Employee Benefit Plan Audits
What is the Purpose of a Plan Audit?
A plan audit conducted by the IRS ensures that plans follow regulatory compliance requirements to maintain their status as qualified retirement plans.
In addition to these aims, the DOL looks to the auditor to provide their judgment on the accuracy and material fairness of information submitted as part of the Form 5500.
This process also includes highlighting areas of weakness or operational errors which can be addressed to enhance the operations of the Employee Benefit Plan. Lastly, an Employee Benefit Plan audit assists the sponsor of the Employee Benefit Plan in carrying out the legal requirement to file the Form 5500.
How are Plans Selected for Audits?
Some plans are audited because of red flags from reviews of 5500 Forms. Most plans audited by the IRS or DOL each year are randomly selected.
Who Can Represent Me in an Audit?
An attorney, accountant, enrolled agent, enrolled actuary, a third-party administrator, ERISA legal counsel, investment trustees and administrators, as well as an independent auditor, or may all play a significant role in this process, as applicable.
What are the Areas of Review?
Eligibility, participation, and coverage— Are eligible employees properly participating?
Vesting—Have service and vesting been properly credited?
Discrimination—Do contributions, benefits, rights, or features favor highly compensated employees in a non-compliant manner?
Top heavy requirements—Have minimum contributions and benefits, and accelerated vesting, been provided
Contribution and benefit limits—Are contributions and benefits within applicable limits?
Funding and deductions—Are contributions sufficient and timely, and deductions within applicable limits?
Distributions—Are distributions properly made and timely and accurately reported?
Trust activities—Is the trust operated for the exclusive benefit of participants and in accordance with fiduciary standards?
Plan and trust documents—Does the form of the plan and trust timely meet applicable tax law
Returns and reports—Were federal returns and reports timely and accurately filed?
How do you determine if an audit is required for your employee benefit plan?
One key determiner is the size of your plan.
Employee Retirement Income Security Act (ERISA) guidelines generally require employee benefit plans with 120 or more eligible participants at the beginning of the plan year to have an audit of the plan’s financial statements.
So, if your Employee Benefit Plan consists of fewer than 120 eligible participants at the start of the plan year and you file as a Small Plan (Schedule 1) for your Form 5500, you do not require an audit. However, if you file as a Large Plan (the accompanying Schedule H) with more than 100 eligible participants, you will require an audit.
While this is the general rule, there are other important factors to consider, as well as other exceptions relative to health and welfare plans depending on whether the plan is considered funded or non-funded.
You should be aware of a few exceptions:
- 80-120 Rule
If the number of participants reported on line 5 of Form 5500 is between 80 and 120, and a Form 5500 annual return/report was filed for the prior plan year, the plan may elect to complete the Form 5500 in the same category (”large plan” or ”small plan”) as was filed for the prior return/report. Thus, if a Form 5500 annual return/report was filed for the prior plan year as a small plan, including Schedule I if applicable, and the number entered on line 5 of the current year Form 5500 is 120 or less, the plan may elect to complete the current Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing Form 5500-SF instead of Form 5500. - Short Plan Year Rule
If the plan had a short plan year of seven (7) months or less for either the prior plan year or the plan year being reported on the current Form 5500, an election can be made to defer filing the audit in accordance with 29 CFR 2520.104-50. If such an election was made for the prior plan year, the current Form 5500 must be completed following the requirements for a large plan, including the attachment of Schedule H and the audit reports, regardless of the number of participants entered in Part II, line 5.