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Attracting, retaining, and motivating talent in today’s competitive job market is a very crucial aspect of managing a company’s human resources.
To address these challenges, the Employee Retirement Income Security Act (ERISA) establishes standards for health, retirement, and other welfare benefit plans in order to protect both employees and employers.
Among these plans, one that holds the maximum weightage is the Employee Benefit plan (EBP), which includes the money deducted from employees’ salaries to enhance their overall well-being.
It is a collection of various programs offered by employers to their employees, including 401(k) plans, pension plans, and profit-sharing schemes. These programs are essential for securing employees’ financial stability and providing health and wellness perks.
In the US, EBPs are regulated by laws like ERISA (Employee Retirement Income Security Act) to ensure fairness and transparency. Employers must also comply with IRS (Internal Revenue Service) and DOL (Department of Labor) rules for tax benefits and reporting.
EBP Audit, also known as 401(k) plan audit, ensures the ability of the Employee Benefit Plan to meet its current as well as future obligations. Ideally, it assesses the plan’s financial and operational compliance.
Employee benefit plans are a critical part of a company’s total rewards. But are they working as intended? Auditing provides you with the answer.
An Employee benefit plan audit is important to assess financial viability and compliance related to employee benefit plans.
Its main objective includes:
Retirement plans come in various forms, including:
Previously, audits were required for plans with 100 or more eligible participants. Still, the recently amended DOL regulations stipulate that audits are now required only for plans with 100 or more participants who have account balances at the beginning of the plan year. This will help remove the audit burden on smaller plans.
An EBP audit benefit plan involves a thorough examination of the plan’s financial statement, which is verified by certified auditors to ensure that the documents are accurate and meet all compliance with 401 (K) audit requirements. During the audit, the auditor will assess the plan sponsor’s control systems, especially the fiduciary responsibilities and internal controls.
The audit process also examines the following:
Phase 1: Providing Requirements — The first step is to provide your auditor with all the necessary documentation and requirements to complete the audit. Companies should ensure the information given to the EBP auditor is complete and detailed to avoid any issues and reduce the likelihood of further investigation by the Department of Labor (DOL).
Phase 2: Fieldwork — The EBP auditor needs to meet with the company’s personnel who are directly responsible for the plan to understand the internal controls, accounting processes, and risks. This meeting can be conducted online or offline. The auditor will review a sample of distributors, loans, and employees and request supporting files and documentation for the selected samples.
This phase of an EBP audit typically takes anywhere from a few days to one week. According to the AICPA, an employee benefit plan audit focuses on financial statements that cover the following areas:
Phase 3: Results — Once the fieldwork of the EBP audit is done, the result phase will begin with EBP audit requirements. In this phase, the auditor will provide a draft of the financial statements, report, and any correspondence about internal control deficiencies discovered during the review. After the draft is approved, the auditor will issue the finalized report and audited financial statements, which will then be attached to Form 5500 for submission to the Department of Labor (DOL).
Furthermore, the Department of Labor (DOL) expects auditors to exercise judgment regarding the accuracy and material fairness of the information submitted as part of Form 5500. This process also includes identifying the area of weakness or any kind of operational errors that offer an opportunity to be made to the EBP’s operations. Finally, an EBP audit helps the sponsor meet the legal requirements of filing Form 5500.
Form 5500 is an annual report that provides federal agencies with key information about employer-sponsored benefit plans, including their finances and operations. It plays a crucial role in ERISA’s disclosure and reporting framework and is jointly overseen by three U.S. government agencies:
Form 5500 is required for many employee benefit plans, including medical, vision, dental, life insurance, disability, flexible spending accounts, and fringe benefit plans. It is an essential reporting document for ERISA compliance and is jointly regulated by the PBGC, IRS, and DOL.
The form consists of a main form plus additional schedules and attachments, which may include:
Form 5500 includes details such as the plan’s start date, participant count, sponsor and administrator details, funding information, and attached schedules. Determining the correct schedules to file can be complex. Common schedules include:
Form 5500 must be filed electronically through the ERISA Filing Acceptance System (EFAST2), as required by the Department of Labor (DOL). This system streamlines the processing, submission, and receipt of the form, ensuring compliance with ERISA regulations.
Although a company’s HR or operations department may assist in preparing Form 5500, the administrator of an EBP is ultimately responsible for filing it and any subsequent reporting. Companies may also choose to outsource the filing to a third-party administrator (TPA) to ensure compliance.
Form 5500 must be filed within seven months after the end of the plan year. For example, if the plan year ends on December 31, the filing deadline is July 31 of the following year, with an option to extend the deadline by 2.5 months to October 15.
For the tax year 2025, the IRS has raised the 401(k)-contribution limit to $23,500, up from $23,000 in 2024. The IRA contribution limit remains unchanged at $7,000.
The IRS Notice 2024-80 provides further details on cost-of-living adjustments affecting various retirement-related limits.
When the audit is complete, the auditor issues a report that includes their opinion on the financial statements and any required schedules for the plan’s annual report. The report will also highlight significant internal control weaknesses, prohibited transactions, and other issues. Additionally, the auditor may provide recommendations for improving controls and addressing operational problems within the plan.
In order to choose a competent EBP auditor, it is important to consider the following key factors which include:
Additionally, the DOL advises EBP administrators to ask the auditor about the significance of an audit engagement letter, the scope of the audit, and the steps taken at the conclusion of the audit.
EBP (Employee Benefit Plan) audits are crucial for ensuring the compliance and financial integrity of retirement plans like 401(k)s and pensions. 401k audit services help safeguard participants’ interests and ensure fiduciary duties are met, and confirm adherence to regulatory requirements. By selecting a qualified auditor and completing the audit process, organizations can maintain transparency and minimize the risk of penalties, ensuring their employee benefit plans are properly managed.
Mercurius is registered with PCAOB, USA, and has assisted its clients with providing audit and assurance services for over a decade to various clients in the United States, including broker-dealers, S-1, F-1, Reg-A, 10K, 10Q, Fund Audits (Mutual Fund, Hedge Fund, Private Equity and Venture Capital Funds, etc), Employee Benefit Plans (401(k)), etc. We conduct audits for all types of firms registered in the United States or would like to register over there.
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