Most Companies Can Benefit From a Plan Audit

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401(k), 403(b), pension plans and health insurance plans are wonderful perks to offer employees. But, many companies don’t understand the compliance required by the Department of Labor (DOL) and the Internal Revenue Service (IRS) that goes along with offering these benefits to employees.  The DOL and IRS have various filing and audit requirements that are applicable to these types of plans. Understanding what they need is imperative in making sure the plans maintain their tax-exempt status. 

When is a benefit plan audit required?

As a general rule – most benefit plans are required to file a Form 5500 (Annual Return/Report of Employee Benefit Plan) on a yearly basis. The amount of information included on the Form 5500 will vary depending on the type of plan in place.  If a plan has over a certain number of employees, they may need to have an annual audit of their plan performed, as well.

What actually triggers the plan audit requirement is the number of eligible employees a company has. Generally, when a company has more than 100 eli­gible employees, an annual audit is re­quired. However, you can’t just count all the people participating in the plan to determine whether or not you need the audit; you need to take into consideration eligible employees, as well. Eli­gible employees are those currently par­ticipating plus those who elected not to participate in the plan.

Companies with less than 100 eligible employees only need to file the Form 5500 as a small plan; they do not need an audit. But, companies with more than 100 eligible employees have to file the tax return along with the annual audited financial statements.  There are also certain exceptions for some types of plans with less than 100 eligible employees, stating that a Form 5500 is not required to be filed at all.

The due date of the filings for both the Form 5500 and audited financial statements relates to the due date of the Form 5500. For a calendar year-end plan, the Form 5500 should be filed by July 31, 2012. They also have the option to file for an extension, which gives them until October 15, 2012. Typically, April or May is when companies start to get questionnaires and draft Form 5500s from their third party administrators. This is a good time to address the audit requirement question.

The DOL imposes strict financial penalties when the Form 5500 either isn’t filed at all or is filed im­properly. These penalties are assessed per day and can be as high as $50,000 per report, per year for a deficient filing.

 

If an annual audit is required, what’s next?

The next step would be to find a firm to perform the audit work. Many com­panies look at the firm that does their annual accounting and tax work to see if they perform employee benefit plan audits, as well. Some accounting firms have separate employee benefit plan audit departments with dedicated staff; others do not. Once you find a firm to handle the audit, ask questions: How many other plans does the firm handle? Does it handle all types of benefit plans?

There are three types of benefit plans:

  1. Defined contribution plans – one example of which is a 401(k).
  2. Defined benefit plan, where the participants don’t contribute, but the company does — the most common ex­ample of which is a pension plan.
  3. Health and welfare plans – that offer health insurance and disability-type insurance to employees.

Firms that specialize in employee benefit plan audits have dedicated staff that work on the audits and go through specialized training, and have a streamlined audit process. Companies will also want to find out if the accounting firm is a member of the American Institute of Certified Public Ac­countants Employee Benefit Plan Audit Quality Center. They should also ask what the audit process is going to entail. How much as­sistance is going to be required on the company’s part? They should know go­ing forward how much time their em­ployees would spend assisting the firm with getting the audit completed.

Who will be involved on the company side?

Human resources and/or the accounting department will work closely with the au­ditors because they handle payroll and ben­efits and have all the documentation for what people choose to contribute, along with per­sonnel records and payroll information. Those people are the ones who will put the most effort into getting the documen­tation ready for the auditors.

How long does the audit process take?

It depends on how quickly the auditors can get the information. Typically, the actual fieldwork, where the firm is on-site reviewing original documents, takes anywhere from a day to a week, depend­ing on the size of the benefit plan. Many times the auditors will leave, but have items they want to follow up on. The whole process – from fieldwork to issuing the financial statements to getting the open items cleared – is usually a four- to six-week process.

The Form 5500 and annual audit process can be confusing for those that are new to the process or for those that don’t fully understand all of the compliance requirements that go along with operating the plans.  It really makes sense to talk to a specialist to make sure all of the plans are filing the appropriate documentation on a yearly basis.

Source: Gisondo, D. (2012). Skoda Minotti

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