They’re two common questions that many businesses sponsoring an employee retirement plan ask: Do we need to have an annual audit performed? And if so, how can we best prepare?
If your plan is deemed a “large” employee benefit plan, then it is subject to the ERISA annual audit requirements. More specifically, if there are at least 100 eligible participants in the plan, you must have an employee benefit plan audit conducted annually and attach it to Schedule H when filing Form 5500.
However, if there are fewer than 100 eligible plan participants, you are exempt from the ERISA annual audit requirements. Note that you still have to file Schedule I along with Form 5500.
Purpose of the Audit
Employee benefit plan audits serve several purposes. Perhaps most importantly, they help provide reasonable assurance that a plan’s financial statements are being presented fairly and in accordance with generally accepted accounting principles (GAAP).
In addition, a plan audit will offer insight into the sponsor’s control environment. This may include uncovering potential operational errors and prohibited transactions, which in turn could result in plan remediation and corrections. The results of a plan audit can help you strengthen internal controls and fulfill your fiduciary compliance responsibilities.
An independent accounting professional should conduct your employee benefit plan audit and will work closely with a wide range of individuals. These typically include employees in your accounting and human resources departments, as well as your third-party administrator, actuary, legal counsel, custodian, and trustee.
In most situations, an audit will closely examine the following areas of your employee benefit plan:
- Plan contributions (both employee and employer) and benefits payments
- Plan investments and income
- Participant data and allocations
- Plan obligations and liabilities
- Plan distributions and participant loans
- Plan asset valuations
- Administrative expenses
Types of Plan Audits
There are two main types of employee benefit plan audits: full-scope audits and limited-scope audits.
Full-scope audit: everything in the plan is subject to testing—this includes contributions, benefit payments, and the valuation of investments and related earnings. The auditor then expresses an opinion on the plan’s financial statements, including supplemental schedules.
Limited-scope audit: the auditor does not perform auditing procedures on certified investment information (such as investments, investment income, and related expenses) prepared by the custodian or trustee. Because investment information is provided by an outside party and not formally audited, the auditor does not express a formal opinion on the plan’s financial statements. Instead, the auditor issues a Disclaimer of Opinion.
If you opt for a limited-scope audit, you have a fiduciary duty to ensure that a qualified entity has certified the accuracy and completeness of the investment information. This certification must cover all plan investments—any investments and related income that aren’t covered must be subject to full-scope audit procedures.
As a plan sponsor, you have a fiduciary duty to hire an auditor with specialized knowledge and experience. Be prepared to perform thorough due diligence in your search for a qualified independent auditor for your employee benefit plan.