Most business owners have heard of benefit plan audits but many are unsure what these audits entail, or even whether their company is required to have one. While the regulations surrounding benefit plans and related audits are complex, it is a relatively straightforward matter to determine your responsibilities under the law. Here’s what you need to know, in a nutshell.
Employee benefit plans fall under the aegis of the Employee Retirement Income Security Act, commonly known as ERISA. The law specifies which plans are subject to independent audits and how these audits must be conducted, among other things. ERISA covers 401(k), 403(b) and other defined benefit and defined contribution plans, including employee ownership, profit-sharing and stock bonus programs. Under ERISA law, benefit plans are required to file Form 5500 annually with the Department of Labor as well as the IRS and the Pension Benefit Guaranty Corporation.
The key factor governing audit requirements is the number of eligible participants. Plans with fewer than 100 eligible participants (including all those who are eligible to participate, whether they choose to do so or not, as well as current and future beneficiaries) have no obligation to undergo an audit. That’s not to say that an audit isn’t a good idea to ensure the integrity of the plan; a regular audit is often advisable even in the absence of the legal requirement to perform one.
Rather than completing a formal audit, companies with small benefit plans can fulfill their legal requirements by filing Form 5500 accompanied by Schedule I in place of Schedule H (which larger plans will complete), Form 5500-SF (for plans with assets of a readily determined market value and that hold no employer securities), Form 5500-EZ (for single-member plans that exclusively cover the plan owner). Single-member or solo 401(k) plans with a value less than $250,000 are exempt from filing at all.
Benefit plans with 100 or more participants are subject to the annual audit requirement, with the audit report submitted along with Form 5500 and the appropriate schedules. However, there are numerous situations where even a plan of this size may be exempted from the audit requirement. A benefits plan audit specialist can help you determine if your situation falls into one of these categories.
The 80-120 Rule
ERISA law includes a provision for continuity in filing as plans change size. Benefit plans with between 80 and 120 eligible participants at the start of the plan year may file as they did the previous year. For example, a small plan that usually files Form 5500 without an audit may continue to do so even if the number of eligible participants increases to 115 during the year, until the number of eligible participants reaches 120 on the first day of the plan year. Likewise, a plan that has fewer than 100 eligible participants at the end of the year must undergo an audit if it was required to do so in the previous year and opts to file as a large plan again for the current year.
Records and Reporting
Records needed for a benefit plan audit include personnel files, payroll records, bank statements and details on remittances made to the plan, as well as records that the plan administrator maintains. All financial statements regarding the plan must meet the GAAP standards detailed in FASB ASC 962. In addition, financial statements should be prepared using the accrual method of accounting and include a statement of net assets available for benefits and a statement of changes to net assets. Audited financial statements, including footnotes, must be submitted to the IRS with Form 5500.
Despite the best efforts of business owners and their accountants, benefit plan audits often run afoul of IRS and DOL rules. Here is a table with information from the IRS detailing the twelve most common mistakes in benefit plan audits, along with strategies to resolve and avoid these errors. To ensure your next benefit plan audit complies with all applicable requirements, turn to the audit specialists at HBP. We’ll help you keep your benefits plan strong and compliant.
Written by Allison Griesbach