EBP Audits: Getting Ready for Regulatory Review
Preparing for a DOL or IRS Audit of Your Employee Benefit Plan
Preparing for a Department of Labor (DOL) or Internal Revenue Service (IRS) audit of your employee benefit plan is essential because a well-organized and proactive approach minimizes adverse findings, reduces penalties, and demonstrates fiduciary prudence. Successful preparation hinges on maintaining meticulous records, understanding the agencies’ respective focuses, and establishing clear internal protocols before the audit notice even arrives. A smooth audit process confirms to regulators that the plan is being managed responsibly and in the best interest of participants.
Key Takeaways
What’s the most important thing for plan audit preparation?
The most important step is maintaining complete and organized plan records, including plan documents and all financial and administrative records.
What does the DOL usually focus on during a plan audit?
The DOL primarily focuses on fiduciary conduct, prohibited transactions, and the timely deposit of employee contributions under ERISA.
How should a plan respond to audit findings?
Fiduciaries must promptly address any findings or recommendations from auditors to prevent minor issues from escalating and avoid penalties.
A Foundation of Records and Organization
The cornerstone of any successful regulatory review is maintaining complete and organized plan records, which is essential for a successful audit. Fiduciaries are legally required to keep records that are sufficient to determine whether the plan is operating in accordance with its terms and the requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).
These records fall into several critical categories:
Plan Documents
This includes the signed plan document, all amendments, summary plan descriptions (SPDs), trust agreements, and investment policy statements.
Financial Records
Audited financial statements, Form 5500 filings and related schedules, contribution remittance reports, bank and trustee statements, and documentation for all distributions and rollovers.
Administrative Records
Documentation supporting participant eligibility determinations, enrollment forms, election forms, and records detailing the process for monitoring service providers.
Organizing these documents—preferably in a format (physical or electronic) that allows for easy retrieval—significantly streamlines the audit process. Delays in producing documentation often raise red flags for auditors, suggesting a lack of governance or control.
“A well-organized and proactive approach minimizes adverse findings, reduces penalties, and demonstrates fiduciary prudence.”
Understanding the Audit Scope
Understanding the scope and focus of DOL and IRS audits helps with effective preparation. While both agencies may conduct reviews, their primary focuses differ based on their regulatory missions.
The DOL (Department of Labor) focuses mainly on fiduciary conduct and participant protection under ERISA. Their audits often scrutinize areas related to:
- Fiduciary breaches: Reviewing the selection and monitoring of service providers and investments.
- Prohibited transactions: Checking for self-dealing or conflicts of interest.
- Timeliness of contributions: Ensuring employee deferrals are deposited promptly.
- Participant disclosures: Confirming that required notices (like SPDs and fee disclosures) were timely and accurate.
The IRS (Internal Revenue Service) focuses on plan qualification and tax compliance under the IRC. Their reviews typically center on:
- Operational compliance: Ensuring the plan operates according to the written document (e.g., proper application of eligibility rules).
- Nondiscrimination testing: Verifying that the plan does not unfairly favor highly compensated employees.
- Distribution rules: Checking that hardship withdrawals, loans, and required minimum distributions (RMDs) meet statutory requirements.
Knowing these separate focuses allows plan administrators to review the most vulnerable areas before an auditor calls.
Streamlining the Process and Managing Findings
To ensure efficiency once an audit begins, having a designated point of contact for audit inquiries streamlines the process. This individual—often the plan administrator, an in-house counsel, or an external consultant—should be knowledgeable about the plan’s operations and documentation. Routing all external communications through a single person ensures consistency, prevents contradictory information from being provided, and maintains control over the flow of sensitive data. This contact person is responsible for communicating with the auditor, gathering requested documents, and coordinating responses from other internal stakeholders (like HR or payroll).
Crucially, promptly addressing any findings or recommendations from auditors is necessary to prevent minor issues from escalating into major compliance problems. Auditors typically issue a report outlining their findings. Fiduciaries must take the necessary corrective action quickly, which may involve correcting participant accounts, filing amended tax forms, or implementing new administrative procedures. Ignoring or delaying a response to a finding can result in the assessment of significant penalties or the potential disqualification of the plan.
The Power of Proactive Compliance
The most effective defense against negative audit outcomes is a continuous commitment to compliance. Proactive compliance measures minimize the risk of adverse audit findings. This means implementing a culture of regular internal self-audits.
These proactive steps include:
Annual Operational Reviews
Regularly reviewing key plan processes—such as contribution timing, loan processing, and distribution procedures—against the written plan document and the law.
Service Provider Due Diligence
Documenting the periodic review and benchmarking of all third-party service providers (TPAs, custodians, investment advisors).
Control Implementation
Ensuring that strong internal controls, such as the segregation of duties, are consistently being followed.
By treating the audit as a matter of when, not if, plan sponsors can transform a potentially disruptive regulatory event into a routine confirmation of their excellent governance and fiduciary diligence.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
Questions?
Jackie leverages her experience in audit, review, and compilation services across multiple industries to serve clients, including those requiring specialized employee benefit plan audits. She applies her audit skills to a variety of engagements, encompassing many of the firm’s client engagements since joining the firm in 2019, ensuring compliance and financial accuracy across diverse sectors, including employee benefit plans.