By Richard Hirschen, CPA
Gray, Gray & Gray, LLP
If you offer your employees a 401(k), pension plan or other defined benefit plan, you may be required by law to have the plan audited on an annual basis. The U.S. Department of Labor (DOL) is diligent in making sure qualifying plans are audited, and in reviewing the audits to make sure the plans are being properly administered for the beneficiaries of your employees.
Failure to comply in a timely manner can be expensive. The DOL has issued fines of up to $1,100 per day for late submission of audited financial statements.
There is some confusion as to which plans must be audited. Generally, any company with 100 or more employees who are eligible to participate in a pension plan at the beginning of the year must have the plan audited, whether all employees participate or not. It is this last provision that can lead to uncertainty, as some companies mistakenly believe that the 100 employee trigger point applies only to participating employees. There is however an exception that often applies that allows you to avoid an audit if a company has fewer than 120 eligible employees.
If you do meet or exceed the 100 eligible employee plateau, and are subject to ERISA, you must file a Form 5500 with the IRS every year. An audited financial statement must accompany this form, which is due seven months after your company’s year end. (An extension of up to 2.5 additional months may be granted.)
So if your year-end is December 31, your Form 5500 and audited financial statement are due by July 31. With an extension, you may have until October 15 to file. For year-end dates other than December 31, other due dates apply.
What is audited?
If you associate the word audit with an IRS investigation leading to possible jail time, relax! The purpose of an employee benefit plan audit is to ensure that the funds in the plan are not being misused or mismanaged and that the plan is being operated in accordance with the plan document. As such, the audit examines the net assets available for benefits and the changes in those assets from year to year, along with plan activity and participant transactions.
This is not a simple audit. Tests are conducted on participant eligibility and activity, contributions (from both employee and employer, if applicable), timeliness of the remittance of contributions, investments, participant loans and distributions. It is important to choose an audit firm with experience in this specific type of audit work.
A little planning and preparation before the audit can help speed the process and keep audit costs to a minimum. Your HR department will need to get involved, as the audit team will need access to participant information such as payroll reports, hire dates, salary, etc. You’ll also need schedules showing all current year activity of the plan and its investments.
The annual audit of your employee benefits plan may seem like an onerous burden. But the assurance provided by the audit can help identify and prevent problems with the plan is precisely the purpose intended by the regulations. And that could save you from enormous headaches and costs down the road.