Retirement Plans... Do You Need an Audit?

Beyond the legal requirement, audits can provide opportunities for improving efficiency or effectiveness.

by Nicole Nevicosi, Heinwold Banwart, Ltd.
Nicole Nevicosi

Many employers offer retirement plans and encourage participation by matching a portion of employee deferrals. Retirement plans make it easy for employees to contribute and save for their retirement.

The Employee Retirement Income Security Act of 1974 (ERISA) sets standards for most retirement plans to protect participating employees. ERISA requires plans to provide participants with information about their plan features and funding, and it establishes reporting requirements. Each plan must also file a 5500 with the Department of Labor—and some plans require an audit.

When Does A Retirement Plan Require An Audit?
Not all retirement plans require an annual audit. Plans with less than 100 participants at the beginning of the plan year are considered “small plans” and are exempt from the audit requirement. A retirement plan with 100 or more eligible participants at the beginning of the year is considered a “large plan” and requires an audit.

There is an exception to the 100-participant threshold audit requirement called the 80-120 rule. The 80-120 rule allows a plan with between 80 and 120 participants to file in the same category (large plan or small plan) the plan filed in the prior year.

For example, if a plan had 90 participants last year and filed as a small plan, and then had 105 participants this year, it can elect to file in the same category as last year since the plan falls in the 80-120 participant range. The plan can continue to file as a small plan each year as long as it remains under 120 participants. If the plan had 125 participants at the beginning of the next year, the 80-120 rule does not apply, and it would be required to file as a large plan. However, if the following year the plan drops to 110 participants, they are again in the 80-120 range, but because they filed as a large plan last year, they would not have the option to file as a small plan in the current year.

Why Are Audits Important?
First and foremost, audits are required by the Department of Labor (DOL) for plans filing as large plans. Beyond simply the legal requirement, audits can be very beneficial for the plan. An audit of the plan’s financial statements provides an independent report that indicates if they can be relied on by participants and plan management. In addition, during the course of the audit, auditors may see opportunities for improving operational efficiency or the effectiveness of controls.

What Qualifications Should A Plan Auditor Have?
Not only must plan administrators hire an auditor, but they need to use reasonable care to hire a reliable and qualified auditor. The hiring of a plan auditor is a fiduciary function that must be performed by plan administrators—and they can be liable to restore losses to the plan if they don’t exercise due care when hiring an auditor. If the DOL finds a significant deficiency in a plan’s audit, they can impose penalties on the plan administrator.

When a plan administrator is deciding which auditor to hire for a plan audit, there are a few things to consider, including the auditor’s technical training and knowledge specifically related to employee benefit plan audits. It is also important to consider the number of employee benefit plan audits the auditors’ firm performs. A firm that performs many employee benefit plan audits will be more aware of their intricacies than a firm that performs just a couple audits.

Another item to consider is what process and quality controls the firm has in place to ensure that quality audits are performed. A great firm will not only perform the plan audit with diligence and care, but will also add value by providing insight about control weaknesses and inefficiencies. PM

Nicole Nevicosi, CPA is a staff accountant in the Audit Services Department at Heinold Banwart, Ltd. She can be reached at (309) 694-4251 or nnevicosi@hbcpas.com.

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