting everyone aligned upfront saves a lot of back-and-forth. Having the right people accessible keeps things moving.
A health check for your employee benefit plan
An employee benefit plan audit protects your employees and provides confidence that everything is running the way it should.
The CPAs at Magone & Company can walk you through exactly what to expect. Our team has 30+ years of expertise with employee benefit plan audits across a wide range of industries. Reach out for a free consultation or call (973) 301-2300.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your unique circumstances.