The 5W’s to A Successful Employee Benefit Plan Audit

Updated 2024

If your Employee Benefit Plan were to get audited today, are you prepared?

A company’s employee benefit plan (EBP), can refer to 401(k), pensions, or profit-sharing plans among others. Once companies reach a certain number of employees enrolled in their employee benefit plans, they are required to have their plans audited to ensure they are in compliance with federal regulations. We’ve prepared a comprehensive breakdown of the who, what, when, why, and how to prepare for a successful EBP audit.

What is an EBP audit and why is it necessary?

An Employee Benefit Plan audit is a requirement by the United States Department of Labor (DOL) to ensure companies remain in regulatory compliance, and to assess the ability of the plan to cover current and future benefits and payments. An employee benefit plan must adhere to the DOL, ERISA, and IRS standards and regulations.

Conducting an audit of a company’s EBP can be complex. An EBP audit reviews whether the EBP is in compliance with all required regulations.  Non-compliance is disclosed in the audited financial statements, and the EBP is responsible for correcting non-compliance issues for future reporting periods.

Who needs an EBP audit?

The key indicating trigger for an EBP audit is if there are 100 or more participants with existing account balances at the start of the plan year. Depending on how you file your Form 5500, if you file as a small plan and have fewer than 120 participants, you may not require an audit. However, if you file as a large plan and have more than 100 participants, you may require an audit. There are other conditions and factors that come into play when determining if your plan needs an audit; thus, making it critical that you work with your accountant to make the proper determination.

How to prepare for an upcoming audit?

A wise tale once said the best way to prepare for tomorrow is to do your best today, and the saying applies to preparing for your upcoming EBP audit. Prior to the initial onset of your audit engagement, your company should work diligently to ensure your documents are in order to help the audit process run smoothly and eliminate prolonged time and costs for all parties. Here are a few items to consider when preparing for your audit engagement:

• Have specific plan details ready to be discussed
• Keep detailed files for each plan year
• Have financial statements and documents relating to the plan ready to be reviewed
• Familiarize yourself with the compliance regulations of the plan
• Review internal controls to ensure accurate and appropriate documentation and reporting

In the instance your company does not yet require an EBP audit, but is nearing 100 eligible employees, we recommended getting your EBP documentation in order and reviewed. To best be prepared for an actual EBP audit, your company can review internal processes as if you were to begin an audit engagement. This preparation ahead of time will not only help familiarize your company with the necessary components of the engagement, but potentially eliminate reporting errors, time, and costs of an official audit.

When do you need to have your EBP audited?

EBP audits are to be conducted annually, and if a company fails to do so, it can result in daily fines and penalties from the IRS as well as serious ramifications from the Department of Labor. Your EBP audit is typically due with your annual tax return and is eligible for extension filings given the calendar specifications of your plan.

How do I choose who should do my EBP audit?

Given the regulatory-heavy requirements of EBP audits, when looking for the appropriate accounting firm to engage with, you should only consider firms with the following designations and standards:

• Auditors are Certified Public Accountants (CPA)
• Auditors are members of the American Institute of Certified Public Accountants (AICPA)
• Are an independent CPA firm in relation to the plan

Additionally, every three years the Department of Labor requires CPA firms that conduct 401(k) audits to be subjected to peer reviews. When looking for a CPA firm to conduct an audit of your employee benefit plans, consider firms that are transparent with their peer review results and are willing to share them with you. This will help confirm your confidence in the auditors on the team working for you.

HM&M has worked with clients’ employee benefit plans all over the state of Texas for over 40 years. We understand the complexities of performing these audits and have a team of highly-trained and skilled professionals who specialize in this audit sector.

Whether your firm needs assistance reviewing internal controls to prepare for future EBP audits or is looking for an independent firm to conduct your EBP audit engagement, our team has you covered.

We’re happy to provide our past EBP audit peer reviews and are confident we are the right auditors for your plan. For more information on how we can answer your employee benefit plan audit questions or provide assistance, contact Jorge Martinez today.