If your company offers a defined contribution plan or a less common defined benefit plan, those plans may be subject to an annual audit by an independent CPA, says Ken Levine, a director of assurance services at SS&G Financial Services, Inc.
“An audit is a test to determine if the financial statements of the plan are accurate and if the plan is operating in compliance with the provisions of the plan and the law,” says Levine. “Think of it from the participant’s perspective, as a safety net. You want to know that the part of your paycheck you are asking your company to contribute to your 401(k) is actually going where you want it to go.”
The audited statements are attached to Form 5500, which all companies with defined contribution, defined benefit, or certain other types of employee benefit plan, must file. However, only companies with about 120 employees or more must attach audited statements to the form.
Smart Business spoke with Levine about what plans must be audited and how to prepare for the annual event.
What kinds of plans must be audited?
Defined contribution and defined benefit plans, as well as certain other types of employee benefit plans, must be audited if they meet certain criteria as proscribed by law. In a defined contribution plan, such as a 401(K) plan, participants define what their contribution is and where it’s invested, and they are entitled to what’s in their account when they retire. These plans are audited to ensure participants’ money is being deposited in a timely manner in the funds they want it to go in and that the earnings on their investments are properly allocated to their accounts.
Defined benefit plans, usually entirely funded by the company, are also covered. In these, participants get a defined amount per year after they retire, based primarily on salary and years of service. An audit helps ensures a company is putting away enough money to cover the entire population of eligible employees.
Both types of plans are separate legal entities from the plan sponsor, so if the employer runs into trouble, the assets of participants are outside the company.
How can a business prepare for an audit?
You need to have your books and records together. You’ll need an annual trustee statement from the organization holding the accounts. The business leader should also make available participant information so the auditor can ensure that everyone who is participating qualifies and that no one who qualifies is being excluded.
Throughout the process, the CFO or CEO should be available to answer questions and help track down data. It’s more cost-effective for the plan sponsor to track down the data than to have the auditor do so.