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Employee Benefit Plan Audit: Know the 12 Triggers

Wendy Lakatosh, CPABy Wendy M. Lakatosh, CPA

Federal Form 5500 is an important component of the Employee Retirement Income Security Act of 1974 (ERISA), but it is also an area that can invite federal scrutiny of your employee benefit plan if it is not completed with care.

Given the high stakes for Form 5500 compliance, employers should ensure that it is completed in a timely and accurate manner and that the reporting of questionable information is avoided.

Rules and Regulations stampsA retirement plan – whether it’s a defined benefit plan, such as a pension, or a defined contribution plan, such as a 401(k) – is an important piece of the benefits package that employers use to attract and retain top talent. ERISA sets minimum standards for employer-provided retirement plans to protect participants and beneficiaries, and Form 5500 is the tool by which employers report information and government agencies assess compliance.

The IRS, Department of Labor (DOL), and the Pension Benefit Guarantee Corporation (PBGC) all closely inspect Form 5500 submissions. The IRS focuses on tax compliance, DOL looks to protect the rights and benefits of participants, and PBGC protects the pension benefits of defined benefit plans.

Both the IRS and DOL identify which plans to audit, in no small part, through data collected from information reported on Form 5500. Through a computerized review of forms, plans are quickly flagged for closer examination.

Triggers for a Form 5500 Audit

You can greatly reduce the chance of your employee benefit plan receiving extra federal regulatory scrutiny by avoiding these audit-triggering sections or responses on Form 5500:

  • Blank line items where there should be an answer
  • Inconsistencies on the 5500 schedules
  • A high drop in the number of participants from one year to the next
  • A high dollar amount on “other” line in Schedule H
  • Insufficient fidelity bonds
  • Real estate or partnership investments
  • Employee-paid fees
  • Hard-to-value investments and nonmarketable securities
  • Loans other than to participants
  • Consistent late deposit of employee deferrals
  • Reporting a nonexempt transaction with a party-in-interest
  • Inconsistencies between employer contributions on Schedule H or I to the amount deducted on the business tax return for the same period

Some of these items can indicate fiduciary or prohibited transaction violations. Others may require supporting documentation and data reconciliation to defend the information submitted. By preparing a thorough and accurate Form 5500, you can avoid unwanted extra scrutiny of your employee benefit plan.

Wendy M. Lakatosh, CPA, is a partner in the audit services group of RKL LLP and leader of the firm’s employee benefit plan audit practice. She can be reached at wlakatosh@rklcpa.com.

For more on employee benefit plan audits, register for PICPA's May 19 Employee Benefit Plans Conference Webcast.

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