Is your construction company required to undergo an employee benefit plan audit? This audit is required under federal law to ensure the plan’s functions, operations and processes are in compliance with established regulations. Unfortunately, these audits do not always go smoothly because the plan sponsor does not always understand the documentation, information and financial statement requirements for the audit. To help construction companies streamline the employee benefit plan audit process, Smith Schafer has provided a list of steps below to help companies prepare.
WHY DO YOU NEED AN AUDIT?
In general, retirement plans with more than 100 participants as of the beginning of the plan year are classified as a large plan. Large plans must complete Schedule H with the Form 5500 Annual Report and are required to have an audit. Small plans must complete Schedule I with the Form 5500 and are not required to have an audit.
The participant count used to make these determinations includes all employees who are eligible to participate in the plan, regardless of participation. It also includes all participants who have separated employment but still have a balance within the plan.
IMPORTANT: There are exceptions to these general rules. Your construction company’s plan third party administrator (TPA) will often inform you when an audit is required. However, if you believe you are close to being considered a large plan, you should review your plan activity and contact your TPA sooner rather than later.
BEFORE THE AUDIT – SELECTING AN AUDITOR
Once it has been determined your construction company needs an audit, the first step is to select an independent CPA firm to perform the audit. It is important to select a firm with the necessary skills and retirement plan experience to provide the services your plan needs.
Here are a few simple ways to find an audit firm with retirement plan experience:
- The American Institute of Certified Public Accountants website contains a list of firms by location that are members of the Employee Benefit Plan Audit Quality Center. These firms are required to meet additional quality control standards related to retirement plans.
- Form 5500 Annual Reports are public documents that can be viewed on the Department of Labor website. These reports will include audited financial statements for all large plans.
- Ask your current service providers if they can recommend a firm they have worked with in the past.
TIP: It may seem like an easy solution to use the CPA firm you use for your corporate accounting needs. However, that firm may not have the required skill or expertise to audit your retirement plan effectively and efficiently. It is worth the extra effort to find a firm that will provide the results your plan needs.
DURING THE AUDIT – PREPARING AND PROVIDING DOCUMENTATION
The purpose of a retirement plan audit is to test financial information, participant information and compliance with plan documents and regulations. During the audit, your auditors will review your plan’s records and transactions, and may ask for additional documentation to support any of the transactions. Some of the areas that are tested during the audit include:
- Contributions – employee and employer, if applicable
- Participant data and accounts
- Loans, if applicable
Significant audit areas for the construction industry are the definitions of eligible participants and eligible compensation. The plan documents will specify when an employee is considered eligible to participate in the retirement plan. In many construction company plans, employees who belong to a union, are not eligible. Your plan may have a length and/or hours of service requirement, which could impact seasonal or temporary employees. The plan documents will also define compensation for the purposes of the plan. Often times, there is compensation excluded from the definition, such as bonuses, overtime and certain expense reimbursements.
TIP: Before your first audit, be sure to gather and read your plan documents and determine if your plan is following all the various provisions. If something is unclear, inquire of your TPA or other plan service provider.
AFTER THE AUDIT – REVIEWING WITH THE AUDITOR
After the audit has been completed, your auditor will issue three documents related to the audit:
- A report on the financial statements.
- A letter commonly referred to as a “management letter.” This letter is an overall summary of the audit and discusses your plan’s accounting policies, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues that need to be brought to management’s attention.
- A letter commonly referred to as an “internal control letter.” This letter is meant to identify and communicate areas of operations or procedures where your plan can strengthen or redesign internal controls.
The insights shared by the auditor in these documents should be reviewed and discussed with management prior to filing the Form 5500 and audit report.
TIP: Ask questions! If you do not understand something, ask. If you think something is wrong, say something. The audit is a reflection of your retirement plan and you are ultimately responsible for it.
The best way to ready your construction company for an employee benefit plan audit is to prepare throughout the year by keeping detailed records and conducting self-audits at regular intervals. If you would like more information or if you are seeking an experienced team that specializes in employee benefit audits, Smith Schafer wants to help! We can take a second look at your current plan and fees at any time.