Weiss FAQ: Employee Benefit Audits

Welcome to Weiss FAQ, a series of occasional blog posts that tackle topics of interest to our clients and others in the small business community. In this edition we cover the annual audits required for certain employee benefits plans by the IRS and Department of Labor.

What is an employee benefit audit?
Companies that offer their employees retirement benefit plans — including 401(k)s, employee stock ownership plans (ESOPs), and defined benefit pension plans that are identified as large plans – must have an annual audit of their plan conducted by certified public accountants.

The audit report and financial statements must then be submitted with Form 5500, the plan’s annual filing to the IRS and Department of Labor.

Who must complete an employee benefit audit?
Not every company needs to have this audit. An employee benefit plan audit is only required if the plan has at least 100 eligible plan participants (whether they have chosen to participate in the plan or not) on the first day of the plan year. Participant counts include those who are no longer with the company but still have plan balances.

If a company has fewer than 100 eligible participants, they have what is considered a small plan, and are not required to have an audit.

Are there any exceptions to the 100+ employee rule?
If a company previously filed as a small plan because they had less than 100 eligible employees, and then the next year they had 120 eligible employees, it can still file as a small plan without an audit. That’s because companies can file within the same category as the previous year as long as there are between 80 and 120 participants in the beginning of the plan year. This is known as the 80-120 rule.

When does a 401(k) plan need to be audited?
Audit reports and financials are due with the Form 5500 by July 31, though it is common to file for an extension until October 15. At Weiss, audit field work generally begins in late May or June, and audits are finished throughout the summer.

How should I prepare for an audit?
Gather your most recent Form 5500, W2s, distributions, and other information related to your company’s 401(k) activity. Weiss clients receive an audit preparation checklist from us well in advance to ensure our auditors have all the information we need.

What is covered in a 401(k) audit?
Auditors will review 401(k) plan documents to verify that the plan is compliant with IRS and Department of Labor rules. They will also review the information on required forms and financial statements to ensure they are accurate and determine whether contributions were remitted, distributions were paid out correctly, and loans were allocated within regulatory limits.

What are some issues generally found in employee benefit plan audits?
Benefit plan administrators often don’t know they have any issues before they have an audit, which can spotlight issues such as discrepancies in how compensation is calculated versus how plan documents say it should be calculated. Issues like this can then be resolved before clients run into problems with the Department of Labor.

How do you know if you’ve had a good audit?
Audit reports with financial statements should run 15 to 20 pages in length. The audit is also an opportunity for the tax professional to identify potential weaknesses in a plan’s internal controls. A good auditor will provide insight and feedback beyond the report – this level of communication is key.

That covers the basics of employee benefit plan audits. If you’d like to learn more, we encourage you to visit our employee benefit plan audit web page, or for answers to specific questions, contact one of our resident experts on the topic, Chris Bozarth or Dennis Anderson.