Audit Requirements for

Employee Benefit Plans

The Employee Retirement Income Security Act of 1974 (ERISA) was established to protect the interest of employees who participate in employee benefit plans. All employee benefit plans are subject to ERISA rules and must report certain information to the Department of Labor (DOL) and the IRS, as well as provide this information to all plan participants, on an annual basis. ERISA holds plan administrators responsible for ensuring that financial statements are audited in accordance with generally accepted auditing standards (GAAS).

When is an audit required?

Typically, only small employee benefit plans have the option to waive the audit requirement. For most large plans (plans with more than 100 "eligible participants" at the beginning of the plan year), an audit is required as part of the mandatory Form 5500 annual return. Many plan administrators confuse the term "eligible participants" with those individuals that actively participate in the plan; however, the instructions to Form 5500 define an eligible participant as "eligible to elect to have the employer make payments to a Code Section 401(k) qualified cash or deferred arrangement." In other words, "eligible participants" include all individuals that meet the eligibility requirements for participation in the plan regardless of whether they actively participate by making employee deferrals into the plan.

Many plan administrators make the mistake of not counting "non-active" participants, opting to waive the audit requirement by claiming to be a "small plan." Unfortunately, this mistake could cost you a significant amount of money in penalties assessed by the Department of Labor. Because an incomplete or untimely audit report may result in penalties being assessed against you as the plan's administrator, the performance of a quality audit is very important.

What type of audit do you need?

There are two types of audits for 401K plans:

A Full Scope Audit is required when certification from your custodian on the investments held is not available (i.e., the custodian has only obtained a Type I SAS 70 report and will not provide a certification on the completeness and accuracy of the investments). This type of audit requires substantially more audit work on the part of the plan's auditor as they will be required to test the investments held by the custodian.

In a Limited Scope Audit, the auditor of the plan will test the participant data and rely on the certification and Type II SAS 70 Report obtained from the custodian for the investment value.

Are there exceptions to the audit requirements?

There is an exception to the large plan audit requirement, which is called the "80-120 Participant Rule." This rule states that if a plan has between 80 and 120 eligible participants at the beginning of the plan year, then the Form 5500 annual report can be filed in the same manner as previously filed (i.e., if the plan had fewer than 100 employees and no audit was conducted in the prior year, and there are between 80 and 120 eligible participants in the current year, then the company can opt not to submit audited financial statements).

We are available to assist you with audit and filing regulations to ensure your compliance with both the Internal Revenue Service and Department of Labor requirements.