Your Guide to Employee Benefit Plan Audits

Imagine you're driving on a long road trip and suddenly your car starts making strange noises. You might not know exactly what's wrong with it, but you know that it needs to be fixed before you can continue on your journey. It’s been yours for several years and it’s probably accumulated some wear and tear along the way.

Your organization’s employee benefits plan might not experience the same type of breakdown, but it’s still important to conduct check-ins to ensure that everything is running smoothly. Through regular maintenance and upkeep, you can make sure that you’re still offering what your employees need and expect. And an audit is a great way to get there.

An employee benefit plan audit can help identify areas of improvement, ensure compliance with regulations, and help you meet your employees’ needs and expectations. Whether you've never conducted an audit before or are looking to improve your current process, you’ll find valuable insights here to help you keep your benefits plan in check.

What is an Employee Benefit Plan Audit?

An employee benefit plan audit is an in-depth examination of your organization's employee benefit plan. It’s a meticulous process that involves a careful review of your company's financial statements, policies, procedures, documentation, and operations related to the benefits plan. The purpose of this audit is to ensure the plan's accuracy and integrity, and to verify that it is operating within the legal and regulatory boundaries set by authorities like the Department of Labor (DOL) and the Internal Revenue Service (IRS).

These audits are not just a formality or for compliance purposes. By conducting an audit, your organization can gauge whether your benefits are helping you truly care for your employees effectively. You can figure out if the resources allocated towards employee benefits are being utilized efficiently.

What Does an Employee Benefit Plan Audit Cover?

What does an employee benefit plan audit cover exactly? At a high level, the audit process usually examines areas such as:

1. Plan operations: The audit investigates if the operations of the plan adhere to the established plan documents. This could cover aspects like eligibility determinations, vesting and benefit payments, contributions, and distributions.
2. Financial information: Auditors scrutinize the accuracy of the plan's financial statements and performance of investments. For instance, with an employee stock ownership plan (ESOP) or a pension plan, they would review how investments are reported and how those contribution plans are performing.
3. Regulatory compliance: The audit ensures that the plan abides by all federal regulations. This could encompass everything from discrimination testing to verifying that all necessary information has been disclosed to the participants and beneficiaries.
4. Fiduciary oversight: This portion of the audit evaluates whether fiduciaries — the individuals or entities that manage the plan — are fulfilling their responsibilities. This includes ensuring that they are acting in the best interests of the plan participants and their beneficiaries.

Why Should You Conduct an Employee Benefit Plan Audit?

An employee benefit plan audit is about much more than fulfilling a legal obligation or ticking a box on a compliance checklist, although those are important reasons to get it done. It can also help you nurture a positive, enriching environment for your employees.

1. Meet Legal Requirements

If your organization has a sizable employee benefits plan, an annual audit isn't just a suggestion. The law requires it. Under the Employee Retirement Income Security Act (ERISA), plan sponsors need to complete an audit of their benefits in order to submit Form 5500 as part of their annual reporting with the DOL. That includes auditing the financial statements of plans like retirement, health, life insurance, and other fringe benefit plans each year.

2. Uncover Issues and Find Solutions

The process of auditing your employee benefit plan can uncover issues or weaknesses that might have been overlooked. These could be operational glitches, financial discrepancies, or areas where your plan isn't complying with the relevant regulations.

Once these issues have been identified, you can take steps to rectify them. This proactive approach will help you avoid any penalties or fines that could result from non-compliance, while also making your plan more efficient and effective.

3. Ensure Fiduciary Responsibility

The DOL is very clear that as an employer, you have a fiduciary responsibility towards the participants of your employee benefits plan. An audit ensures that this responsibility is being fulfilled and that the interests of your employees are being protected.

4. Improve Employee Satisfaction and Retention

A well-functioning benefits plan is a powerful tool for employee retention. It sends a strong message to your employees that you value their contribution and care about their wellbeing. An audit can help you ensure that your plan is meeting the needs of your employees so that you can make the necessary adjustments. 

For instance, it’s well-known that many employees value benefits like health care and paid time off. But affordability also matters — 72% of employees rated affordability as a top factor when thinking about their organizations’ demonstration of employee care, according to MetLife. An audit can help you determine if costs are in line with what your employees expect to pay so you can increase retention and loyalty.

Who is Required to Audit Their Benefits Plan?

Navigating the intricate world of employee benefit plan audits can feel like a challenge, but ultimately, company size and plan participant size determines who is required to conduct audits. From there, you’ll need to follow legal guidance around how to perform a benefit plan audit.

The 100-Participant Rule

The primary criterion for determining whether you need to conduct an audit of your employee benefits plan is the number of participants. According to the DOL, if your plan includes 100 or more participants at the beginning of the plan year, it's considered a "large" plan and is therefore subject to an annual audit.

Participants include not just active employees who are currently contributing to the plan, but also retired or separated employees who still have account balances in the plan. So, take steps to evaluate the size of your plan correctly so that you avoid any legal issues with DOL reporting.

The 80-120 Participant Rule

There's an interesting provision called the 80-120 participant rule. If your plan has between 80 to 120 participants at the beginning of the plan year, and it was considered a "small" plan in the previous year (meaning it had fewer than 100 participants), then you can choose to continue treating the plan as a "small" plan. 

Under the 80-120 rule, you’d be exempt from conducting an audit, but you would still submit Form 5500 to disclose your financial statements and reporting to the DOL. This rule provides some flexibility to delay the audit requirement for growing organizations until the participant count consistently exceeds 120.

Timing and Deadlines

Timing is key when it comes to conducting an employee benefit plan audit. The audit report is generally part of the Form 5500, the Annual Return/Report of Employee Benefit Plan, which must be filed with the Department of Labor (DOL) seven months after the end of the plan year.

However, if you need a little more time, you can apply for an extension that gives you an additional two and a half months. For example, if your plan year aligns with the calendar year, your Form 5500 and audit report would be due by July 31 of the following year, or October 15 if an extension is filed.

Who Can Perform An Employee Benefit Plan Audit?

ERISA mandates that the audit should be conducted by an independent qualified public accountant. But not just any accountant or CPA will do. You should select an auditor who has specific experience and knowledge in auditing employee benefit plans. They need to understand the unique operational and regulatory aspects associated with these plans.

Membership in the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center can be a good indicator of commitment to quality in this specialized area. The selection of the right auditor can ensure your employee benefits plan is compliant, effective, and ultimately beneficial for your employees.

Use Audit Insights to Deliver What Employees Value

An audit doesn’t just help you stay in compliance, correct anomalies, or measure plan performance. It’s also a time to assess the state of your benefits and how well they’re delivering what your employees need from your organization. In many cases, employees value their benefits enough to consider better benefits — like health, dental, vision plans — over a higher-paying job, according to Fractl.

But standard plans aren’t the only perks that matter. Employees rank wellbeing benefits as the second-most important factor when considering a new role, making it no surprise the vast majority of employees would consider leaving a company that doesn’t focus on wellbeing.

You can build wellbeing perks into a robust wellness program so that you’re delivering employees what they want out of your benefits package. Speak to a Wellbeing Specialist today to find out more about how to improve your wellness offerings!

References

• Advisory Council Report on Employee Benefit Plan Auditing and Financial Reporting Models. U.S. Department of Labor — Employee Benefits Security Administration. Retrieved June 22, 2023 from https://www.dol.gov/agencies/ebsa/about-ebsa/about-us/erisa-advisory-council/2010-employee-benefit-plan-auditing-and-financial-reporting-models 
• Employee Benefits Law Group. (December 4, 2019.) ERISA Reporting Requirements. Employee Benefits Law Group. Retrieved June 22, 2023 from https://www.employeebenefitslawgroup.com/erisa-reporting-requirements/ 
• Employee Benefit Plan Audit Quality Center. AICPA. Retrieved June 22, 2023 from https://us.aicpa.org/interestareas/employeebenefitplanauditquality.html 
• Employee Benefits Study: The Cost and Value of Employee Perks. Fractl. Retrieved June 22, 2023 from https://www.frac.tl/employee-benefits-study/ 
• Fiduciary Responsibilities. U.S. Department of Labor. Retrieved June 22, 2023 from https://www.dol.gov/general/topic/retirement/fiduciaryresp 
• Form 5500 Corner. Internal Revenue Service. Retrieved June 22, 2023 from https://www.irs.gov/retirement-plans/form-5500-corner 
• Form 5558 Reminders. Internal Revenue Service. Retrieved June 22, 2023 from https://www.irs.gov/retirement-plans/form-5558-reminders 
• MetLife’s 21st Annual U.S. Employee Benefit Trends Study 2023. Metlife. (2023.) Retrieved June 22, 2023 from https://www.metlife.com/content/dam/metlifecom/us/noindex/pdf/ebts-2023/MetLife_EBTS_2023.pdf 
• Selecting an Auditor for Your Employee Benefit Plan. (September 2018.) U.S. Department of Labor — Employee Benefits Security Administration. Retrieved June 22, 2023 from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/selecting-an-auditor-for-your-employee-benefit-plan.pdf 
• The 80-120 Rule, and How It Affects Your Annual 401(k) Plan Reporting. DeLeon & Stang. Retrieved June 22, 2023 from https://deleonandstang.com/insights/the-80-120-rule