Employee benefit plans are a vital way to attract and retain employees, so their effectiveness and compliance should be a priority. However, with so many requirements set forth by the U.S. Department of Labor (DOL), Internal Revenue Service (IRS) and other regulatory agencies, plan administration can be arduous.
Whether you are new to being audited because you’ve just crossed the mandatory threshold of 120 employees, or you’ve been audited many times, easing the audit process is an achievable goal. An efficient, streamlined audit will save you time, relieve compliance concerns, and offer insight on potential plan improvements.
Here are six smart steps to a smooth Employee Benefit Plan (EBP) audit.
- Take a hard look at your auditors
The simple truth is that your audit process is most influenced by the experience and expertise of your audit team. Too many companies engage auditors who are missing the crucial understanding of benefit plan provisions, compliance and complexities, which can result in difficult and time-consuming audits, or even audits with deficiencies.
You should partner with audit professionals who focus their time specifically on employee benefit plans and staff their engagements with an experienced team. These are the auditors who can give your employee benefit plans the attention they deserve, including testing of all critical areas each plan provides so you feel confident your plan is operating as designed. You want your audit led by senior auditors who are adept at problem solving, so you get valuable recommendations for improvement and not merely identification of issues.
Generally, if a plan has more than 120 eligible employees at the beginning of a plan year, the plan is required to attach audited financial statements to the plan’s annual Form 5500 filing. There are a number of points of emphasis during the plan audit, including testing of participant eligibility, distributions, loans, the definition of eligible compensation, calculation of employee and employer contributions, timeliness of contribution remittances and other specific provisions detailed by your plan document. Navigating these complexities can be simplified when working with auditors who are highly experienced and can assist you with the audit process.
2. Invest time and effort to prepare
In addition to getting the right team in place ahead of your audit, you must also take the time to prepare. In nearly all cases, you have what you need to conduct an audit, but putting the pieces together is the challenge.
To start, gather all relevant documents, including your current adoption agreement or plan document, all plan amendments, plan committee minutes, and service agreements. Double-check with your plan’s oversight committee and your third-party administrator to ensure your records are current, complete, and all documents are executed. It is also beneficial to provide previous years’ non-discrimination testing results, as well as any other information that illustrates the changes you have made to correct previous compliance errors.
Provide copies of these documents to your auditors for review. Remember that outside factors, such as a pending merger or acquisition, can affect your plan and change crucial elements, such as who is eligible for participation. Once you gather the required documents, you will be ready for the next stage of your employee benefit plan audit.
3. Discuss the audit plan
Next is the planning phase. At this time, you should have a meeting with your audit team to go over the details and the relevant documentation you have already provided. This is also a good time to discuss what additional information will be needed during the audit itself, so you can have those details at hand when the time comes. Many auditors will request information in advance so they can organize the information, plan their procedures, and make sample selections. Additionally, many third-party administrators provide auditor access, which will allow your auditor to obtain many reports and participant level information and may even allow them to make detail selections directly with the third-party administrator.
The planning stage is also when you want to establish points of contact within your organization and your auditing firm and agree on a timeline. Your auditors will often need to discuss key topics with members of your company and having those professionals available during the audit fieldwork will streamline the process. On a related note, always call your auditor with important questions. Asking in advance can ensure clarity and improve efficiencies.
4. Be available and involved during your audit
Now that you are prepared and ready, next up is your actual audit. This is when the auditors will review your plan document, participant transactions, and payroll records to evaluate the plan’s compliance with the provisions of the plan document. The auditors will assess employees’ eligibility to participate in the plan; whether participants who did not participate were given the opportunity to participate; whether payroll calculated contributions properly based on the participants’ most recent deferral election; and whether benefit payments were properly reviewed for eligibility, approved timely, and properly calculated in accordance with the provisions of the plan document.
Due to the depth and complexity of the fieldwork aspect of an audit, you should make yourself as available as possible. It is not uncommon for auditors to need additional information once they review the initial forms. A best practice is to establish touchpoints throughout the audit to ensure communication is regular and everyone is updated. Communication difficulties only complicate a plan audit.
5. Seek actionable feedback from the audit report
The final step is the wrap-up stage of an employee benefit plan audit. This is when you will meet with your auditors to discuss the findings, including any recommendations for improvement that were uncovered during the process. A comprehensive report will be provided to you for review and use in future audits. A draft version of your Form 5500 can also be discussed at this time, to ensure the Form 5500 agrees with the reported amounts in the audited financial statements and the filing deadline is met.
An amenable working relationship is crucial to the success of your plan audit. This final step will be educational and beneficial for you, especially if you are involved in the entire process from the beginning. Ask questions, probe for more information, and stay committed so your partnership with your auditors can grow and flourish.
6. Keep your auditors informed all year
There are numerous complexities present with your employee benefit plans. Given the amount of IRS and DOL requirements, there is plenty of room for mistakes to occur. Working with the right advisors and auditors helps reduce the risk of noncompliance and the partnerships you create are invaluable when errors do occur, and corrections are needed. Keeping your auditor informed of critical business changes, goals of the plan, and complexities you encounter in your internal control systems is the best way to be proactive in assessing the impact of the plan and making any necessary corrections promptly.
A high-quality plan audit is a valid priority
The lack of an audit – or a poor one – can lead to compliance issues and penalties for your business, which can impair your ability to provide comprehensive benefits to your employees. It can also be very time consuming and painful to your team who is working on the audit, taking them away from their primary responsibilities.
So, when choosing an auditor, make sure you pick one who is at the top of the industry. Clark Schaefer Hackett is a premier firm for plan audits, and our experts can go the extra step for your business by offering solutions and strategies to get the most out of your benefit plans. In order to go above basic compliance, we understand your needs and employee benefit plans as a whole, creating a team-based approach in the process. Contact us if you’re interested in learning more.
Hiring the Right Auditor for your Benefit Plan
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