Best Practices for Benefit Plan Audits


Best Practices for Benefit Plan Audits

Best Practices for Benefit Plan Audits

May 31, 2023
by Tara Szerpicki

Companies and organizations that sponsor employee benefit plans, such as 401(k)s, may have to undergo a benefit plan audit if they meet certain criteria.

There is a big change coming for the 2023 plan year regarding how to determine when an audit is required. This also makes now a good time to share some common “hiccups” we see when conducting benefit plan audits. Here’s what’s changing along with a list of tips on how to streamline your benefit plan administration and possibly avoid the audit altogether.

The big change for plan year 2023 relates to the determination of who is required to have an annual benefit plan audit. Currently, any plan for which there are 100 or more “eligible” participants must have an audit conducted by a third-party auditor. Eligible participants fall into three categories:

  • Anyone who has met the requirements to participate in the plan and is contributing to the plan.
  • Anyone who has met the requirements to participate in the plan and has opted out of the plan.
  • Anyone who has a balance in the plan, but no longer works for the company.

Starting for plan year 2023, one tenet of the way in which you determine those 100 participants changes: Anyone who has met the requirements to participate in the plan and has opted out of the plan is no longer counted as an eligible participant. That’s good news for companies close to or straddling that 100-person audit threshold. However, those who meet eligibility requirements and contribute, as well as any terminated employees who have a balance, continue to count toward the 100-person threshold.

Speaking of that threshold, should you meet it, and an audit is required, there are some issues that can delay or complicate the audit process. Here are common pitfalls to avoid.

  • Carefully Review Your Certified Trust Statement. The holder of the plan’s assets, such as Empower, Charles Schwab, Fidelity or another similar entity, provides the plan sponsor with an annual “certified trust statement.” Occasionally, the ending balances don’t match the beginning balance of the current year; always check to make sure that these match.
  • Don’t Forget About Loans. Certified trust statements also include a list of loans. For example, if an employee took out a loan against their 401(k), the list should include the beginning balance, any repayments made, any interest charges, and the ending balance. Often, we see issues where loan repayments are not being made. Plan sponsors should pay close attention to ensure that loan repayments are being made in a timely fashion.
  • Review Your List of Terminated Employees. As mentioned above, “anyone who has a balance in the plan that no longer works for the company and has not withdrawn from the plan” is considered eligible. Believe it or not, people often leave money untouched for years in the plans of former employers. Reminding these folks to move their funds can get them off your books and potentially help you to stay under the audit threshold.
  • Establish a Forced Exit Amount for Terminated Hangers-On. Most plan documents include a stipulation that for individuals no longer with the company with a plan balance under a certain amount, the plan sponsor can force them out and they must remove their funds. Does your plan have such a stipulation? Amounts can vary, and often range anywhere from $1,000-$5,000. It’s good practice to review your list of former employees who are carrying balances. The company taking action can help to reduce the count toward the benefit audit threshold.
  • Be Cognizant of Participant Contribution Thresholds. Another good thing to note is how much an individual can contribute to their 401(k); limits change every year. For example, in regard to allowed contribution amounts, it was $20,500 in 2022 and will be $22,500 in 2023 for those 50 and under. For anyone over 50 they can make additional “catch up” contributions of $6,500 for 2022 and $7,500 for 2023.
  • Use of Forfeitures. Some plans have a vesting schedule for the employer contributions. If a participant leaves the plan before they’ve been with the company long enough to fulfill the vesting period, the amount that is not yet vested on their behalf is forfeited and comes back to the plan. Plan sponsors should have plans to use these forfeitures within the same year received. Typical uses allowed by the plan include paying plan expenses or paying toward another individual’s matching contribution.
  • Timing is Everything. It’s important to make sure these limits are clear to participants so they can take full advantage of their benefits. Advising them WHEN to make those contributions is important as well. For whatever reason, some folks like to frontload their contributions at the beginning of the year. However, if you make your contribution up front, you could lose out. Employers generally only match up to a certain amount. Rather than making one or two large contributions early in the year, if you lower your upfront contribution and make lower periodic contributions until you hit the threshold, you’ll receive additional periods of the employer match.

Required Minimum Distribution Guidelines

Another item of which participants should be aware is that they must take a required minimum distribution from their retirement account once they reach retirement age. Here are the current age guidelines:

Age RMDs Required
For Births on June 30, 1949 or earlierAge 70 ½
For Births on July 1, 1949 through and included December 31, 1950Age 72
For Births on January 1, 1951 through and including December 31, 1959Age 73
For Births on January 1, 1960 or laterAge 75

The takeaway here is that if you are at the 100-participant level for your benefit plan, you are required to have an independent auditor conduct an annual audit. Independent, certified CPAs, such as those at Thornhill, have vast experience conducting Employee Benefit Plan (EBP) audits, as required by the by the United States Department of Labor (DOL), and mandated in the Employee Retirement Income Security Act of 1974 (ERISA).

Whether or not you reach that 100-participant level can often be impacted by how you manage your plan. So, vigilance in keeping your participant level up to date is worthwhile. And keeping your participants informed about individual contributions, employer contributions and required minimum distribution guidelines can help them to get the most out of their benefit plans. To learn more about benefit plans audits, contact us today.


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