A first-year retirement plan audit is a significant milestone for plan sponsors and auditors alike. As a plan crosses the 100-participant balance threshold, the Employee Retirement Income Security Act (ERISA) generally requires the plan to be audited by an independent qualified public accountant (IQPA). The audit requirement is measured as of the first day of the plan year and focuses on participants with account balances.
What is the First-Year Audit Requirement?
ERISA and the IRS require plans with more than 100 participants to engage in an EBP audit. Plans with 80–120 participants may defer the audit for a year if they filed as a small plan in the previous year. Short plan years (less than seven months) can defer the audit requirement until the subsequent year end.
Understanding the Purpose of a Retirement Plan Audit
The primary aim of a retirement plan audit is to provide assurance that your plan’s financial statements are presented fairly and accurately. It also ensures compliance with the current plan provisions and ERISA and IRS regulations, safeguarding both plan participants’ interests and the plan sponsor from potential penalties.
Planning and Preparing for Your Audit
Planning a first-year audit begins months before fieldwork. Gathering the necessary plan documentation, coordinating with all related service providers, and understanding the audit requests can be time consuming.
Your auditors should educate you on each request to clearly identify what information is needed and why it is being requested to avoid any assumptions or confusion.
Best practices advise starting at least 90–120 days before the plan year ends. This proactive approach allows both you and your audit firm to align timelines, coordinate document requests, and ensure staff are informed.
Your auditor will focus on testing the following:
- Plan compliance: verifying participant eligibility, compliance with the definition of eligible compensation, and timely remittance of contributions
- Testing participant accounts, contributions, distributions, and loans for accuracy
- Review of investment valuations, plan expenses, forfeitures, and procedural adherence
- Financial reporting: ensuring accuracy of financial statements and related disclosures
Common Challenges in a Retirement Plan Audit
Common challenges can arise during a retirement plan audit if preparation and documentation are not carefully managed. For example, inaccurate participant counts can result in incorrect Form 5500 filings, which may require amendments and additional follow-up.
Another frequent issue is an overreliance on trust statements. While a certified trust statement provides useful information, it doesn’t replace the procedures required in an audit.
Auditors also commonly identify instances of noncompliance with plan provisions during the engagement. In these situations, the objective is not simply to point out the issue, but to help you understand and apply the appropriate correction methods to bring the plan back into compliance.
Delayed audit preparation can also create unnecessary pressure as filing deadlines approach, so it’s important to begin planning early and gather key documents in advance to provide to your auditor during the proposal process.
Finally, missing or outdated documentation can slow the audit and introduce avoidable complications, making it essential to ensure that all plan documents are current, properly signed, and readily accessible.
Benefits of a First-Year Audit
Though demanding, the audit provides valuable benefits such as improved financial accuracy and clarity, better understanding of regulatory responsibilities, and identification of compliance gaps. It also helps protect your employees by verifying contributions and ensures you meet your fiduciary duties. Implementation of self-audit procedures by the plan administrator will help monitor the plan throughout the year and identify any potential issues well in advance of the next audit.
Setting Your Plan Up for a Successful First Audit
By preparing thoroughly, communicating effectively, and starting early, plan sponsors can ensure a smoother and more efficient first-year retirement plan audit. This proactive approach safeguards both your organization and your employees, laying a foundation for future audits and enhancing overall plan operations.
Our Employee Benefit Plan Services team delivers specialized audit and accounting services for retirement plans and works with plan sponsors and service providers throughout the audit process. If you have any questions or would like assistance navigating audit requirements, preparing for regulatory expectations, or addressing audit-related questions as they arise, please contact us.