Auditing and Corporate Governance

Pension Audits: The Process and Annual Requirements

Navigate the required annual pension audit. This guide clarifies the process from participant count rules to the final auditor's opinion for Form 5500 filing.

A pension audit is an independent examination of a retirement plan’s financial statements. This review is a compliance measure mandated by the Department of Labor (DOL) under the Employee Retirement Income Security Act of 1974 (ERISA). The goal of ERISA is to protect the interests of plan participants and their beneficiaries. An audit serves as a safeguard, ensuring that the financial information reported by the plan is accurate and that its operations adhere to the governing regulations and plan documents.

An independent certified public accountant (CPA) scrutinizes the plan’s financial health and operational integrity to form an opinion on whether the financial statements are presented fairly. This formal, annual requirement for large plans provides assurance to participants, plan management, and the DOL that the plan’s assets are being managed responsibly.

Determining the Audit Requirement

The primary factor determining whether a pension plan requires an annual audit is its size. Under DOL regulations, plans classified as “large plans”—those with 100 or more participants at the start of the plan year—are subject to a mandatory audit. The count of participants is based on individuals with an account balance, including active employees, retired or separated employees who have left assets in the plan, and beneficiaries of deceased employees.

To provide stability for plans whose participant numbers hover around the 100-person threshold, the DOL has established the “80-120 Participant Rule.” This rule allows a plan that filed as a “small plan” in the previous year to continue filing as such as long as its participant count does not exceed 120. Once the plan’s participant count reaches 121, it must file as a large plan and undergo an audit. This provision prevents plans from switching between large and small plan status due to minor fluctuations in participant numbers.

This annual audit is a routine compliance measure performed by an independent CPA firm. It is distinct from a direct audit or investigation conducted by the DOL, which is typically a more targeted regulatory examination triggered by specific compliance concerns.

Preparing for the Audit

Thorough preparation is important for an efficient pension audit. Before the auditor begins fieldwork, the plan sponsor must gather a comprehensive set of documents that provide a complete picture of the plan’s financial activities and governance for the year.

The required documentation includes the signed Plan Document, along with any subsequent amendments and the plan’s Adoption Agreement. These legal documents outline the specific rules of the plan, such as eligibility requirements and contribution formulas, and serve as the benchmark against which the auditor will test the plan’s operations. The auditor will also need the plan’s latest IRS determination letter, which confirms the plan document complies with tax law.

The plan sponsor must provide complete trust reports or custodian statements for the plan year. These statements detail all investment holdings, purchases, sales, and earnings. The auditor will also require a detailed participant census, which is a comprehensive list of all plan participants, their demographic information, compensation, contributions, and account balances.

To verify the flow of money, the sponsor must assemble specific transactional records. This includes payroll records to trace contributions to the plan’s trust and records for all distributions, benefit payments, and participant loans. Finally, a copy of the prior year’s filed Form 5500 and the accompanying audit report provides a baseline.

The Audit Process

Once the plan sponsor has provided the necessary documentation, the auditor begins the fieldwork phase. This stage involves a series of tests and procedures designed to evaluate the plan’s compliance with its own rules and with ERISA regulations.

A significant part of the audit involves detailed transaction testing. The auditor will select a sample of transactions to examine, tracing employee contributions from payroll records to the trust statements to confirm timely remittance. They will also test a sample of distributions and benefit payments to verify that the payments were made to the correct individuals, in the correct amounts, and were properly authorized.

Participant data is another area of focus. The auditor will test the eligibility of a sample of employees to ensure all who met the plan’s criteria were given the opportunity to participate. They will also review participant loan processing, checking that loans comply with the plan’s provisions and federal limits.

Throughout this process, there is typically ongoing communication between the auditor and the plan sponsor. Auditors will often have questions or require additional clarification on certain transactions or processes to resolve any potential issues.

Understanding the Audit Report and Filing

The culmination of the audit process is the independent auditor’s report, which expresses an opinion on the plan’s financial statements. This formal document is attached to the plan’s annual Form 5500 filing. There are four primary types of audit opinions:

  • An unqualified opinion is the most common and indicates the financial statements are presented fairly.
  • A qualified opinion is issued when the auditor finds a specific, material issue that does not pervasively misstate the financial statements.
  • An adverse opinion states that the financial statements are materially misstated and do not present the plan’s financial position fairly.
  • A disclaimer of opinion is issued when the auditor is unable to obtain sufficient evidence to form an opinion.

The plan sponsor must attach this complete audit report to the plan’s annual Form 5500, “Annual Return/Report of Employee Benefit Plan.” This package, consisting of the form, its schedules, and the auditor’s report, is then filed electronically with the Department of Labor. This filing fulfills the plan’s annual reporting obligation for large plans and demonstrates compliance with ERISA’s transparency and fiduciary responsibility standards.

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