What Is a 5500 Audit & When Is One Required?
Demystify the 5500 audit for employee benefit plans. Discover when it's required, how to prepare, and navigate the audit process for regulatory compliance.
A 5500 audit refers to the independent examination of an employee benefit plan’s financial statements by a qualified public accountant. This audit helps maintain compliance with federal regulations. It ensures the integrity and accuracy of financial information reported to the Department of Labor (DOL) and the Internal Revenue Service (IRS), safeguarding plan assets and operations for participants and beneficiaries.
Understanding Form 5500
Form 5500 serves as a reporting document for most employee benefit plans. Plan administrators file this form annually with the Department of Labor. The form collects detailed information on the plan’s financial condition, investments, and operations, allowing federal agencies to monitor compliance with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
The Form 5500 includes various schedules attached based on the plan’s characteristics, covering financial, actuarial, and participant data. This comprehensive filing ensures regulators receive a complete picture of the plan’s activities, helping protect participant and beneficiary rights.
When an Audit Is Required
An independent qualified public accountant (IQPA) audit of an employee benefit plan’s financial statements is required for many plans filing Form 5500. The most common trigger is the number of participants at the beginning of the plan year. Plans with 100 or more participants at the start of their plan year must include an audit report with their Form 5500 filing. This applies to both defined contribution and defined benefit plans.
Participant count includes active, retired, or separated employees with an account balance. There are specific exceptions, such as the “80-120 rule,” which allows plans with between 80 and 120 participants to file in the same category as they filed in the previous year.
Small plans, typically those with fewer than 100 participants, are generally exempt from the audit requirement. However, they must still file Form 5500. Some plan types, like certain 403(b) plans not subject to ERISA, or plans fully invested in regulated insurance contracts, may have different reporting or audit requirements.
Preparing for the Audit
Plan administrators should begin organizing required documentation well in advance of the auditor’s arrival. Key documents typically requested include the plan instrument, trust agreement, and any amendments, which outline the plan’s rules and structure.
Financial statements and related records form a substantial part of the audit preparation. This includes the plan’s balance sheet, statement of changes in net assets available for benefits, and detailed investment schedules. Supporting documentation for these financial statements, such as investment manager statements, bank reconciliations, and participant loan registers, must also be compiled. Reconciling plan records with custodian statements and other third-party reports is a preparatory step.
Participant data is another central area of focus, requiring meticulous organization. Auditors will review records related to participant eligibility, contributions, distributions, and loan activity. This often involves reviewing payroll records, participant enrollment forms, and distribution requests. Documentation of internal controls, such as policies and procedures for handling contributions, distributions, and data management, should also be prepared for the auditor’s review.
The Audit Process and Scope
The audit of an employee benefit plan begins with planning. During this initial phase, the auditor gains an understanding of the plan’s operations, internal controls, and specific risks. This involves reviewing prior year audit reports and discussions with plan management to tailor the audit approach to the plan’s unique characteristics. The planning phase establishes the scope and objectives for the subsequent fieldwork.
Fieldwork is the core of the audit process, where the auditor performs detailed testing. This includes substantive testing of financial transactions, such as contributions, benefit payments, and investment activities, to verify their accuracy and proper authorization. Auditors also assess the plan’s compliance with its governing documents and applicable federal regulations, including ERISA and the Internal Revenue Code. This includes verifying participant eligibility, proper calculation of benefits, and adherence to contribution limits.
The audit scope also encompasses a thorough review of investment valuations, ensuring that plan assets are reported at fair value. Auditors examine participant data for accuracy and completeness, verifying accounts are properly maintained and reconciled. Upon completion of fieldwork, the auditor issues a report that includes an opinion on whether the financial statements are presented fairly in accordance with generally accepted accounting principles. This report, along with the audited financial statements, is then attached to the Form 5500 filing.