Q & A: Understanding Employee Benefit Plan Audits

Chris Bozarth is a partner at Weiss & Company LLP who oversees the firm’s Accounting & Advisory Services Department. He has more than 20 years of accounting, auditing and consulting experience and oversees the employee benefit plan audit practice of the firm.
Chris sat down recently to discuss employee benefit plan audits, benefit plan audit requirements, how to spot a bad benefit plan audit, and how Weiss provides companies with valuable feedback beyond the audit.

First of all, what is an employee benefit plan audit?
Good question – not everyone is aware of these audits, and not everyone understands when they are required. Retirement benefit plans, including 401(k)s, employee stock ownership plans (ESOPs), and defined benefit pension plans that are identified as large plans are required to have an annual audit conducted by certified public accountants. An audit report and financial statements need to be submitted with Form 5500, which is the plan’s annual filing to the IRS and Department of Labor. These audits have been around since the Employee Retirement Income Security Act of 1974.

Here at Weiss, we do audits for those retirement plans I mentioned, but the vast majority of benefit plan audits we conduct are for 401(k) plans.

Is every company required to have their benefit plan audited?
No – and this is one question that throws people off. An audit is only required if the plan has at least 100 eligible plan participants on the first day of the plan year. If you have fewer than 100 eligible participants (whether they have chosen to be in the plan or not), that is considered a small plan, and you are not required to have an audit.

Normally once you have over 100 eligible employees on the first day of the plan year the plan is considered a large plan and is subject to the audit requirements. But let’s say you previously filed as a small plan because you had less than 100 eligible employees, and then your eligible participant count as of the first day of the plan year goes up to 120. You can still elect to file as a small plan and not be subject to an audit until the year that your eligible participant count exceeds 120. This is known as the 80-120 rule. This was done so that plans whose participant counts fluctuate over and under the 100 eligible participant threshold from year to year aren’t shifting between small and large plan status and being unnecessarily subjected to the audit requirements.

We often get calls from prospective clients who say their TPA (Third Party Administrator) told them they needed an audit. We recommend that they review their census – the list of all the eligible plan participants – and they may find out they weren’t over 120 employees on the first day of the plan year, so they don’t need an audit after all. That saves them time and money

What is Weiss’s process for conducting audits?
I can say that we have been doing this for so long that our process is pretty streamlined. We have about 10 staff members experienced in this practice area. During the summer, their focus is on benefit plan audits. We generally perform audits in teams of two and each audit ends with a manager and partner review. Our clients generally have the same team every year, which provides the client with consistency, good communication, and a seamlessly executed audit year after year. They know what to expect.

I oversee the benefit plan audits with my fellow partner, Dennis Anderson. For us, these audits have become routine but we do not take them for granted due to the scrutiny they are subjected to by the DOL (Department of Labor), and we are successful due to our years of experience. Our team knows every step, and our clients appreciate the consistent, reliable experience they get year after year.

How long does it take?
Generally, we start audit field work in late May or June, where we are on site with the client, reviewing their files. This usually takes about a week. We then finish the audits throughout the summer, communicating back and forth with the client, and then complete the financial statements and audit report by the end of September. The audit report and financials are due with the Form 5500 by the July 31 filing deadline, though extensions until October 15 are common.

How much experience do you have doing these audits?
I’ve been with Weiss for more than 20 years, and I’ve been doing benefit plan audits since I started.

We have several dozen clients, so we have a lot of experience in this area. We offer better value than the large firms, and better communication and service. Larger firms will send out their less experienced employees to do these audits, instead of offering the same experienced team each year. On the flip side, some smaller firms might offer low-priced audits, but you get what you pay for. This is a specialized, niche area. Unless you do a fair amount of these audits, there are things that can be overlooked.

What do you find in audits that companies should know about?
It’s an opportunity for us to kick the tires of the company’s benefit plan. We may identify discrepancies in how something such as compensation is calculated versus how the plan documents says it should be calculated, so it provides us an opportunity to talk with our clients about any issues and resolve them before they run into problems with the Department of Labor. Benefit plan Administrators often don’t know they have issues until they have an audit, or they have had a deficient audit that didn’t reveal this information.

How do you know you’ve had a deficient audit?
Even basic 401k audits result in an audit report with financial statements and footnotes that are generally 15 to 20 pages in length. If you receive an audit report that’s only five pages long and has no disclosures, that’s a sure-fire sign you’ve had a bad audit. Communication is another sign. At Weiss, we use the audit as an opportunity to help businesses identify potential weaknesses in their plan’s internal controls. We strive to offer our clients insight and feedback beyond the standard report.

If your auditor doesn’t request information before fieldwork starts, doesn’t talk to you and ask questions during the process and provides you a basic report without any follow through, that could be a deficient audit.

What are the risks of getting a deficient audit?
I’ve heard horror stories of the Department of Labor requesting auditor workpapers and finding that there are none and that no testing was done, and the auditor just rubber-stamped an audit report and signed off. That can result in an audit failure and in drastic situations a loss of the plans qualified status, which could lead to cascading issues, like amended returns related to past filings. That’s a worst-case scenario.

Let’s say you go under 100 eligible employees for one year and aren’t required to complete an audit. Are there benefits of still doing it?
If you think it’s possible you’re going to be back over 100 eligible participants the next year, skipping the audit for a year usually isn’t that productive, because any time we do a new audit we need to audit the beginning balances. So we are ultimately going to have to go back and look at everything from that prior year. Generally, it’s better to just continue to do the audit until the plan is certain it will not go back over 100 eligible participants.

What do you do during the summer when you’re not working on audits?
Usually, after tax season, I take a much-needed vacation. Over the summer, I try and keep up with my three kids, taking them to their activities, like gymnastics and dance. I like to golf, though I often don’t have much time as I would like to get out on the course these days.