Common Mistakes in Employee Benefit Plan Audits

1. Common Mistakes in Employee Benefit Plan Audits Table of Contents Choosing the Wrong Auditor ................................................................................................. 1 Misunderstanding Plan Provisions ......................................................................................... 2 Incomplete or Inaccurate Participant Data ............................................................................ 2 Improper Handling of Contributions ...................................................................................... 2 Overlooking Party-in-Interest Transactions ........................................................................... 2 Inadequate Internal Controls ................................................................................................. 2 Ignoring SOC Reports ............................................................................................................. 3 Misclassifying Employees ....................................................................................................... 3 Late or Incorrect Filing of Form 5500 ..................................................................................... 3 Lack of Year-Round Communication ...................................................................................... 3 Failure to Document Plan Changes ........................................................................................ 3 Insufficient Auditor Independence ........................................................................................ 3 FAQs .................................................................................................................................... 4 Conclusion .......................................................................................................................... 4 Proper financial oversight is critical for any organization offering retirement or health benefits, especially when subject to annual audits required by the Department of Labor (DOL). An employee benefit plan audit is more than a compliance formality—it’s a key factor in maintaining fiduciary responsibility, identifying financial risks, and ensuring plan participants are protected. However, many companies make avoidable errors that can lead to audit deficiencies, DOL penalties, and compromised trust from employees and stakeholders. Understanding the common pitfalls in an employee benefit plan audit can help plan sponsors, administrators, and auditors conduct more accurate and compliant reviews. Below are some of the most frequent mistakes made during EBP audits and how to avoid them. Choosing the Wrong Auditor Many plan sponsors prioritize cost over expertise when selecting an auditor. Unfortunately, using an auditor without sufficient experience in EBP Audit Services can result in significant

2. errors. The DOL regularly finds deficiencies in audits performed by firms that only handle a small number of benefit plan audits annually. Hiring a qualified CPA firm that specializes in EBP Audit Services not only improves the audit’s quality but also reduces the risk of noncompliance and potential penalties. Misunderstanding Plan Provisions A surprising number of audit issues stem from the auditor or plan sponsor misinterpreting the plan document itself. Each plan is governed by specific eligibility requirements, contribution limits, and vesting schedules. Failure to understand or correctly apply these provisions during an employee benefit plan audit can lead to errors in participant data, incorrect employer matching, or improper distribution processing. Auditors and administrators must thoroughly review and comprehend the plan document before initiating any audit work. Incomplete or Inaccurate Participant Data Accurate participant data is essential for a successful audit. Yet, many audits are delayed or compromised due to incomplete records related to employment dates, compensation, or eligibility. These discrepancies often result from poor internal controls or outdated payroll systems. Consistently maintaining accurate, real-time data can greatly streamline the employee benefit plan audit process and improve audit outcomes. Improper Handling of Contributions Timely remittance of participant contributions is a common area where employers falter. The DOL requires that contributions be deposited as soon as they can reasonably be segregated from the employer's general assets—often within a few days. Late deposits, even by a few days, are a red flag during an employee benefit plan audit and must be disclosed and corrected. Implementing automated systems and internal reminders can help employers comply with DOL contribution timeliness requirements. Overlooking Party-in-Interest Transactions Related-party transactions, such as loans or services involving the employer or plan fiduciaries, require heightened scrutiny. Failure to properly disclose or document party-in- interest transactions can result in prohibited transaction penalties. Experienced EBP Audit Services firms will be well-versed in these nuances and can guide plan sponsors in identifying and reporting these transactions appropriately during the audit. Inadequate Internal Controls Weak or nonexistent internal controls around the plan’s financial reporting process are another frequent cause of audit deficiencies. Proper segregation of duties, periodic reconciliations, and robust documentation are vital. Without these safeguards, errors and fraud can go undetected. A strong internal control environment not only aids the auditor during the employee benefit plan audit but also reduces the likelihood of costly mistakes in day-to-day plan operations.

3. Ignoring SOC Reports If a third-party service provider is used to administer the plan, the auditor will likely rely on a Service Organization Control (SOC) report. However, not all plan sponsors review these reports before or during the audit. Failing to examine SOC 1 reports, especially Type II, can result in unrecognized risks or control weaknesses. Collaborating closely with your auditor and understanding the relevance of these documents is essential for a complete employee benefit plan audit. Misclassifying Employees Incorrect classification of employees as eligible or ineligible participants is another frequent audit issue. Missteps in determining eligibility can lead to missed contributions, incorrect vesting, or even disqualification of the plan. Companies should work with their payroll and HR departments to ensure that eligibility determinations align with the plan document and that updates are made as employees change status. Late or Incorrect Filing of Form 5500 Form 5500 is a critical document required for most benefit plans subject to ERISA. Errors in reporting or late filings can trigger DOL penalties and scrutiny. Many issues originate from inadequate preparation during the employee benefit plan audit process, such as missing schedules or inconsistencies in financial reporting. Working with a specialized EBP Audit Services provider can help ensure that this form is completed accurately and submitted on time. Lack of Year-Round Communication One of the most preventable mistakes is treating the audit as a once-a-year event. Communication between plan sponsors, third-party administrators, and auditors should be ongoing. Proactive collaboration allows issues to be identified early, reduces audit timelines, and helps ensure that changes in the plan or regulatory environment are properly addressed before the audit begins. Failure to Document Plan Changes Throughout the year, many organizations make changes to their benefit plan provisions, such as changing eligibility requirements, contribution formulas, or adopting safe harbor status. If these changes are not well-documented and communicated to the auditor, they can lead to material audit misstatements. Maintaining a comprehensive record of amendments and ensuring that all relevant parties are informed will support a smooth and compliant employee benefit plan audit. Insufficient Auditor Independence Another less obvious but critical mistake is hiring an auditor who lacks independence, especially when using smaller firms that may provide both administrative and audit services. The DOL requires that the auditor remain independent to ensure the objectivity and

4. integrity of the employee benefit plan audit. Ensuring that your selected auditor meets the independence standards set by the AICPA and DOL is essential. FAQs What triggers the need for an employee benefit plan audit? An employee benefit plan audit is typically required when a retirement plan covers 100 or more eligible participants as of the beginning of the plan year. However, exceptions apply under the 80-120 participant rule, so employers should consult their CPA for specifics. How can we choose the right firm for EBP Audit Services? Choose a firm with proven experience in EBP Audit Services, ideally one that performs a significant number of audits each year. Verify that they are listed with the AICPA Employee Benefit Plan Audit Quality Center, which ensures higher quality standards. What documents are needed for an employee benefit plan audit? Key documents include the plan document and amendments, Form 5500, participant data, financial statements, payroll records, trust statements, and any relevant SOC reports if third-party providers are involved. How do late participant contributions affect the audit? Late remittances are flagged during an employee benefit plan audit and may require correction and reporting to the DOL. Continued late deposits can raise serious compliance concerns and increase the risk of penalties. Can plan sponsors perform internal audits instead? While internal reviews are helpful, they do not replace the requirement for an independent audit. The DOL mandates that an external CPA conduct the employee benefit plan audit to ensure objectivity and compliance. Conclusion Conducting a successful employee benefit plan audit requires detailed preparation, specialized knowledge, and a commitment to regulatory compliance. Many common audit mistakes can be avoided by choosing experienced EBP Audit Services providers, maintaining accurate data, enforcing internal controls, and fostering open communication throughout the year. Organizations that prioritize audit readiness not only protect their plan participants but also reduce their exposure to penalties and reputational risk. By recognizing and correcting these common errors, plan sponsors can ensure that their benefit plans operate smoothly and stand up to the scrutiny of both auditors and regulators.