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Preparing for Your First Employee Benefit Plan Audit


Preparing for your first employee benefit plan auditDuring this time of the year, plan administrators are again filing their company’s 401(k) Form 5500. If your company has been growing, it is likely that the number of participants within your 401k plan has grown as well. But do you know if your plan has grown enough for it to require a plan audit? And if your plan has grown to the point that it will require an audit, are you prepared for the audit process?

When is an audit required?
Your 401(k) plan will require an audit when it reaches 100 eligible participants on the first day of the plan year. An eligible participant is anyone able to participate in the plan (even if they are not actually contributing). The eligible participant count also includes terminated employees with balances remaining on the first day of the plan year.

However, if your plan has previously filed a 5500 without requiring an audit, then the minimum number of eligible participants to require an audit is 121. For all subsequent years the cutoff for the audit requirement is 100. If you are above these thresholds, your plan is considered a large plan and additional reporting is required.

What changes when your plan is considered a large plan requiring an audit?
A few aspects, such as the filing deadline will remain unchanged. However, when classified as a large plan, you are required to file a Schedule H attachment instead of filing the 5500SF or Schedule I. The requirements for the 5500 Schedule H include filing audited financial statements with your 5500.

What should you consider in selecting an auditor?
Always consider the experience the audit firm has with auditing benefit plans. As a plan administrator, selecting a qualified auditor is one of the most important duties of managing your plan. A quality auditor will be able to ensure the plan files complete and accurate financial data within the return including properly prepared financial statements. Inaccurate, incomplete or untimely filed reports may potentially result in penalties being assessed.

Once you select an auditor, what should you expect from the audit process?
You should expect several distinct phases of the audit:

  1. A planning phase to meet with the auditor to set expectations, establish timing for the engagement, discuss document requests and establish contacts both within your company and with the audit firm.
  2. A pre-fieldwork phase in which the auditor gains an understanding of the plan’s processes.
  3. A fieldwork stage for the auditor to test investment balances, the plan’s compliance with the plan document and associated laws, and to review the accuracy of the plan’s 5500.
  4. A wrap-up phase for the auditor to hold a closing meeting with plan management to discuss the financial statements, any significant problems found during the testing and any recommendations they have for plan management.
  5. At the conclusion of the audit, the auditor will issue a report and state his or her opinion on the plan’s financial statements.

What should you prepare in advance to ensure a smooth audit?
Plan sponsors are not always familiar with all of the plan’s documents or where they are kept in the company’s records. Your auditor will need:

  • Executed plan documents and amendments (including adoption agreements for prototype or volume submitter plans).
  • A current IRS determination or opinion letter for the executed plan document.
  • A summary plan document and summaries of material modifications.
  • Administrative committee minutes and/or board minutes that pertain to the plan.
  • Trust and recordkeeping agreements with the plan custodian and recordkeeper.
  • A copy of the plan’s fiduciary bond insurance agreements.
  • Copies of prior 5500 filings.
  • Other significant agreements or correspondence related to the plan.

Even if your plan does not currently require an audit, many of the items needed to prepare for an audit are best practice items you should maintain as a 401(k) plan sponsor or administrator.

Our benefit plan audit team frequently works with 401(k) plan sponsors undergoing their first 401(k) plan audit. The audit process is involved, even more so for a plan’s first audit. However, if your company is prepared for the audit, the result will be a more time and resource-efficient process.

Matthew E. Powell, CPAMatthew Powell, CPA, is a partner in the Brown Smith Wallace audit services practice who specializes in employee benefit plan audits. To schedule a meeting, fill out the adjacent form.


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