Employee benefit plans are vital for providing workers with retirement, health, and other benefits. Ensuring these plans are managed correctly and transparently is crucial for the well-being of participants and beneficiaries.
This article delves into the significance of employee benefit plan audits, the requirements and responsibilities associated with Form 5500, and the essential role of the plan administrator. Learn more regarding the audit process, including selecting an independent auditor, preparing for the audit, and reviewing the audit report with CPA Nerds today.
What Is An Employee Benefit Plan Audit?
An Employee Benefit Plan Audit examines a benefit plan’s financial statements and operations by an independent auditor to ensure accuracy and compliance with regulations. Form 5500 is an annual return/report required by federal law for most employee benefit plans with 100 or more participants, providing information on the plan’s financial condition, investments, and operations. This audit helps protect plan assets and ensures the integrity of the plan’s financial reporting.
Understanding Employee Benefit Plan Audits
Under federal law, most employee benefit plans with 100 or more participants must submit audited plan financial statements when they file an annual return/report, commonly called Form 5500. The audit comprehensively examines a benefit plan’s financial statements and operations. Conducted by an independent qualified public accountant, the auditor’s primary objective is to provide an opinion on whether the plan’s financial statements are presented fairly and by generally accepted accounting principles (GAAP).
Protecting Plan Assets and Integrity
A well-performed audit protects the assets of the employee benefit plan and ensures its financial integrity. The audit process includes evaluating the plan’s internal controls over financial reporting and identifying any weaknesses or operational errors.
What is Form 5500?
Form 5500 is critical to the Employee Retirement Income Security Act (ERISA) reporting and disclosure requirements. It provides the federal government with information about the plan’s financial condition, investments, and operations.
Who Must File A Form 5500?
Most employee benefit plans with 100 or more participants are required to file Form 5500 annually. This form must be accompanied by audited financial statements if the plan meets the criteria for an audit. Smaller plans may be exempt from the audit requirement if they meet specific conditions related to their investments, fidelity bonding, and participant disclosure.
The Role of the Plan Administrator
The plan administrator, usually the employer or employee organization sponsoring the plan, is responsible for fiduciary responsibility for ensuring the plan’s financial statements are audited if required. This responsibility includes hiring an independent, qualified public accountant to conduct the audit.
Hiring an Independent Auditor
Hiring an independent auditor is one of the plan administrator’s most important fiduciary duties. The selected auditor must be licensed or certified as a public accountant by a state regulatory authority. Moreover, the auditor must be independent and have no financial or other conflicts of interest concerning the plan or the sponsor.
The Employee Benefit Audit Process
- Engagement Letter: The auditor will prepare an engagement letter before the audit begins. This document outlines the scope of the audit work, the timing, and the fees. It also details the responsibilities of both the auditor and the plan administrator.
- Preparing for the Audit: The plan administrator must provide the auditor with various financial, accounting, and other plan records. If third-party service providers manage recordkeeping for the plan, arrangements must be made for these records to be available to the auditor.
- Reviewing the Audit Report: Once the audit is complete, the auditor will issue a report that includes their opinion on the plan’s financial statements and any required schedules for the annual report filing. The report will highlight significant deficiencies or material weaknesses in the plan’s internal controls, if any, and provide recommendations for improvements.
Key Questions for the Auditor
To ensure a thorough and effective audit, the plan administrator should ask the auditor several vital questions:
- Were the plan assets fairly reported?
- Are plan obligations correctly stated and described?
- Were contributions to the plan accurately calculated and promptly?
- Were benefit payments made by plan terms?
- Were employees properly included or excluded from plan participation?
- Are participant accounts fairly stated?
- Were any issues identified that might impact the plan’s tax status?
- Were any transactions prohibited under ERISA properly reported?
- Maximizing the Value of the Audit
Work with CPA Nerds For Your Next Audit
While many business owners pride themselves on their ability to manage multiple aspects of their business, navigating the complexities of tax law and audits is an area where professional business tax assistance from a CPA Firm like Lotito & Lazzara can be invaluable. Engaging with a tax advisor helps avoid errors and allows business owners to focus on growth and operations.