Category: Retirement Plan Audits

The world has become a much more complicated place for businesses of all types with the events of the first half of 2020. Yet there is one constant for many companies—the requirement to have a retirement plan audit by an independent CPA firm.

Despite changes to the deadlines for many IRS forms, as of now, all sponsors of a 401(k) or other benefit plan with more than 120 participants will be required to submit an independent audit of the plan by July 31, or file an extension and submit an audit by October 15.

At Jones & Roth, our team of retirement plan audit specialists expect to perform over 100 retirement plan and benefit plan audits in 2020 for clients across the Pacific Northwest. We are preparing to perform every one of the audits remotely. We continue working to improve our processes for each of our plan audit clients to make a remote audit simple and stress-free.

We use online file share technology, setting up a separate file transfer portal for each client so that information and documents can be shared easily and securely. We also use video-conferencing technology so that we’re able to communicate with you efficiently regarding updates and progress. Our audit team consists of many experienced plan auditors so you can be sure you won’t have to train our staff and that the audit process will be as efficient and quick as possible.

While we truly enjoy meeting our clients face to face and working in your office, in 2020 performing a retirement plan audit remotely isn’t just a good idea—it may be the only way for many of our clients to have their audits completed. If you have questions or would like to discuss our retirement plan audit approach, please contact us. Stay safe and healthy!

When an organization moves from having a small retirement plan to a large one, the Employee Retirement Income Security Act (ERISA) generally requires a retirement plan with 100 or more participants to have an audit of their plan performed by an external auditor. The purpose of the process is to make sure the retirement plan is operating according to plan guidelines and rules, complying with state and federal laws, and actually depositing the correct amount in each employee’s retirement account. It’s wise to not wait until the company hits the 100 employee mark to start planning for the audit.

Evan Dickens, a partner with Jones & Roth CPAs and Business Advisors, recommends that businesses start exploring the requirements when they reach around 80 staff members. That gives them time to determine when they will need the first audit, find a qualified CPA firm, and start pulling together all the necessary paperwork.

Jones & Roth partner Jon Newport, CPA acknowledges that an audit can sound like a burden. However, he encourages companies to think of it as an opportunity. It gives them a chance to double-check that everyone really is receiving the money owed to them. “We’re doing it for the benefit of the participants,” he says. “They’re the stakeholders we’re most concerned with.”

Hiring the Right Audit Firm is Key

Most companies will need their first benefit plan audit when they reach 100 employees, but this can vary based on the plan. And while a company may choose to pose this initial question to their existing auditor, don’t assume their firm is the best choice to perform the benefit plan audit. The U.S. Department of Labor (DOL), the government agency that requires the audits, shares the following on its website:

“One of the most common reasons for deficient accountants’ reports is the failure of the auditor to perform tests in areas unique to benefit plan audits.”

There are a lot of technical details the auditor must understand in order to complete the audit correctly. In fact, the DOL goes on to say that if a professional who is unfamiliar with these types of audits performs the review, that person should have an experienced benefit plan auditor review his or her work.

It makes sense to look for a company that specializes in the area. Jones & Roth is one example. They have established a niche practice in benefit plan audits and now have seven staff members devoted exclusively to working on them.

“We’ve made this area a focal point. It’s not just an afterthought for us,” Dickens says. Staff members within the niche are experts at reviewing the common 401(k) plans, but they’ve also worked with many defined benefit, employee stock ownership, 403(b), and health and welfare plans. A lot of other CPA firms won’t touch these more unusual, highly technical plans because they don’t have the expertise, Dickens notes. Jones & Roth is based in Oregon and performs more benefit plan audits than any other firm headquartered in the state.

Establish Good Communication Between All Partners

During the initial stages of the benefit plan audit, it’s essential to establish good communication between the business’s plan administrator, the CPA firm and the TPA. The audit team needs access to a wealth of documents including payroll records, personnel files, and other human resource data. “It can be a little intrusive for companies that are going through this for the very first time,” Dickens says, “but our focus is on making the first-time process as gentle as possible.”

It’s a good idea to make sure the CPA firm won’t wait until the last minute to complete the audit. October 15 is the deadline for TPA’s to submit all documentation to the Department of Labor. Many CPAs tend to submit their audits to the TPA on October 14. Jones & Roth’s staff always aims to finish theirs by September 30. Another way to glean more value from the audit is to see if the CPA firm can share any best practices or advice for improving the plan’s administration. Dickens and his staff try to do this with all their clients. “Companies want to do the right thing for their employees. They care about things like best practices and internal controls. We want to give them some confidence that they’re doing things the best way.” The right firm may even have other helpful resources they can make available. Since Jones & Roth has its own retirement plan administration practice, Newport says that he often calls his colleagues when his clients have questions they’ve struggled to get their TPA to answer. “We can get them a much quicker, real-time, basically free response to a simple compliance question,” he says.

Making a Positive Impact

Dickens notes that he’s never identified a case where a retirement plan was trying to steal from its employees. But mistakes can happen, especially as retirement plans grow, which is why the audit requirement exists. “I can think of multiple occasions in the last year where we’ve identified that a participant received less of a contribution to their retirement plan than they should have. Sometimes it’s a relatively material amount. I’ve found cases where individual participants were shorted by four figures or more.”

Catching those errors is what Dickens says he likes best about his job. “I really enjoy the chance to make a positive impact on someone’s retirement account. When I’m able to correct those mistakes I feel like I’ve done some good.”

Consider the following scenario: it’s October 10th, and you have just been notified by your third-party administrator that your retirement plan program has exceeded the maximum number of eligible participants to qualify for “small” plan status. Your program is now considered a “large” plan, and you have an annual audit due to the Department of Labor by October 15th.

This is something that no HR manager or CFO wants to hear. How did you get to this point? What has caused you to be under this requirement? What are the next steps to fulfill this requirement? And how can you plan ahead to ensure you are never caught in this position again?

When considering whether a retirement plan audit is necessary, the main factor is participant counts. For most plans, the magic number is 120. If a plan exceeds 120 eligible participants on the first day of the plan year, the plan is required to have a financial statement audit performed by an independent CPA firm.

Some of the items in the count are intuitive, but others are not so much. The count includes all currently eligible participants who are participating, those who are eligible but not participating, and any former employees who still have balances left in the plan.

Many organizations strive to know the standing of their counts at the end of the previous plan year (e.g. 12/31). While planning ahead is always admirable, these organizations run the risk of missing newly eligible participants on the first day of the next plan year (e.g. 1/1).

Because it is very common for newly eligible participants to be admitted to the plan on 1/1, the count from 12/31 to 1/1 can be drastically different; new participants can be forgotten until the employee and participant census is completed the following year. Despite great intentions, we know the rest of the story from the scenario above. Finalizing these participant counts on the last day of the plan year is simply too late.

Start-up plans are not exempt from these concerns; existing businesses that initiate a new employee retirement plan must also consider their counts. If the employee participant count is 100 or more on the date the plan document is signed and goes into effect, the plan is automatically under audit requirement and could be required to have an audit from the beginning.

Understanding these requirements and planning ahead can reduce some of the initial audit fees. The Department of Labor allows some leeway on audit deadlines if the first plan year is less than 7 months old. If this is the case, the plan has the option of delaying the audit until the next full year and submitting two completed audits at once. The auditor would then file both audits together with the Department of Labor in the subsequent 5500.

What if the count falls back below the minimum participant count for an audit? Once the participant number requirement has been met, an audit will be required for that year–and most likely the following year, too–even if the count falls back below the minimum. The Department of Labor will allow a plan to go from a large plan status to small plan once the participant count drops below 100 eligible participants. If the count is 99 or fewer on the first day of the plan year, the plan is considered a small plan for that year. The plan would continue to be a small plan until it crosses the 120 eligible threshold once more on the first day of a future plan year. As companies grow and add employees, this may not be possible, but for those that have steady employee populations, the audit requirement and the related challenges the audit provides may be avoided.

Plan for Success

An effective third-party administrator will work with you to maintain accurate counts at the correct level, monitor and notify you early about audit requirements, and help you make informed decisions that can eliminate or delay the need for a plan audit. Here are a few proactive steps that should be discussed with your third-party administrator:

1. Use a forward-looking census that allows for keeping track of participants who are not eligible, but will be within the next year.
2. Ensure that employees leaving the organization are aware of their ability to take distributions, and/or roll their account funds over to their new employers’ plan or an IRA. Make it part of the employee exit process to prompt taking action with their funds. An employee in the HR department should be responsible for following up with those employees when action is not taken.
3. Review the plan eligibility requirements. Does it make sense to have a short waiting period for eligibility? Do employee turnover rates affect this decision? Eligibility can be as soon as the day the employee begins employment or as far out as one year of service. Delaying eligibility as long as allowed will prevent those employees who may not be around long-term from being included in the overall participant count.
4. Review plan force-out provisions for participants no longer employed. For balances under $1,000, you can automatically cash out participants. And generally, participant balances between $1,000 and $5,000 can be rolled out to an automatic-rollover IRA.

By fully understanding and planning for precise counts, you can avoid the headache of surprise retirement plan audit requirements. What’s more, you can make informed decisions that will add value to your company and mitigate the long-term effects of retirement plan audits.

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has completed an assessment of the quality of audit work performed by CPAs with respect to financial statement audits of employee benefit plans covered under the Employee Retirement Income Security Act of 1974 (ERISA).

The results of their study were alarming.

Nearly 40% of plan audits failed to comply with generally accepted auditing standards (GAAS), putting $653 billion dollars and 22.5 million plan participants and beneficiaries at an elevated risk of loss. In addition, the AICPA has determined that 21 % of practitioners in our study were not in compliance with required peer review requirements.

One notable finding was that firms that performed the fewest benefit plan audits had a 76% deficiency rate in complying with GAAS.

This report confirms what our Employee Benefit Plan Audit team believes to be true – a quality auditor is one who has extensive and specialized experience in the unique and highly technical aspects of Employee Benefit Plan audits.

The Jones & Roth Employee Benefit Plan Audit team performs more benefit plan audits than any other firm headquartered in the state of Oregon. Therefore, we hold a vigorous commitment to excellence, and our expertise covers common 401(k) plans, as well as unusual, highly technical plans such as defined benefit, 403(b), employee stock ownership (ESOP), profit-sharing, self-directed, health and welfare, and alternative investments.