Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
In this video, Kayla Daniels, an assurance supervisor at CK, explains the importance of Employee Benefit Plan Audits, emphasizing their role in ensuring compliance with Department of Labor regulations and internal revenue codes. She discusses the audit process from risk assessment to financial statement preparation. Kayla also offers recommendations for improving plan management and oversight to enhance compliance and operational efficiency.
Transcript:
My name is Kayla Daniels. Employee Benefit Plan Audit is an audit that is required by the Department of Labor to be filed with your 5500 annual filing. So Employee Benefit Plan Audit is a compliance audit, so we are making sure that plan processes and plan transactions are in agreement with the plan provisions in the plan documents.
Generally employee benefit plan audits are required for any plan that has a hundred people with balances in the plan. The purpose of an employee benefit plan audit is very compliance based. It is to make sure that your plan is operating in compliance with Department of Labor regulations, internal revenue codes, and a lot of the time those regulations and codes will be built into the plan document. So our audit is actually going to focus on making sure that your plan activities and transactions are in line with those plan provisions.
The value that can be added from an Employee Benefit plan audit is related to identifying places in your plan that might have a weakness or could be improved in some way. So our audit will definitely look at those areas that might be a little bit more complex or areas that have a lot of room for error. So during our audit we’ll bring it to the attention of management, any areas that we see that could be improved and that will help your plan operate more efficiently, more effectively, and will make sure that you’re in compliance.
One of the key risks associated with employee benefit plans is the remittance of employee funds. So there is a requirement that plan sponsors have to permit funds in a timely manner. So that’s as soon as feasibly possible or as soon as the assets can be segregated, those assets need to go from the employer to the plan. And we’ll see many times that there are delayed remittances. So it took a lot of time between when it was withheld in payroll and when the plan actually received it. And that’s something that the DOL will definitely look at if you’re ever subjected to an audit. And when you do have delayed remittances it is your responsibility to correct that by calculating lost earnings and remitting those lost earnings to the participant to make them whole because a lot of our audit is going to focus on making sure that employee funds are being used in a proper manner in accordance with the DOL regulations.
Another deficiency that we sometimes see in plans is improper definition of compensation, which the definition of compensation is used when you’re calculating employee or employer contributions. And in the plan provisions, this can be kind of complex where certain types of compensation are excluded for certain types of contributions. So these things can be easily missed and fall through the cracks or maybe the payroll system isn’t set up correctly and is calculating contributions on the wrong compensation. So that’s also something that we look at during our audit and something that we see quite commonly and it’s something that we can fix and make sure that it’s right in the future.
And then another common deficiency that we see is deferral elections for employees not being followed. So when they sign up for the plan, they’ll tell you I want 5 % of my pay being withheld to the plan. And as a plan sponsor, you are required to do what a person wants you to do. And then after that point, they can change your deferral. So it’s important that there’s a process in place to track those changes, to track those new enrollments, to make sure that the employee’s authorization is being followed with their payroll funds.
So the first place you want to start when you’re going to perform an employee benefit plan is with our planning and risk assessment. So we will set up a meeting with the client, we will discuss any changes that happened during the year that would include plan amendments, any new plan documents, agreements, and then that’ll serve as the foundation for our risk assessment. And during that process, we’re going to make sure that we identify all the risky areas of the plan and we’ll look back at prior years too to make sure that we’re including anything specific to the plan, where we will modify our audit procedures to ensure that we’re covering all of those areas and that our audit has great audit results. And from that step, we’re going to perform detailed testing of all the significant areas of the plan. And those generally will be related to contributions, distributions, loans and expenses. So we’ll do individual testing of all those areas to make sure that everything is in compliance with the plan documents. And lastly we’re going to prepare our financial statements which will be attached to the 5500.
Some of the discrepancies that you’ll see in the financial statements of plans will be supplemental schedules so that is required by the DOL. If there’s any delay remittances, those need to be identified and recorded in the 5500, in the financial statements. Also, you may see inconsistencies between the financial statement and the 5500. And either the 5500 will have to be revised so that it matches the audited amounts or will have to include a financial statement disclosure to make sure that those match up with each other for the filing.
The number one recommendation I would have for any plan that wants to improve their financial reporting in relation to their employee benefit plan would be to have a member of management or a team of management for proper oversight. That would be a person who does not perform the everyday activities of the plan but a person who knows the plan very well and can be involved in all the processes to make sure that everything is in compliance with the plan. When you are overseeing the process of your plan, you’re going to want to make sure that you have proper personnel documentation in place so that would be signed I -9 forms, anything from the personnel file that will support the important demographic information. So you’ll want to have those available to your auditors because we’re going to want to look at those to make sure that everything’s right. Also if you use paper forms for loans, distributions or deferrals you’re going to want to gather those. Make sure that they’re organized in a place where you can access them.
You need to have an employee benefit plan performed every year that you have over 100 participants with balances and also you can have an audit done if you believe that your plan is going to go over 100 participants in the near future.
One of the more complicated issues that can come up when administering an employee benefit plan is when you realize that you haven’t followed employee deferral instructions. So you’ll find out a person originally deferred 5% and then they increased it to 15% and you didn’t implement that in a timely manner. So how you would fix that is you would remit them the extra that they missed out on and then you would calculate any missed earnings. If the market head gains and they missed out on those, you would calculate them and send them over to the participant to essentially make them whole again.
And another issue that you might come across in plans is issues with vesting. If there is employer contributions where it takes years of service for the participant to become fully vested. Sometimes when a participant takes a distribution, the vesting can be calculated incorrectly, which means that the person might not receive their full distribution. And in that circumstance, you would have to make an additional distribution to that participant to make them whole again.
So annually, the plan is required to have discrimination testing, and that is a series of testing that will ensure that highly compensated employees are not being favored over non-highly compensated employees and this is testing that will be performed either by the plan personnel or a third-party administrator. And the results of those plans will let you know if you need to make any refunds back to highly compensated employees and you need to remit those excess contributions within two and a half months after year-end or else you will have to pay a penalty. So it’s important to get those done in a timely manner and to make sure that you’re keeping track of your compliance testing every year.
One thing that I’ve learned while doing employee benefit plans is just the attention to detail that’s needed that you can carry over into other areas of your work life, where you really need to pay attention to what’s the intention, what is written into this agreement, and pay attention to those small details that really make a big difference.
Cray Kaiser has decades of experience in audits, including specialized audits for nonprofits and employee benefit plans. And today, we’re excited to announce the addition of another specialization: transnational audits.
Working with Russell Bedford, our firm underwent a strict AQC process to ensure the quality of our audit practice. From this certification process, it was determined that CK:
We are incredibly proud of our audit team for completing this rigorous certification process over the course of the last few months. As a result of the Approved Transnational Audit Firm certification, we are now able to perform audits for organizations across the globe through Russell Bedford. We look forward to offering our services and extending the CK family internationally.
To learn more about Cray Kaiser’s audit services, please click here. If you’d like assistance with an audit you can contact us at 630-953-4900.
As businesses are formed and as they grow, one question often asked by owners and chief financial officers is whether their companies would benefit from an audit. As you might have guessed, the answer depends on a number of factors specific to each company. Below is helpful information about audits to keep in mind as you decide whether or not an audit is right for your business.
Although audits, reviews, and compilations all involve a report on financial statements, an audit provides a higher level of assurance compared to a review or a compilation. Here’s what each consists of:
The most basic of the three, a compilation is when the accountant assists management in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications needed to the financial statements.
In a review engagement, the accountant performs analytical, inquiry, and other procedures to obtain limited assurance that no material modifications should be made to the financial statements.
An auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. In order to obtain this assurance, auditors are required to gain an understanding of an entity’s internal controls and fraud risk. During the audit, tests of balances and transactions through third-party confirmations, physical inspections, observations, and other procedures are performed. Due to its greater scope, an audit is higher in cost, but the benefit is that it is more thorough and provides a higher assurance of accuracy.
There are many reasons why a business may benefit from an audit. Here are a few examples:
As auditors gain an understanding of internal controls, they are required to communicate any weaknesses they identify to the company board and management. These auditor communications can be a valuable resource in helping management and ownership take action to establish or strengthen procedures that safeguard assets, reduce the risk of fraud, and improve the financial reporting process. As a result, the company will have more effective and efficient financial reporting and accounting processes, which may lead to even more operational efficiencies.
At Cray Kaiser, we recognize that every business has unique needs and considerations when it comes to audits. If you have questions about whether an audit may be right for your business, contact us today.
Click here to learn more about audits.
We recently shared what you should do if you receive notification of a tax audit (and why you should never take on the IRS alone!). But have you ever wondered what the odds are of your return being audited? This is somewhat of a mystery to taxpayers and unfortunately there is no concrete answer. Audits are generally selected at random, but there are a few things that may flag your return for an audit. Here are some considerations to keep in mind:
Before you panic when you check the mail and find a letter from the IRS, know that not all notices are audit notices. Taxpayers often receive notices about information on tax returns that does not agree with government tax records. These are known as computer-generated CP2000 notices. They generally cover the data mismatches of income and deductions on your tax returns when compared to the data the IRS receives via W-2s, 1099s, and 1098s. Most importantly, CP2000 notices are NOT audits.
There are other types of notices requesting additional information to allow for a deduction or simply to verify reported data. These are also NOT audits. If you ever receive a notice from the IRS and you’re not sure what it means, contact your tax advisor right away.
Overall, there has actually been a decrease in audit rates over the last few years. In 2018 there was a 7% drop in audit exam rates compared to 2017 for all tax returns.
The 2018 individual audit rate was just 0.59%, which means one out of every 170 returns filed was audited. 81% of those audits were correspondence exams and 19% were conducted in person at IRS offices or at the taxpayer’s business. In other words, only about one out of every 900 returns required in-person audit meetings.There were also less business return audits in 2018. The C corporation exam rate was 0.9% and exam rates for both partnerships and S corporations was only 0.2%.
As the IRS audit staff is reduced, fewer audits are being performed. However, with the increased application of computer-assisted audits and reviews, we believe audits will continue for taxpayers that are at high risk.There are many red flags that can increase your chance for an audit. Some are identified by IRS computer formulas while others are issue-focused compliance campaigns by IRS’s Large Business and International Divisions. Here are the most common audit triggers:
If you are concerned about your tax audit risk, we can review your situation and advise if we identify any potential red flags. Call Cray Kaiser if you would like a risk assessment or if you receive any tax notices that you are uncertain about.
It’s another normal day at the office, until you receive a letter from the IRS. You’re being audited. What do you do now? The first thing you should do is call your tax advisor! While you might be up to navigating an audit on your own, there are many reasons why utilizing a professional’s help will make or break the outcome of your audit. Here’s why:
Seasoned IRS agents have seen your situation many times and know the rules better than you. On top of that, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.
When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, that’s when things get tricky. It may be possible to reconstruct some of your records, but generally the IRS wants your records to be contemporaneous. Your tax advisor can help you gather the information necessary to meet IRS standards, and avoid additional taxes (plus a possible 20% negligence penalty).
While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support from your advisor and concise, smart answers to their questions is the best approach to limiting further audit risk.
When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you want your point of view to be heard, get help right away to prepare a plan and manage the IRS deadlines. While you might think you have time to take this on, you don’t want to risk paying the price of a missed due date.
Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, you and your tax advisor can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.
While an audit is the last thing you want on your plate, we can help relieve the pressure. Call Cray Kaiser today if receive an audit letter and need support.
It’s not fun to think about, but there’s no way to be completely immune from the possibility of an IRS audit. But if thinking about it isn’t pleasant, going through an audit can be even worse. If you do get audited, you’ll have a better chance of an easy audit experience if you start planning for it now. Since we’re in tax season, it’s wise to prepare for a potential audit while your tax information for the previous year is at hand. Here’s how to prepare for an IRS audit:
Use your current tax return to guide you in gathering all the components of your tax return and putting them together in one file. That way, if the state or federal tax authorities decide to review your return, you’ll have the right documents readily available.
It’s a good idea to organize your documents by year, as well as income and expense type. Including a summary of transactions for each year as a quick guide for yourself and the auditors will also be helpful.
You can anticipate by looking over anything that could potentially trigger an audit. Anything that looks out of the ordinary like foreign bank accounts, large tax losses, or significant business tax deductions are all flags for auditors. It’s best to have explanations for those items in advance. It’s an auditor’s job to ask tough questions, so be prepared!
Audits aren’t known for being enjoyable, but there are ways you can make them stress free by being proactive. If you do get audited, Cray Kaiser is here to help you through the entire process. Please don’t hesitate to contact us if you have questions on how to prepare for an IRS audit or how to avoid an audit.
Employee benefit plan (EBP) audits are much more than a simple audit of net assets and income contained in the benefit plan’s financial statements. They also serve as a safeguard to participants, plan management, and plan fiduciaries through compliance testing procedures. In addition to testing the plan’s operational compliance in accordance with DOL/IRS regulations and the plan document, auditors will also note areas for improvement in internal controls and other matters through written communications with management.
It is very important to operate the benefit plan in accordance with the DOL/IRS and plan document for many reasons, such as:
Cray Kaiser has extensive experience with EBP audits. Often, when we work with a new client on an EBP audit, it’s their very first benefit plan audit. We also see many cases where the client’s plan was previously audited by a firm without the training and expertise needed in the complex area of EBP audits. During the most recent audit season, we performed an EBP audit for a plan whose previous auditor had stopped performing EBP audits altogether. We discovered numerous operational deficiencies, which if left uncorrected could have jeopardized the plan’s tax-exempt status and potentially exposed the plan sponsor and fiduciaries to fines and penalties. We worked with plan management to identify corrections and processes to prevent the issues from occurring again. Internal control weaknesses were also brought to management’s attention.
Often, plan auditors are selected solely based on fees. While fees are an important consideration, there are other crucial factors to consider when selecting a plan auditor. EBP auditing is a specialized area with complexities not found in traditional audit engagements of company financial statements. For this reason, it is essential to select a firm that:
At Cray Kaiser, we are committed to quality EBP audit engagements. Our highly experienced EBP audit team continually monitors developments and changes in the industry. Cray Kaiser is also a member of the American Institute of Certified Public Accountants’ Employee Benefit Plan Audit Quality Center, a select group that provides EBP audit resources and industry updates to member firms. Our experience and resources ensure that our EBP audit clients receive rigorous, precisely executed audits to support plan operations and help plan fiduciaries fulfill their responsibilities. If you would like more information on EBP audits, please contact us.
It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand benefit plan audits, when you’ll need one, and what to expect during the process.
Form 5500
If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year. Participants include people in the following four categories:
If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.
For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.
The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.
While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.
To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:
In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.
At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon. Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared for benefit plan audits.
Now that you have determined the need for a nonprofit financial statement audit, it is time to select an accounting firm and begin the process. This can be an overwhelming experience, but it doesn’t have to be. With the right team on your side and all the documentation you need prepared ahead of time, you’ll be ready to execute a successful audit.
As soon as the need is determined, you can start the process of selecting an accounting firm for your financial statement audit. In addition to selecting a firm that’s certified to perform audits in the state of Illinois, you’ll want to make sure that you choose a team that truly understands your operations and transactions. It’s critical that the firm has extensive nonprofit experience since the regulations differ significantly from those of for-profit businesses. It is highly recommended to ask all potential accounting firms to provide a copy of their most recent peer review certificate and report.
After your firm has been selected, you’ll start the organizational and preparation processes. Your audit team should clearly communicate what documentation you’ll need to have ready initially. You’ll also meet with your auditors to understand what metrics, such as key balances from your balance sheet, will be important to the process. The auditors will go over your risk assessment and internal controls to ensure that they’re working properly. In a perfect world, those meetings should take place throughout the year so that nothing is missed. Finally, the team will review your accounting and personnel policies to ensure everything is up to date. Based upon these discussions, your audit team will determine the procedures that will take place during the audit.
Once you’re ready to move forward, the most critical element of a successful audit is good communication between the auditors and your internal team. The audit team will relay which key documents will be necessary. Having all of your documentation and reporting ready in advance of any on-site visits will save you time and money. Since most firms bill by the hour, the less time that’s spent on the audit means more resources to devote towards fulfilling your mission.
As a final note, there are going to be updates to the financial statements themselves. There are new reporting standards that will take effect for 2018’s audits. These changes are going to require major revisions to the current accounting policies and reporting for nonprofits. It’s important to start implementing these changes prior to the end of this year so that you’re prepared for next year. Click here for more information.
An unqualified audit report from the audit firm will provide reasonable assurances to your governing bodies, lenders, and donors that you’re running your organization responsibly. It can help open doors for more funding so that you’ll be able to pursue your mission to the fullest. Contact us today if you have questions about whether you need an audit or to see how we can make the process as seamless as possible.
