You’ve just wrapped up your employee benefit plan for your business.
Now you’re wondering…
…what do I do next?
Do you need to check your EBP? If you do, how will you find a good checker?
And most importantly: do we really need to check employee benefit plans?
First off—yes. Most businesses really do need to do this.
The only problem is: 39% of checks are done wrong, according to a study by the DOL in 2011.
But you’re not a checker, you’re just the person running the plan! How are you supposed to know if your check is done wrong or not?
Don’t worry—we’ll explain that (and much more) in just a bit.
But first, let’s figure out if you need to check your employee benefit plan to start with.
Read This First…Do You Need an Employee Benefit Plan Audit?
Before we go any further…
…it’s important to note that not every company with an Employee Benefit Plan (EBP) requires an official audit.
According to DOL regulations, most EBPs with 100 or more eligible employees must submit audited financial plan statements when they file an annual Form 5500.
But there are a couple of exceptions.
If your EBP:
- Falls into the “small” category (less than 100 eligible employees)
- Was recently implemented (seven months or less)
- Was recently terminated
Then your EBP may be exempt from and/or can delay the Employee Benefit Plan Audit process.
There’s also an exception called the 80-120 Rule.
The 80-120 Rule states that any plan with 80-120 eligible employees filing Form 5500 on the first day of the plan year can file in the same “size category” from the previous year. (Meaning, you can still treat yourself as a “small” company if you did so last year.)
So, if your plan fell into the small category last year but has since moved into the large category, you can still file in the small category and avoid an Employee Benefit Plan Audit temporarily.
Just remember to review your plan before moving forward with the auditing process—you may not even need one in the first place.
What Is an Employee Benefit Plan Audit?
An Employee Benefit Plan Audit (or EBPA) ensures that the plan’s financial statements are accurate in order to deliver the designated benefits/funds to eligible employees in a company.
There are four common EBPA types according to the FDIC:
- Defined benefit plans—these plans pay employees a certain amount after they retire.
- Employee welfare plans—these plans provide employees with medical, health, and hospitalization benefits.
- Defined contribution plans—these plans allow for tax-deferred contributions that participants can access at a later date.
- Keogh plans—these plans are used by self-employed individuals to make tax-deferred contributions that participants can access later.
The Department of Labor (DOL) requires that only licensed, independent auditors from CPA firms conduct EBPAs due to their complexity and to ensure standards set by the DOL and IRS are met.
Annual EBPAs are typically due seven months after your plan year ends (July 31st for most), but by filing IRS Form 5588, companies can extend their EBPA due date for an additional 2 ½ months.
Let’s go over a quick checklist from the DOL to guarantee you’re prepared for your EBPA.
You’ll need to:
- Review your auditor’s engagement letter (the document that specifies their responsibilities, the timeline of the work, their fees, etc.)
- Provide any necessary records to the auditor (financial, accounting, etc.)
- If using a third-party record-keeping service, ensure they have what they need to make your records available to the auditor
What does an EBP audit cover?
When conducting an EBP audit, it’s important to evaluate several key areas of the employee benefit plan.
Benefit Disbursements Validation
During an audit, the auditor verifies that the correct benefit amounts were paid to eligible participants and beneficiaries. They confirm the participant data, look at how the benefits were calculated, and verify that the payments were made properly.
Contribution Compliance Assessment
The auditor checks whether the proper contribution amounts were remitted to the plan. This includes ensuring that the contribution records match up, checking that the correct contribution rates were applied, and testing the receipts.
Investment Portfolio Evaluation
When doing a full audit, the auditor goes through your investment portfolio and looks at all your transactions. They check how much your investments are worth, make sure the income you get from them is correct, and see how well your assets are being managed.
Expenditure Oversight
The auditor reviews all the payments made from the plan to ensure they are reasonable administrative expenses. In this step, they check all the invoices, contractual agreements, and allocations of shared expenses.
Participant Data Verification
As part of the auditing process, it is crucial to double-check the data of plan participants. This helps to make sure they’re eligible and enrolled in the plan and that the census data is accurate.
This step also ensures proper coverage and maintains precise recordkeeping. So, the auditor carefully examines the participant data to ensure its authenticity and correctness.
Loan Management Review
This time, the auditor reviews the loan-granting procedures to ensure that loans are granted in accordance with established guidelines and policies.
They also check if the payments were made according to the loan terms and if there are any missed or late payments. This actually helps mitigate default risk and protect plan assets.
Asset Allocation Confirmation
For plans with pooled investments, the auditor verifies each participant’s portion of the pool is accurately calculated and allocated according to the terms of the plan.
This process helps to ensure that the assets are distributed fairly among all participants.
Liability Assessment
The auditor reviews estimates for benefit obligations to ensure that they are accurate and up-to-date.
They also review the funding levels to verify that the company has set aside enough funds to cover these obligations. Lastly, they check to see that the plan has properly accounted for all the liabilities, including any projected future costs.
Tips for a Smooth EBP Audit
For a smooth EBP audit process, it is important to work closely and effectively with your auditors. Here are some tips:
Choosing the Right Auditors
When it comes to selecting auditors for your employee benefit plans, take time to dive into thorough research. Are you considering their experience, qualifications, and reputation in the industry?
Remember, the right auditors can make a big difference in how smooth and effective your audit process goes.
Start by exploring various audit firms, assessing their track records, and ensuring they have the expertise needed to meet your specific audit requirements. This will help you set a solid foundation for a successful audit experience.
Assemble Relevant Documents
Make sure you gather all the papers the auditors need to review.
This includes plan documents, summary plan descriptions, investment policy statements, distribution forms, contribution reports, financial statements, board resolutions, and any other related materials.
Keep the papers well-organized, so the auditors can easily find and reference them.
Developing an Audit Plan
Collaborate closely with your chosen auditors to develop a comprehensive audit plan tailored to your specific benefit plan.
Define audit objectives, scope, timelines, and responsibilities clearly to ensure alignment between both parties. Discuss the audit approach, methodologies, and any potential areas of focus or concerns.
Establishing a detailed audit plan upfront helps streamline the audit process, avoid disrupting daily operations, and ensure that all the important areas are covered during the audit.
Communicate Promptly with the Auditors
Designate staff members who will be the auditors’ main contacts and assistants. Make sure they’re familiar with the plan’s operations and key documents. They should be available to pull requested files, run reports, and answer auditor questions.
On top of that, let your auditors know what to expect in terms of data access, personnel availability, and timelines. Keep those communication lines wide open.
The auditors will likely have many questions and document requests throughout the process. The quicker you can get back to them, the smoother the whole process will be.
Discuss Audit Findings
After the audit is done, set up a meeting with the auditors to talk about their findings, what they noticed, and anything that might be worrying.
This discussion isn’t just about pointing out mistakes. It’s about collaboration and problem-solving.
Work together with the auditors to identify the root causes of any issues and brainstorm effective solutions.
Implement Recommendations
Once the audit recommendations are on the table, it’s time to roll up your sleeves and implement them.
Analyze each recommendation carefully and assess its implications for your organization’s internal controls, processes, and procedures.
Create a plan and document each step to mitigate risks and improve overall performance in future audits.
What Are the Benefits of an EBP Audit for Your Company?
1. Guarantee Benefits for Your Employees
Mistakes happen. No one’s perfect, and it’s not uncommon for a decimal to get misplaced or an error to be left unchecked in a benefit plan.
The problem is…
…EBPs carry high stakes for your employees.
One mistake could mean a failure to accurately deliver funds, failure to get specified benefits, or serious legal consequences for your company.
EBPAs help ensure that your employees are receiving the benefits you promised them.
2. Determine Your Plan’s Strengths and Weaknesses
Think of your employee benefit plan audit like a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats).
Your auditor is trying to determine the strengths and weaknesses of your plan’s ability to deliver on its promises, control potential risks, and set itself up for the best chance of success for you and your employees.
They’ll also check for internal controls over financial reporting and operational errors.
3. Improve Plan Management and Operations
EBPAs can help improve plan management and your ability to optimize plan operations. It confirms that you’re fulfilling your legal responsibilities as the plan administrator (such as filing your Form 5500), and serves as a stamp of approval to the DOL.
How to Find the Right Auditor for Your EBP Audit
The DOL lists three main qualities to search for in an auditor:
- Licensed or certified
- Independent
- Prior training and experience in auditing EBPAs
1. Your auditor should be licensed
The DOL requires your auditor and/or CPA firm to be licensed or certified as a public accountant by a State authority.
This ensures each auditor is following the DOL and ERISA regulations and standards as they complete your audit.
It’s also common practice for auditors’ work to be peer-reviewed by other licensed auditors.
2. The auditor should be independent
Though most CPA Firms are required to be independent, there are many instances in which this is not the case.
According to Michael Rapoport in his article, “The Way Audits Work is About to Change,” regulators found that one-third of Big-Four audits were compromised in this way.
Double-check that your CPA Firm and/or auditor are completely independent to avoid any bias or conflicts during the auditing process.
3. Your auditor should have prior training/experience in auditing EBPAs
The DOL recognizes that some of the most common EBPA mistakes are due to the auditor’s lack of experience in audits specific to employee benefits.
When selecting an auditor, it’s important to consider the amount and quality of their experience in auditing employee benefit plans. A successful audit is dependent on the auditor’s ability to accurately check for regulations specific to employee benefits.
Warning! If Your EBP Audit Isn’t Completed in Time, It Could Mean…
Now that you know what an employee benefit plan audit is and why it’s necessary to complete one, let’s talk about what might happen if a company fails to conduct their audit.
As the plan administrator, you could be looking at serious civil penalties such as:
- $2,194 per day for failing to complete a Form 5500
- $10 per day with a max of $3,650 for failure to answer a question on Form 5500
- $25 a day penalties from the IRS with a $15,000 max
- Daily $1,100 penalties from the DOL with no max
And if the audit you submit is deemed deficient by the DOL—nearly 39% of investigated audits in 2011—then you’re liable to face civil penalties, too.
This might mean:
- $150 daily charges with a $50,000 max for deficient audits
- $100 daily charges with a $36,500 max when the audit contains deficient financial information
In other words: submit your employee benefit plan audit on time. And make sure your auditor is experienced and peer-reviewed to avoid deficiencies and potential charges from the DOL.
Frequently Asked Questions (FAQs):
1. Who is Responsible for an EBP Audit?
Employee benefit plan audits involve three main parties that each play an important role:
Plan Administrator
The plan administrator is in charge of overseeing the management and administration of the employee benefit plan.
They’re responsible for keeping all the records up-to-date, deciding who’s eligible for benefits, talking to employees about the plan, and making sure all the paperwork gets filled out and filed.
The plan administrator works closely with the auditor to provide necessary information and ensure a smooth audit process.
Plan Sponsor
The company or organization that sets up and manages the employee benefit plan is usually called the “plan sponsor.”
They are responsible for looking after the best interests of the plan participants.
Although they are not directly involved in the audit, they supervise the plan administrator and go through the audit results.
Auditor
A qualified, independent auditor is hired to conduct the employee benefit plan audit.
They are responsible for reviewing financial records, testing transactions, assessing internal controls, and determining if the plan is compliant with all regulations and requirements.
After all that, they write a report with their opinion on whether the plan’s financial statements are presented fairly.
2. What Happens During an EBP Audit?
Employee Benefit Plan Audits involve a comprehensive review of the financial statements, operations, and compliance of the plan.
Basically, auditors take a close look at the plan’s assets, contributions, distributions, and admin processes to ensure they comply with regulatory standards and the plan document.
They’ll also sift through participant data and investment performance to see if it all lines up with Internal Revenue Service (IRS) and Department of Labor (DOL) regulations.
The end goal is to give the plan’s financial reporting and operations a good once-over to make sure everything is accurate and legitimate.
3. Who is Required to Have One?
Generally, employee benefit plans with over 100 eligible participants are required by the Employee Retirement Income Security Act (ERISA) to undergo an annual audit.
However, there are certain exemptions and exceptions based on the size and type of your plan. It’s always better to take advice from an expert to determine if you need to go through an audit or not.
Conclusion
We hope you’re leaving with a better understanding of the employee benefit plan audit process, and what makes them so vital to a company’s overall efficiency and success.
But one more thing before you go:
If you happen to be a smaller company that’s struggling to add more insurance coverage for their employees, you might consider Abenity’s Fortune 500 perks and discounts.
It gives smaller companies every opportunity to compete and offer their employees the benefits they deserve. This is why the perks packages aren’t only customizable based on your budget, but also allow you to stretch your payroll by $4,500 per employee!
