How Plan Audits Work – Vestwell

In this article we will cover information regarding: Does my plan require an audit? What is the purpose of an audit?...and more:

How will I know if my plan requires an audit?
What is the purpose of an audit?
My plan started in the middle of the calendar year. Is my plan still required to undergo an audit if I have more than 100 employees?
I have a small plan with less than 100 participants. Can my plan ever be required to undergo an audit?
I heard an audit can be expensive. Are there any other options to save some costs?
Is an audit included in my fees paid to Vestwell?
Where can I find an auditor? Can my company's accountant handle this?
What should I do once I've selected an auditor?
Our auditor will need documents that have sensitive information in them, like social security numbers. How do we get those files safely?
What are the general types of documents that our auditors will need, and where on the Vestwell Platform can I find them?
What if my auditor says there are discrepancies between the data in our records and the records provided by Vestwell?
Our auditor has asked for investment profiles and descriptions of each of the funds available to participants. Where can I find those?
Our plan uses Vestwell Advisors as the investment manager. Does Vestwell offer an opinion consistent with FASB ASC 820 fair value?
Our auditor says we will need to amend a prior year's Form 5500. Is that a problem? What is the process for that?
Are there any steps I can take to reduce the number of participants in my plan?
I can't get the audit done in time for the deadline to file Form 5500. What are my options?
I received a notice from the Department of Labor that my Form 5500 was rejected. What should I do?
How can I be better prepared next year?

How will I know if my plan requires an audit?

Plans with more than 100 eligible employees as of the start of the plan year are required to undergo an annual audit. This means that the participant count must include (1) actively participating employees, (2) retired, deceased, or separated employees who still have assets in the plan, and (3) all eligible employees who have yet to enroll or have elected not to enter the plan.

There is also a special rule called the "80-120 rule" that allows plans with between 80 and 120 participants, as of the first day of the plan year, to file Form 5500 in the same category ("large plan" or "small plan") as indicated on the prior year Form 5500 filing. There are some nuances to this rule that are beyond the scope of this article, so if you believe your plan has between 80 and 120 participants (as defined above), your Vestwell representative will discuss how this rule affects your plan.

We use the information you provide to us about your plan at the end of each calendar year to determine whether your plan is subject to the audit requirements so we are generally unable to confirm whether your plan is required to undergo an annual audit until that time. If required, we notify you in the first half of the following year, which gives you plenty of time to complete the audit before the Form 5500 filing deadline (seven to nine-and-a-half months after the end of the year).

This simplified chart of the requirements may be helpful:

*Audits are always required if you elect to file as a large plan using Schedule H. We will file Schedule I where applicable to avoid the audit requirement in these circumstances.

That being said, counting the number of participants to determine if an audit is required is not as straightforward as it may sound. For example, a participant includes anyone as of the start of the plan year who is eligible for the plan, even if s/he is not actively contributing, and any former employee who still has a balance in the plan. There are also special rules about plans with short plan years (see below) and other legal rules at play. Refer to our Help Center article on how participants are counted for audit purposes.

Once identified, we provide you with a list of the individuals who we believe are eligible in your year-end compliance package. You can also find a report on your sponsor portal with an ongoing eligibility list; you should check it regularly and let us know if you have any questions. If we don't hear from you, we assume our data is correct.

If we flag that you are eligible for an audit and you disagree with our conclusion, just let your Vestwell representative know, and we will work with our Compliance Team to understand and clarify the issue.

What is the purpose of an audit?

The word "audit" should not cause panic or alarm. On the contrary, with some advanced planning and hiring a qualified auditor, the audit can actually be a good opportunity to surface any possible issues to help you run your plan more efficiently. The auditor prepares a report that includes an opinion about whether or not the plan's financial statements are fairly presented in accordance with generally accepted accounting principles (GAAP), a review of the company's plan-related internal controls, and a sampling of participant transactions.

The purpose of the audit is for the benefit of the plan, and in turn, the participants and beneficiaries as well. Thus, while your role as a fiduciary of the plan is to select an auditor prudently, the auditor's "client" is actually the plan -- their goal is to ensure it is properly administered and accounted for so all employees and their beneficiaries receive the benefits to which they are entitled.

My plan started in the middle of the calendar year. Is my plan still required to undergo an audit if I have more than 100 employees?

Yes -- though it could be deferred for a time. In general, if your plan's effective date is in the middle of the plan year and was in effect for less than seven months of the year, it may be considered a "short plan year" under the law. If that is the case, your plan could postpone undergoing the audit for one year. However, in the first year that you do undertake the audit, you should have your auditor include the short plan year as well. In other words, this isn't a "free pass," but it does give you some extra time. If your plan had an effective date of January 1 but only started to allow deferrals sometime after January 1, postponing the audit is not an option. If you will be taking advantage of the short plan year rule, we will note it on Schedule H of Form 5500, and we will file the Annual Return without an audit report.

I have a small plan with less than 100 participants. Can my plan ever be required to undergo an audit?

Yes. If a small plan does not have a proper fidelity bond, it must be audited annually. This is why we require you to obtain a fidelity bond as part of your plan onboarding process, which is mentioned in Appendix C to your Plan Services Agreement. The cost of a bond is a fraction of the cost of an audit. When we prepare your plan's Form 5500, we check boxes that acknowledge that the plan qualifies for this audit exemption and that there is a bond in place.

I heard an audit can be expensive. Are there any other options to save some costs?

Yes. As a plan sponsor, you can instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by "qualified institutions." This option is referred to as a "limited scope audit." It is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive than full-scope audits. It is solely your decision as to whether to undergo a full-scope or limited-scope audit.

You will need to engage an auditor either way. In a full-scope audit, the auditor reviews the plan's financial statements, including all assets, liabilities, and obligations, and financial activities, without any limitation. In a limited-scope audit, the auditor does not audit the certified investment Information for the plan but still tests participant data, including the allocation of investment income to individual participant accounts, and tests contributions, benefit payments, and other information that was not certified. If you choose to proceed with a limited-scope audit, Vestwell Trust Company, one of our subsidiaries, can prepare a certified annual trust statement for your auditor, which your auditor will need to prepare its independent auditor report. If your plan did not already engage us for that service, we will need to amend your Vestwell Plan Service Agreement for the service and there is an additional annual fee that will be included in Appendix A to your agreement.

Is an audit included in my fees paid to Vestwell?

No. As noted in Appendix B to your Plan Services Agreement, we provide up to four hours of assistance to your auditor at no additional charge. However, you are solely responsible for selecting the auditor and paying for the audit.

Where can I find an auditor? Can my company's accountant handle this?

The decision about selecting an auditor is solely for you as the plan sponsor to make. However, you should be aware that the Department of Labor has strict requirements about how an annual audit is to be conducted, so working with your company's bookkeeper or someone who is not familiar with audits and employee benefit plans can be risky. The law requires an audit to be prepared by:

A certified public accountant, certified by a regulatory authority of the State;
A licensed public accountant licensed by a regulatory authority of a State; or
An individual certified by the DOL as a qualified public accountant.

It is important to hire a qualified auditor to ensure that the plan's Form 5500 will be accepted. If the Department of Labor determines that the audit was deficient in some way, the plan sponsor can be held responsible, which means a potential penalty of up to $2,000 per day for a late 5500 filing. Vestwell is not responsible for selecting the auditor, the preparation of the audit report, or any aspect of your audit process. Your company's accountant may be able to prepare the auditor's report. If not, the DOL published an article with helpful information on selecting an auditor, and the Employee Benefit Plan Audit Quality Center published a report that lists auditor firms by state.

What should I do once I've selected an auditor?

Once you have chosen an auditor for your plan, let us know who that is by emailing annualtesting@vestwell.com. We will need the auditor's name and contact information. Any requests for documents or other information should be sent to that same email address. We will provide you and the auditor with a link to a SendSafely folder where we will upload the standard audit package.

Our auditor will need documents that have sensitive information in them, like social security numbers. How do we get those files safely?

Your Annual Testing Team will provide you with a link to SendSafely, a secure cloud-based platform that we use for the delivery of documents like this. Since SendSafely is cloud-based, there isn't any software for you to install or maintain. In the future, we will have an audit package on our platform where you or your auditor will be able to receive and submit files securely for audit purposes.

What are the general types of documents that our auditors will need, and where on the Vestwell Platform can I find them?

Our standard audit package includes all items that an auditor would need from a retirement plan provider, including:

SOC reports - SOC reports are governed by the American Institute of Certified Public Accountants (AICPA) and focus on offering assurance that the controls service organizations put in place to protect their clients' assets (data in most cases) are effective. Vestwell obtained an unqualified SOC report from an independent auditor in June 2020, which is updated annually.
Certified Annual Trust Statement – We provide you with a certified financial statement of the plan's assets, which is sufficient for a limited-scope audit and simplifies the audit process for you and your auditing firm for a full-scope audit.
Form 5500 Draft – We prepare a draft copy of your plan's annual return and relevant schedules. In order to file Form 5500, the auditor's opinion and financial statements will need to be attached, and Schedule H, Part III will need to be reviewed and updated. These three items will need to be completed by your auditing firm.
Compliance Package – We provide a copy of the annual compliance tests that we performed for your plan

We will also provide you with an Audit Report, which will include:

Annual Executive Summary – financial summary of plan assets for the plan year
Annual Account Totals by Fund/Source – summary of all plan contributions of participants and sponsor
Annual Account Detail by Participant – detailed participant-level information for plan year
Forfeiture Account Analysis – summary of forfeiture level activity during the plan year, such as unvested account balances of now-former employees
Annual Loan Summary and Activity– overall loan summary and detailed information about all loans taken from the plan during the year
Rollovers Report - detailed information about incoming and outgoing rollovers to or from the plan
Annual Fee Report – summary of fees paid from plan assets during the plan year, such as for Vestwell and other service providers to the plan
Distribution Report
Payroll Detail Report
Reconciliation (if requested by your auditor) between the Certified Trust Statement (which we provide to you, as mentioned above) and the Annual Account Totals by Fund/Source

What if my auditor says there are discrepancies between the data in our records and the records provided by Vestwell?

There is no cause for alarm. With all of the data that a retirement plan processes over the course of the year, it is not uncommon to find a variation between records. The Certified Statement is an investment-based report and includes investment-specific details. As opposed to the Audit Report, which is a recordkeeping report and, as such, does not include all of the investment details that the Certified Statement does. You will often find that the end-of-year Market Value on the Certified Statement is higher than that on that Audit Report.

Some explanations as to why these could arise include:

The ending balance on the Certified Statement will include trades that have not settled as of the end of the year (shown as cash), so the ending balance on the Audit Report will exclude pending cash.
The ending balance on the Certified Statement will include any forfeiture funds (generally invested in a money market account). In contrast, the Audit Report lists the Forfeiture Suspense account as a separate line item not included in the ending balance.
Both the Certified Statement and the audit report are determined on a cash basis, which means that any payrolls (for instance, the December 31 payroll) or corrections that were deposited after the plan year-end would not be included in them even though they would appear on your payroll reports.
The Form 5500 financial information is determined on an accrual basis and would therefore include any corrections or payrolls submitted after the plan year-end but are attributable to the prior plan year.

Our auditor has asked for investment profiles and descriptions of each of the funds available to participants. Where can I find those?

Your sponsor portal includes a fact sheet for all Target Date Series and Model Strategies available to your plan. The fact sheet shows each funds' top 5 holdings, performance data, expense ratio, benchmark comparison, and other information that may be helpful.

Our plan uses Vestwell Advisors as the investment manager. Does Vestwell offer an opinion consistent with FASB ASC 820 fair value?

Auditors and accountants use that accounting standard to help prepare certified valuations of plan assets. However, that standard is not applicable to plans using Vestwell Advisors' lineup because that lineup consists of ETFs and other investment options that can be readily valued in the market.

Our auditor says we will need to amend a prior year's Form 5500. Is that a problem? What is the process for that?

Sometimes plans need to amend their Annual Return for various reasons. For instance, there could have been an internal clerical or data entry mistake that now needs to be corrected. We can assist you in preparing the revised Form 5500. There may be an additional charge depending on the nature of the revision.

Are there any steps I can take to reduce the number of participants in my plan?

Yes, sponsors can take several steps to reduce the number of participants and therefore delay the audit requirement. The participant count is done annually, so if your plan drops to less than 100 participants, an audit will not be required for those years.

Regularly review the eligibility report on your sponsor portal and alert us to any possible discrepancies. If we do not hear from you, we assume our data is correct.
If your plan has very liberal eligibility rules, you may wish to amend your plan to require a longer waiting period or increase the age requirement.
Since former employees with a balance are included, the law allows plans to force out employees with small vested balances below $5,000. By processing these distributions before the end of the year, these individuals are not included in the participant count for future years.

I can't get the audit done in time for the deadline to file Form 5500. What are my options?

As mentioned above, we will notify you in the first quarter if we believe your plan is subject to an audit. Our ability to give you prompt notice is dependent on your completion of our year-end questionnaire. We point this out in Appendix C to your Plan Services Agreement. When we inform you of the audit requirement, we expect that you will follow up promptly and make your audit arrangements. If you don't get started early enough, or you start an audit and find issues that you cannot fix in a timely manner (for instance, if there has been a change of personnel at our organization), you have two options.

First, you can file an incomplete Form 5500 without the audit report. The DOL will likely reject the filing, and it will usually give you a limited period of time to provide the audit report before penalties are imposed. Those penalties can be very expensive – up to $50,000 – and the DOL will generally not put the process "on hold" while the audit is being secured. If you are in this scenario, you should consider hiring counsel quickly as there is often a limited window of opportunity to get these penalties reduced or eliminated, for instance, if there is a legitimate good faith reason for the delay.

The second option is to hold off filing anything until the audit is complete and then file Form 5500 with the completed audit report. The DOL has a special program for this type of filing that imposes reduced penalties.

It is completely your decision about how to proceed. Vestwell is not a law firm and cannot and does not provide legal advice.

I received a notice from the Department of Labor that my Form 5500 was rejected. What should I do?

This notice informs the plan sponsor that there was some issue with the submission and that the DOL will issue penalties if it is not corrected timely. The plan sponsor has 30 days from the date of the letter to respond. Do not miss this response date! You must send the notice to us immediately. The DOL understands that there may be reasons why a submission was incorrect and allows an opportunity to submit a response and request extensions.

How can I be better prepared next year?

We make a variety of reports available on your plan sponsor portal. It is your responsibility to review them periodically; this is mentioned in Appendix C to your Plan Services Agreement. We are always happy to assist you if you let us know of any issues, but if we do not hear from you, we will assume that the data in our systems is correct.

There are two reports that help you to prepare for audit season:

Quarterly Contribution Reports - these reports are located in the Reports Tab and can be helpful to reconcile your payroll records against Vestwell records. If any payrolls were missed or improperly transmitted, this report will help you to identify them and resolve any discrepancies in your payroll system.
Eligibility Report - You can always check your current participant account by visiting your Vestwell portal. However, please note that this count will be as of the current date (not the beginning of the plan year) and will not include terminated participants with a balance.
For a more detailed report, you can also download your eligibility report from the Reports tab. You will need to filter the sheet to include terminated participants with balances and participants that have entry dates on or before the first day of the plan year in question. Please note that the entry dates for terminated participants do not show on this report, but it will give you an approximate participant count. For an exact participant count as of the beginning of the plan year, email clientsuccess@vestwell.com and request a custom report.

Additional resources from other sources: