Employee Benefit Plans, Retirement Plans, Defined Contribution Plans, Profit Sharing Plans, and 401K Plans – call them what you like, they all require annual audits if the number of plan participants stays above 100. When companies reduce their workforce and the number of participants decreases, it is important to watch for the time when the count drops below 100. This is when the plan no longer needs an audit: the year that begins with fewer than 100 plan participants. Hopefully, when the count drops below 100, the auditor will inform the plan trustee that an audit is no longer required for the following year.
Most plan trustees will not want to pay for an audit if it is not required. The Department of Labor (DOL) decided that the participants in these plans needed CPA firms to protect their rights and money. Companies were not always running the plans with workers’ best interests in mind. In 1974, the DOL created the Employee Retirement Income Security Act (ERISA) that requires plan sponsors to hire independent CPA firms to perform audits to police the plans and try to protect the participants. The audit report gets attached to the plan’s annual tax filing with the Internal Revenue Service (Form 5500). Only plans with over 100 plan participants are required to have the audits, so who is watching over all the plans that have under 100 plan participants? No one. It is up to the trustees of the plan to see that the plan is administered properly.
I have been auditing employee benefit plans for over 25 years. During that time, I have seen many errors made in plans that would not have been caught without the audit. Even plans that are audited every year contain mistakes. For some smaller plans, the errors aren’t discovered until the plan starts its termination process.
A former client of mine had sold its business and was terminating the 401k Plan. The number of employees at the company was always under 75 so they never had a 401K Plan audit. When they reviewed the most up-to-date plan document (the DOL is always finding changes to be made to plans), they were surprised to find that the definition of what should be included in compensation that is subject to deferral and matching benefits was not the same as what their payroll department had been using for several years. These errors had to be corrected at an additional cost.
The definition of compensation is not a disclosure in the audited financial statements of the plan; It is the focus of audit procedures that test to see that the compensation being used for all related payroll deferral and matching contributions is correct according to the plan document. Usually the definition includes all compensation. Plan trustees should periodically check to see that these calculations are correct, especially if the company changes payroll-processing companies or updates its plan document.
James M. Sausmer recently retired from Mazars USA LLP as a Partner and is currently directing the audits of 401K plans for Rizick & Rizick CPAs, LLC. Contact Jim.