How Companies Can Ensure an Employee Benefit Plan Audit Will Be a Success
Employee benefit plan audits are necessary for compliance, but can also enable management to improve and streamline plan operations.
Employee benefit plans are, by their very nature, decentralized. There are aspects of the plan that are likely to be outsourced to third-party service organizations that specialize in accounting and investment record keeping functions. However, somewhat paradoxically, companies bear the full responsibility for the integrity of all aspects of their benefit plan, including those handled by third parties.
Organizations with more than 100 employees eligible to participate in their benefit plan are required to have an audit performed on an annual basis and filed with Form 5500. Though the audit has to be performed by an outside firm, preparing for it and managing the process effectively is key, and can result in streamlining your employee benefit plan processes overall.
Choose an experienced firm
Employee benefit plan audits are submitted to the US Department of Labor, which actively encourages companies to use experienced audit firms. According to the DOL, accounting firms that perform the fewest employee benefit audits are six times more likely to make mistakes than those that perform a high volume of employee benefit audits.
Assign an internal person to manage the audit process
Since employee benefits may encompass retirement, healthcare, dental and more, the different vendors involved and information required for the audit can be quite sprawling. When companies go through their first employee benefit plan audit, they often underestimate what is involved.
The auditor has to get an understanding of all of the activities surrounding the plan, the internal controls and the financial processes that are directly related to how the plan operates. They’ll also need to understand what systems you're using, such as payroll, a plan trustee and record keeper.
Appointing an individual within your organization to be the point of contact for the audit and to manage compiling and sharing this information will ensure the process unfolds smoothly and reduces the burden for the rest of your team.
Understand your processes and controls
Processes and controls over the systems that impact your employee benefit plan are an essential component of an employee benefit plan audit. This includes oversight and monitoring controls over any third-party service organizations who have a role in those processes.
For example, employees frequently change the percentage of their pay that is diverted to their retirement account. The company has a responsibility to make this change in their payroll system in a timely manner. Understanding how those changes are received and made in the payroll system and ensuring procedures are established to ensure it happens is important.
The company also has to make sure it isn’t holding on to funds longer than it should. Contributions, which include employee contributions as well as any employer match, have to be sent to the trustee and record keeper in a timely fashion.
Maintaining these controls is no small task, but it’s essential in protecting the financial integrity of the employee benefit plan. Hiccups along the way aren’t something to be afraid of — the audit can help management improve, streamline the operations associated with the plan and strengthen the internal controls over the reporting within the plan.
A real-world example
My firm worked with a technology company that had grown rapidly. As a result, the HR department was understaffed and overburdened with other normal responsibilities internally. They weren't able to make changes timely or accurately in their payroll system for employee contribution percentages, or sometimes weren't even making changes that the employees were requesting.
When we went in and tested contributions made for employees, the amounts that the employee had asked to be taken out were either understated or overstated. This had to be fixed before the audit was completed. Most often, companies that have good policies and procedures over the employee contributions to the plan would have identified this problem and fixed it prior to the audit process.
An audit helps the company file a complete and accurate Form 5500 for the plan with the DOL, but it may also help plan management improve and streamline plan operations.