If you offer a benefit plan to your employees, you may be required to have the plan audited. The Employee Retirement Income Security Act of 1974 (ERISA) sets this requirement. But, how do you know when your company needs an employee benefit plan audit? We outline what a plan audit is, the value it can bring to your company, and when you need an audit below.
What’s an employee benefit plan audit?
An employee benefit plan audit is an audit of the plan’s financial statement. This audit reports the plan’s financial standing and general information about the plan.
A plan’s audit also can highlight opportunities for improvement within plan operations, efficiency, controls, and how well the plan complies with IRS and Department of Labor (DOL) regulations.
For example, an audit can identify if employees are appropriately included or excluded based on the plan’s eligibility requirements. And, an audit can recognize if distribution payments are properly authorized and made according to the plan document.
Which plans have to follow ERISA’s audit requirement?
Defined contribution plans (including 401(k), 403(b), and employee stock ownership plans), as well as defined benefit pension plans and health plans, are all subject to ERISA.
Few plans are exempt from ERISA’s audit requirement. Exempt plans include governmental plans, church plans, and plans established and maintained to comply with workers’ compensation, unemployment compensation, or disability insurance laws. Plans maintained outside the U.S. for nonresident aliens and unfunded excess benefit plans don’t require an audit either.
Who can perform a plan audit? When is it due?
Independent public accountants are the only professionals qualified to perform employee benefit plan audits. Once completed, the annual audit is attached to the Form 5500 (Annual Return/Report of Employee Benefit Plan) form filing.
This filing is due seven months after the plan year ends. If your plan year ends on Dec. 31, you must submit Form 5500 by July 31. You can request a 2.5-month extension if needed, making the new deadline Oct. 15.
When do I need an employee benefit plan audit?
Your company’s benefit plan generally needs an audit if it has more than 100 eligible participants. An eligible participant is an employee of your company who meets plan eligibility requirements at the beginning of the plan year. This includes individuals who choose to opt-out of the plan, as well as terminated or retired employees who still have plan balances.
Your company’s plan falls into one of two categories: a large or small plan. A large plan has more than 100 eligible participants, and a small plan has fewer than 100 eligible participants. Your plan’s size is based on how many eligible participants it has at the beginning of the plan year. Typically, small plans don’t require an audit.
Once your employee benefit plan is audited, it needs to be audited annually. But, there are two exceptions to this – the 80-120 and the short plan year rules.
The 80-120 Rule
A plan with 80 to 120 eligible participants on the first day of the plan year can file Form 5500 in the same category (large or small plan) as the previous year according to DOL regulations.
For example, your company’s plan had 98 eligible participants and filed as a small plan last year, then grew to 101 eligible participants this year. Because the new number of eligible participants falls within the 80 to 120 range, you can still file your plan as a small plan for this year using the short version of Form 5500 (Form 5500-SF). However, if the plan grows to 121 eligible participants next year, it officially becomes a large plan. A large plan will then require an audit.
The Short Plan Year Rule
Did your company recently implement or terminate an employee benefit plan? Any employee benefit plans in existence for seven months or less can generally delay, but not eliminate, ERISA’s audit requirement until the following year. Your plan could be affected by this rule if it was just created, the plan year changed, or your company went through a merger.
It’s important to be familiar with these rules if you’re a plan administrator. Failing to comply with ERISA audit standards can result in serious penalties. But, audits also can bring significant value to your company and should be viewed as opportunities to improve your plan.
At Beene Garter, our team of experts is skilled in performing employee benefit plan audits. We know these audits are complex. Let’s talk!