A qualified plan offers significant tax benefits to both employers and employees. As such, it’s subject to many rules and requirements that the plan must meet to be qualified. For large retirement plans that have a benefit plan audit requirement, this annual reporting process serves as a valuable check on the financial reporting of a benefit plan, but it may not provide the type of deeper analysis that can help an employer strengthen protections and streamline processes.
Employers are increasingly turning to compliance assessments to more thoroughly examine and evaluate their benefit plans. These proactive, sponsor-initiated reviews of plan operations and processes can help to identify and mitigate compliance risks, operational errors, and weaknesses in internal controls before they become significant problems or are found in a formal Internal Revenue Service (IRS) or Department of Labor (DOL) audit.
Employee benefit plan audits support ERISA compliance
The benefit plan audit that accompanies the annual Form 5500 filing is conducted in accordance with the rules set forth in federal regulations. The audit is designed to obtain reasonable assurance that the plan’s financial statements are free of material misstatement by performing prescribed audit procedures to a sample of transactions, including consideration of plan provisions that may pose a risk of material misstatement. The resulting financial report, including the audit opinion, is attached to the filing and available for public review. Without this audit, the employer is out of compliance with federal benefit plan requirements and is subject to significant fines, penalties, and other administrative actions by the Department of Labor (DOL) and the Internal Revenue Service (IRS).
Compliance assessments typically offer a deeper analysis over a broader scope
In contrast, a compliance assessment digs deep into a plan’s administrative procedures and operations before potential issues are identified by the IRS or DOL. These assessments are an effective, proactive measure to safeguard against these risks. Given the number of rules applicable to qualified plans, it’s likely that mistakes will occur. A compliance assessment can help identify and correct potential costly mistakes.
While an annual benefit plan audit tests similar areas as part of its required procedures, it does so on a sample basis and in the context of financial statement reporting. A compliance assessment, however, is intentionally broader and more detailed, often involving a participant-by-participant and payroll-by-payroll review of plan transactions. This approach equips plan sponsors with greater insight into compliance risks, potential correction costs, and opportunities to strengthen internal controls and plan administration.
When should a plan sponsor perform a compliance assessment?
- When service issues arise with a third-party administrator that may signal broader compliance problems.
- If the plan sponsors are managing through an upcoming or recent merger or acquisition.
- If the annual benefit plan audit identified errors.
- When the plan sponsor has seen recent turnover in personnel involved in plan administration.
Differences between the benefit plan audit and compliance assessment
In essence, a compliance assessment is a preventative, self-initiated inspection, while an employee benefit plan audit is a mandatory, annual third-party verification required for ERISA compliance that carries enforcement authority and potential penalties for noncompliance.
A common misconception is that the annual benefit plan audit focuses on all areas of ERISA compliance. It’s important to note that an employee benefit plan audit is designed to address financial reporting compliance under ERISA by providing reasonable assurance over the plan’s financial statements — not to evaluate full operational compliance with all ERISA requirements.
The following highlights some of the key differences between a “DOL” benefit plan audit and a compliance assessment.
Key differences by feature
1. Initiator
- Benefit plan audit: An examination of the plan’s financial information performed by an independent qualified public accountant (IQPA). ERISA mandates that large plans, generally those with more than 100 participants, engage an IQPA to express an opinion on the financial information included in their annual filings.
- Compliance assessment: Typically initiated internally by the plan sponsor or compliance officer. Sometimes performed on a recommendation from an external consultant engaged by management, like ERISA counsel or a plan investment advisor.
2. Purpose
- Benefit plan audit: To provide an independent opinion on financial information presented in Schedule H of Form 5500. The independent accountant certifies that the plan’s financial statements are presented fairly in accordance with Generally Accepted Accounting Principles (GAAP) (or another applicable framework) and that the accountant performed an audit as required under ERISA rules.
- Compliance assessment: To proactively identify and mitigate compliance risks, operational errors, and weaknesses in internal controls before they become significant problems or are found in a formal audit.
3. Scope
- Benefit plan audit: Sample-based procedures focused on addressing the risks of material misstatement in the financial reporting of the plan, including plan provisions that are relevant to the financial reporting.
- Compliance assessment: Flexible scope tailored to immediate needs, often focusing on specific high-risk areas or general adherence to internal policies and regulations. Examines every participant, payroll, and transaction within scope and reruns all applicable calculations. Tends to be a much deeper dive into plan operations.
4. Reporting
- Benefit plan audit: A formal audit report is issued and attached to the publicly filed Form 5500, expressing the accountant’s opinion on the plan’s financial statements. That opinion may be unmodified or modified (qualified, disclaimer, or adverse), and modified opinions may draw scrutiny from the DOL.
- Compliance assessment: Findings are usually internal (unless the employer chooses to make them public) and are reported to department heads or management with a focus on developing a corrective action plan.
5. Consequences
- Benefit plan audit: A deficient audit or failure to file a timely and complete Form 5500 can result in significant penalties, fines, or litigation from the DOL/IRS.
- Compliance assessment: Findings lead to internal corrective actions and improved operational efficiency, helping to prevent future IRS and DOL penalties.
To learn more about how a compliance assessment can strengthen your plan’s operational integrity and reduce regulatory risk, please contact your tax or benefits advisor.
