The federal Employee Retirement Income Security Act (ERISA) generally requires employee benefit Plans (EBPs) with more than 100 participants who have account balances at the beginning of the Plan year to undergo an independent audit. Here is what you need to know if you are facing your first EBP audit.

The Basic Requirement

Plan Sponsors must submit an audit report with their annual Form 5500, “Annual Return/Report of Employee Benefit Plan.” The form is due by the last day of the seventh month after the end of the Plan year. For calendar-year Plans, the return must be submitted by July 31 of the following year (with an option to extend through October 15). You must file the Form 5500 electronically through the EFAST2 system.

The Form 5500 reports information on the qualification of the Plan, as well as its financial condition, investments and operations. It is intended to provide assurance that EBPs are operated and managed according to applicable standards and that sufficient information is available to protect the rights and benefits of Participants and Beneficiaries. In other words, it gives your Plan credibility and confirms that the necessary funding is in place to pay for the benefits when due. You can also leverage the results of the audit to improve the efficiency of your Plan operations, including internal controls.

Audit Process Overview

Auditors look to verify an EBP’s compliance with the Plan Documents, such as the Adoption Agreement. They also seek to ensure the EBP complies with U.S. Department of Labor and ERISA requirements regarding:

• Participant data;
• Employer and employee contributions;
• Benefit payments;
• Plan obligations and liabilities;
• Administrative expenses;
• Participant loans; and
• Investments and investment income.

EBP audits report on the fair presentation of the financial statements including footnote disclosures.

An audit can be either be a “full scope” audit or an ERISA Section 103(a)(3)(C) (formerly known as a “limited scope”) audit. An ERISA Section 103(a)(3)(C) audit allows auditors to not extend audit procedures to any statements or information related to assets held for investment of the Plan (investment information) by a bank or similar institution or insurance carrier that is regulated, supervised and subject to periodic examination by a state or federal agency, provided that the statements or information regarding assets so held are prepared and certified to by the bank or similar institution or insurance carrier in accordance with 29 CFR 2520.103-5 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA (a qualified institution).

Regardless of the scope of the audit, the auditor will issue a report at the conclusion. It will state an opinion on the Plan’s financial statements and any schedules that must be included as part of the EBP’s annual Form 5500 filing.

Specific Areas of Interest

Auditors will likely be focusing their time evaluating the following areas:

• Fiduciary responsibility. How does the Plan Sponsor fulfill its fiduciary duty to act in the best interest of Plan Participants and Beneficiaries? It is advisable to have an administrative committee for the Plan that is responsible for compliance and reporting. The committee should hold regular meetings with minutes, develop and adhere to an investment policy statement, consult with independent advisors and monitor fees for reasonableness.
• Operational compliance with Plan documents. For example, are the eligibility rules properly applied — including eligibility for participation in the Plan and the types of compensation that is eligible for Contributions? Are deposits of deferrals made accurately and on a timely basis?
• Internal controls. How strong are the Plan’s preventative and detective controls over its financial reporting? Does the Plan regularly review your TPA’s System and Organization Controls Report (SOC 1) to evaluate the controls of the TPA?
• Financial reporting. Plans must include audited financial statements with their Form 5500 filing.

Preparation

You can streamline the audit process by preparing in advance. For example, to expedite the auditors’ work, gather and organize the follow materials before they arrive:

• Plan-related documents (including the Adoption Agreement, IRS determination letter, Summary Plan descriptions (SPD), loan policies and any amendments);
• Income and disbursement statements (including loan repayments) with supporting documents and any delinquent remittances flagged;
• Administrative committee meeting minutes;
• Board of directors minutes if related to the Plan’s operations;
• Current and previous financial statements and supporting documents (including census data for employees, the trust report, participant statements, contribution schedules and loan schedules),
• Payroll records;
• Vesting and benefit calculation documents;
• Copies of prior Forms 5500;
• Copy of the Plan’s fidelity bond insurance;
• Any other agreements or significant correspondence related to the Plan (for example, service provider contracts and fee schedules);
• Investment policy statement and information on actual investments;
• Process and control documentation; and
• Nondiscrimination testing results.

The Plan Sponsor can further help save time and money by assigning a primary contact person for your audit team. The contact should be equipped to answer auditor questions and properly direct requests, whether to the TPA or to a staff person.

Also remember to keep open the lines of communication. Surprises can disrupt the timeline of an audit. Keep in touch with your audit team throughout the year as to Plan amendments, changes in Plan operations, etc. Open lines of communication will help make for an efficient, effective, and timely EBP audit.

For more information contact Jim Quaid at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.