Key Steps to Prepare for a Plan Audit

Employee benefit plans (EBP) are important tools for employee recruitment and retention. They also come with clear requirements and government regulations under ERISA. Many plans must undergo an annual independent audit that depends on information from human resources, finance, payroll, and several outside service providers. Plan sponsors can take a more proactive, year-round approach to these EBP audits. This can make it easier to respond to the auditor as well as allow more time for remediation when necessary. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

What Is an EBP Audit?

An employee benefit plan audit is an independent examination of a plan’s financial statements and related activity. The auditor reviews financial information, plan operations, and selected participant transactions to determine whether the financial statements are fairly presented and whether the underlying activity is properly supported. The audit is generally completed in connection with the annual Form 5500 filing. 

Common areas of review include:

• Plan documentation. This may include the plan document, applicable SECURE 2.0 amendments, the summary plan description, documents supporting the plan’s tax-qualified status, and committee meeting minutes demonstrating fiduciary oversight.
• Financial records. Auditors may request trust or custodial statements, reconciliation reports, SOC reports, and fee disclosures.
• Participant data. Auditors generally review census files, payroll records, and contribution remittance logs. Data entry for areas like hire and termination dates, for example, are particularly important, as these records directly impact EBP requirements. 
• Participant activity. Supporting records may include enrollment and deferral elections, distributions and rollovers, participant loan documentation, and annual nondiscrimination testing.

Key Steps to Prepare for an EBP Audit

Exact auditor requests will vary based on the plan. Knowing the types of information likely to be reviewed and establishing a process to prepare for the audit can help plan sponsors have a smoother experience.

Understand the Audit Timeline and Requirements — Start by confirming the filing deadline and working backward to establish the audit schedule. The planning process should identify when records are due, when fieldwork will begin, and when the auditor expects to complete the engagement.

Sponsors should request the auditor’s document list early and identify information that will need to come from third parties, such as the recordkeeper, payroll provider, trustee or custodian. The discussion is also when to tell the auditor about any changes during the year, including a new service provider, plan amendments, a merger or other unusual activity. Establishing the scope, timeline and responsibilities early can reduce delays later in the engagement.

Establish Responsibilities and a Point of Contact — Designate one person to serve as the primary contact with the auditor and coordinate requests across the organization. That person does not need to prepare every document but should know who is responsible and be able to track outstanding items.

Responsibilities may be divided among several teams. For example, HR may provide census and eligibility information, and payroll may provide compensation and contribution records. Defining those roles before the audit can make it easier to respond in a timely manner.

Update Audit Files Throughout the Year — For a more efficient audit season, plan sponsors will want to update audit files throughout the year. Plan documents and amendments, for example, can be updated on a monthly or quarterly basis rather than at year-end. 

Annual nondiscrimination testing and other required compliance testing should be completed, with supporting results available for the auditor. If testing resulted in corrective distributions or contributions, sponsors should confirm that the required action was completed and documented.

The same applies to other operational corrections made during the year. The file should clearly explain the issue and the corrective action. Prior-year audit findings should also be reviewed to confirm that previously identified issues were resolved.

Plan sponsors are encouraged to organize digital folders into categories that reflect the major areas of the audit, such as plan governance, financial records, and participant activity. This can reduce the amount of work needed when the next audit begins. Instead of rebuilding the audit file each year, plan sponsors can go to the folder and then focus on responding to the auditor’s specific requests.

Perform a Pre-Audit Review — Before providing records to the auditor, plan sponsors may complete a pre-audit review with the help of an advisor. The goal is to identify missing documentation or plan administration issues before they become part of the audit findings.

Many plan sponsors check participant data and records for accuracy, including date of birth, hire and termination dates, and hours worked. Auditors typically review this information carefully because errors can affect plan participation and retirement contributions. 

Another common compliance issue involves the timing of those retirement contributions. Contributions are to be remitted as soon as reasonably possible after being withheld from payroll. If there is a mistake in this area, the plan sponsor has an opportunity for correction before the audit. However, there is still the possibility of penalties and interest with this type of error, as well as plan disqualification under certain circumstances. Annual nondiscrimination testing and other compliance information should also be complete and readily available. 

Finally, consider whether the plan has been administered according to its written terms. Identifying a potential issue before fieldwork begins provides more time to investigate the issue and determine an means of remediation. .

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Preparing for an EBP audit is easier when the process begins before fieldwork gets started. Establishing a clear audit process can help plan sponsors maintain compliance and respond more efficiently during the audit. This reduces disruption and keeps the focus on effective employee benefit plan administration. If you have questions about the information outlined above or need assistance with your next retirement plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.