How to Navigate an Employee Benefit Plan Audit
April 5, 2020
Annual benefit plan audits can seem overwhelming at times, however much of the angst and stress of such an audit can be curtailed if one knows how to navigate the process. Benefit plan audits have similarities but are different than a corporate financial statement audit.
While internal controls and processes are important in both types of audits, well documented controls that are consistently executed are essential to benefit plan audits due to the compliance nature of the audit. A plan administrator’s core responsibility is to manage the plan in the best interest of participants. This includes, but is not limited to:
- Carrying out the policies of the 401(k) plan in accordance with plan documents and related laws and regulations
- Ensuring the diversification of plan investments against established criteria to minimize risks of large losses
- Monitoring investment performance and replacing underperforming investments, ensuring the reasonableness of plan fees and defraying any unnecessary costs
- Providing access to relevant information to help participants make sound financial decisions
An auditor’s core job during an employee benefit plan audit engagement is to assess whether the plan sponsor is reasonably administering the plan in accordance with IRS/DOL regulations and the plan document.
Human resources data, including personnel files and payroll data along with transaction data, from the custodian/third party administrator are key pieces of evidence for the auditor.
Having this data readily available will help both parties (the plan administrator and the auditor) navigate the testing procedures. Allowing the auditor read only access to the plan’s third party administrator portal and data will also assist an efficient audit process and lesson plan sponsor personnel time commitment.
The plan administrator should be able to provide such data to the auditors and explain any variances found when auditors are testing plan features and transactions such as:
- Compliance with plan documents
- Participant eligibility and participant data
- Contributions to the plan
- Distributions from the plan
- Participant loans
- Plan investments and related income
- Plan expenses
- Related party and party-in-interest transactions
- Tax compliance
Remember the ultimate goal of the regulators is to ensure that no employee is adversely affected by improper operations of a benefit plan.
If you are about to undergo an Employee Benefit Plan Audit and have questions on how to prepare Contact Us and we can help ensure a high quality audit is performed to prevent liabilities and risks.