Assurance Services • Published 12/13/2016 Employee Benefits and the Importance of Hiring a Quality Auditor


As a business grows, regulatory compliance becomes increasingly important. Understanding and preparing for the fulfillment of these regulations is a need that is felt across industries. A common focus of regulatory compliance is employee benefits.

Generally, the Employee Retirement Security Act of 1974 (ERISA) requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series). For businesses, it is not always clear what applicable policies should be enacted and in what manner. We’ve identified some specifics that will be helpful in better understanding how your business can address the need for an auditor.

Does your employee benefit plan need an audit? 

Whether your plan requires an audit depends upon what category your plan falls into on the first day of the plan year. If your plan falls into the large plan category on the first day of the plan year, you will likely need an audit.

Definition of a Large Plan

A large plan is a pension (profit sharing, 401(k), 403(b), money purchase, etc.) plan that has over 100 participants at the beginning of the plan year. A participant is defined as follows:

  • Active participants - those individuals currently employed with the plan sponsor and who are covered under the plan and are receiving credited services. An active participant would include those employees who have elected to participate in the plan as well as those who are eligible to participate but have elected not to do so.
  • Retired or separated participants - those individuals who are no longer employed by the employer but who are receiving benefits or are entitled to receive benefits under the plan. A common example would be a former employee who maintains an account balance in the plan.
  • Deceased participants - those individuals who are deceased and have one or more beneficiaries receiving or entitled to receive benefits.

If the plan qualifies as a large plan, it must file Schedule H to Form 5500 and have the plan audited by a qualified independent public accountant. If the plan has fewer than 100 participants at the beginning of the plan year, it will file Schedule I Small Plan with its 5500 and will not require an audit. There are exceptions to the audit requirement for large plans including having a short plan year of seven months or less. In this case, the business may defer the audit requirement to the following year.

80 to 120 Participant Rule

Additionally, some plans may be subject to the 80 to 120 Participant Rule. If the number of participants reported in Part II, line 6, of Form 5500 is between 80 and 120 and a Form 5500 was filed in the prior year, the filer may elect to complete the current year’s Form 5500 in the same category (large or small plan) as was filed in the previous year. For example, if the number of participants at the beginning of the plan year is 110, and a Form 5500 was filed in the previous year as a small plan (Schedule I was filed instead of Schedule H), the filer may elect to continue to file Schedule I and forego the audit requirement. However, if the participant count is 121, then regardless of what category of plan was filed in the previous year, the current year’s Form 5500 must include Schedule H and the plan must be audited.

Participant Count

Because the audit requirement is solely dependent on the number of participants, an accurate participant count is critical. There are strategies you can take to reduce your participant count. If you need assistance determining your options, or have questions about whether your plan requires an audit, our experienced team can help you.

Why a Financial Statement Audit is Important 

A financial statement audit provides an independent, third-party report to participants, plan management, the DOL, and other interested parties that indicates whether the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. It helps protect the financial integrity of the employee benefit plan which helps users determine whether the necessary funds will be available to pay retirement, health, and other promised benefits to participants.

The audit also may help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. And the audit helps the plan administrator carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.

Hiring a Quality Auditor

If you find you do require an audit, hiring a quality auditor is considered a fiduciary function. Reviewing the auditor’s qualifications is a critical step in selecting your plan auditor. This will require the consideration of licensing and independence rules as well as the auditor’s experience, including specific employee benefit plan audit experience.

Consequences if a Quality Audit is not Performed

ERISA holds plan administrators responsible for ensuring that plan financial statements are properly audited in accordance with generally accepted auditing standards (GAAS). As with all fiduciary responsibilities, there is potential liability: Fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan. The DOL has implemented various enforcement strategies with respect to audit deficiencies. The penalties for such audit failures can be substantial. In recent years, the DOL Employee Benefits Security Administration (EBSA) has significantly stepped up its enforcement of the audit requirement for employee benefit plans. The DOL has the right to assess penalties of up to $1,100 per day, without limit, on plan administrators for deficient filings.

Because an incomplete, inadequate, or untimely audit report may result in penalties being assessed against you as the plan administrator, selection of an experienced and reliable auditor is very important. Plan administrators should make the selection of the plan auditor a high priority and exercise due care during every phase of the auditor selection process.

Postlethwaite & Netterville provides employee benefit plan audit services for more Louisiana benefit plans than any other accounting firm. If you have questions about your plan and its audit requirement or if you want to learn more about our team of audit professionals, visit our Assurance Services.

The information noted in the above is excerpted from the AICPA’s EPACQC Plan Advisory, The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.

Click to Read AICPA Advisory

SOURCE: AICPA Employee Benefit Plan Audit Quality Center

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