By: Hannah Hebsch, Senior Accountant

Retirement plans, such as a 401(k) Plan or a 403(b) Plan, offer a great incentive to employees, can be used to attract and retain talented employees, and help employees meet their financial goals. Along with the benefits of establishing a retirement plan, however, come added compliance obligations. Employee benefit plans are subject to regulations established under the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA), a federal law imposing restrictions on retirement plans to protect individual plan participants. Among the many requirements under ERISA, certain plans must file Form 5500 with audited financial statements attached each year to satisfy Department of Labor (DOL) and Internal Revenue Service (IRS) reporting requirements under ERISA and the IRC, respectively.

Plans meeting the definition of a “large plan” require an audit. A “large plan” is generally considered to be a plan with more than 100 participants at the start of a plan year, while a “small plan” is a plan with fewer than 100 participants. For plans with between 80 and 120 participants, an exception applies that may allow a plan to delay the requirement for audited financials statements. Plans with fewer than 120 participants at the start of a plan year can file under the requirements of a “small plan” if they were able to do so in the preceding year. For plans to which this exception does not apply, a number of steps can be taken to prepare for an impending audit.

If you anticipate that your plan will meet the definition of a “large plan” in the coming years, consider implementing the following strategies in preparation for an audit of your plan’s financial statements:

  1. Ensure that employee personnel records are complete and up-to-date. The DOL and numerous federal and state agencies require certain items to be maintained in employee personnel files. These documentation requirements vary greatly among employers and are influenced by a number of factors including size and type of business. While there is no one-size-fits-all solution for compliance with these requirements, a few things to consider including in employee personnel files are the employee’s name, social security number, current mailing address, date of birth, date of hire, and authorized pay rate. In addition to maintaining these items, employers should also retain timecards and payroll records for each employee. Further, signed enrollment forms indicating an employee’s decision to enroll or not to enroll in the plan should be kept on file for all employees eligible for participation in the plan.
  2. Ensure adequate ERISA fidelity bond coverage. Under ERISA, bond coverage of 10% of prior year plan assets up to a maximum of $500,000 must be in place for plan administrators, trustees or employees who handle plan funds (Note: Plans with certain types of investments may require additional coverage). Plans without adequate fidelity bond coverage could trigger an IRS or DOL plan audit, jeopardize the Plan’s tax-exempt status, and cause the Plan’s fiduciaries to be held personally liable for losses that should have been covered by a fidelity bond.
  3. Make timely contributions to the plan. DOL regulations require that employee deferrals be remitted to the plan on the earliest date that they can be reasonably segregated from the plan sponsor’s assets, but not later than the 15th business day of the month following the date in which funds are withheld from an employee’s paycheck. Plans meeting the definition of a “small plan” are considered to be in compliance with DOL requirements if employee contributions are remitted to the plan within 7 business days of an employee’s payday. This safe harbor no longer applies to plans meeting the definition of a “large plan” and the DOL has indicated that “large plans” should remit employee deferrals at least as quickly as the employer deposits payroll taxes. Plan sponsor’s that do not remit employee deferrals to the Plan timely may be subject to additional penalties, excise taxes and potentially plan disqualification.
  4. Hold Regular Plan Meetings. ERISA’s guidelines for plan fiduciaries state that the plan should carry out due diligence in monitoring and administering plan operations (i.e. reviewing investment options, monitoring plan expenses, etc.). In order to demonstrate this due diligence, meetings of plan management should be held on an annual basis, at minimum, and official minutes should be prepared to document these meetings.

An initial audit of your plan’s financial statements may seem daunting, but using the above strategies can help to ensure that you are well-prepared to comply with ERISA, DOL and IRS regulations. If you have questions regarding audits of employee benefit plans or think you may require an audit in the near future, please contact us so that we may help to meet the needs of your plan.