Common Mistakes to Avoid in Employee Benefit Plan Audits

The Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of employee benefit plans which generally have over 100 participants at the beginning of the plan year. This audit must be completed by a qualified independent accountant who will review each aspect of the benefit plan and ensure compliance with legal and regulatory requirements.

When found during the audit, failures to comply with the Plan’s provisions and/or Internal Revenue Code requirements (commonly known as operational failures) must be corrected in a timely manner. Correcting operational failures can be costly, and the costs increase dramatically when they are allowed to continue uncorrected for multiple years.

Common EBP Audit Mistakes

Most errors occur when a plan administrator, either internal or outsourced, fails to administer the plan in accordance with the terms of the plan. Some of the most common mistakes include:

• Not properly implementing employee deferral elections
• Not depositing employee contributions promptly
• Not calculating distributions using the proper vesting schedule
• Not filing Form 5500 by the filing deadline
• Financial statement deficiencies
• Improperly approved hardship distributions
• Nondiscrimination testing failures which are not corrected within one year

Correcting Operational Failures – IRS Programs

Plan sponsors are responsible for correcting any operational failures, regardless of whether they were discovered as part of the annual audit or were detected by management, the impacted employees or regulatory agencies. Employees who believe errors have occurred and were not properly corrected may also contact regulatory agencies directly to report such suspected errors.

The IRS has published its guidance for correcting operational failures in the Employee Plans Compliance Resolution System (EPCRS). EPCRS provides the approved calculations for correcting common operational failures, such as failing to enroll new participants in the plan on time or not implementing the proper deferral or matching calculations.

When corrections are made according to EPCRS guidance within two years of the end of the year when the operational failures occurred, plan sponsors may use the Self-Correction Program (SCP) to correct such failures and avoid contacting the IRS or paying a fee. For other failures being corrected by the plan sponsor, a Voluntary Correction Program (VCP) filing will need to be made and the IRS will review and approve the correction. If an operational failure is detected while a plan is under inspection by the IRS, the plan sponsor will pay a sanction along with the correction through the Audit Closing Agreement Program (Audit CAP).

Correcting Operational Failures – DOL Programs

The Department of Labor (DOL) is responsible for monitoring that annual Forms 5500 (along with any required audit financial statements) are filed timely for plans covered by ERISA. Failure to file Form 5500 by its required due date will require plan sponsors to use the Delinquent Filer Voluntary Correction Program (DFVCP) to remedy late filings. The penalties assessed against plan sponsors for failure to file Form 5500 timely have recently increased. Therefore, it is increasingly important to complete plan audits on time or correct late filings before the DOL assesses penalties.

The other most commonly used correction program exists for plan sponsors to correct untimely remittances of employee contributions to plans. The DOL provides the Voluntary Fiduciary Correction Program (VFCP) for plan sponsors to calculate lost earnings owed to the plan for such delays, and plan sponsors can similarly determine whether to self-correct such delays or submit a VFCP filing to the DOL for their approval. Each plan sponsor is responsible for determining an appropriate timing policy to remit contributions to EBPs, and there is no “safe harbor” timing guidance for plans with over 100 participants.

Preventing Failures

Plan sponsors should ensure their plan documents are being amended in a timely manner for recent legislation related to EBPs, and that responsible personnel are educated regularly on common problem areas, such as timing of deposits, eligibility and auto-enrollment, and definition of eligible compensation. Proactive communication between plan administrators, their outsourced service providers, and their auditors is vitally important to ensure there are no surprises discovered during EBP audits.

The reality is that many EBP audits fall short of the mark. According to a 2023 DOL audit quality study conducted on 2020 audits, out of a sampling of over 300 audits reviewed, 30% were found to have substantial deficiencies. Plan sponsors are responsible for selecting their service providers, including plan auditors, and ensuring they are performing appropriate audit procedures that would be acceptable to the DOL if inspected.

Connect With Us

If you need assistance with your annual EBP audit, CBIZ can help. Our professionals have the expertise to handle all aspects of EBP audits, including 401(k) plans, 403(b) plans, ESOPs, defined benefit plans and more.

If you’re concerned about the quality of your EBP audit, please connect with our professionals today. Our team of auditors, equipped with thorough expertise and comprehensive knowledge, will ensure your audit adheres to all necessary standards, effectively simplifying EBP audit complexities, and ensuring smooth compliance with IRS and DOL regulations.