Understanding Employee Benefit Plan (EBP) Audits

Why EBP Audits Matter 

Employee Benefit Plan (EBP) audits are a critical compliance requirement for businesses that offer retirement and welfare benefit plans to their employees. Governed by the Employee Retirement Income Security Act (ERISA) and overseen by the Department of Labor (DOL), these audits help ensure that plan sponsors manage their employees’ benefits responsibly and in accordance with regulations. 

For businesses that meet the threshold for mandatory audits—typically plans with 100 or more participants—understanding the EBP audit process is essential to maintaining compliance, avoiding penalties, and ensuring the financial integrity of their benefit offerings. 

Who Needs an EBP Audit? 

The general rule is that any business with an employee benefit plan covered by ERISA and more than 100 eligible participants at the beginning of the plan year must undergo an independent audit. However, there are some exceptions, such as the 80-120 participant rule, which allows companies with between 80 and 120 participants to continue filing under the previous year’s category. 

Plans subject to audits include: 

• 401(k) and 403(b) plans 

• Pension and profit-sharing plans 

• Employee stock ownership plans (ESOPs) 

• Health and welfare benefit plans 

What Does an EBP Audit Involve? 

An EBP audit is conducted by an independent CPA (Certified Public Accountant) specializing in benefit plan audits. The goal is to verify that the plan's financial statements are presented fairly and comply with ERISA regulations. The process typically includes: 

• Reviewing Plan Documents – Ensuring that the plan is operating according to its formal documents and that required updates have been implemented. 

• Assessing Internal Controls – Evaluating how well the plan administrator safeguards assets and processes transactions. 

• Examining Contributions & Distributions – Verifying that employee and employer contributions are accurately recorded and distributed in a timely manner. 

• Ensuring Compliance with ERISA & IRS Requirements – Confirming adherence to all reporting and disclosure obligations. 

• Validating Participant Data – Checking that participant accounts are accurate and correctly managed. 

Common EBP Audit Issues & How to Avoid Them 

Employers often encounter challenges during EBP audits. Some of the most frequent issues include: 

• Late Remittance of Employee Contributions – The DOL requires that employee contributions be deposited as soon as administratively possible, but many businesses fail to do so within the required timeframe. 

• Plan Document Noncompliance – Plans must operate according to their governing documents; failure to update documents as regulations change can lead to compliance issues. 

• Inaccurate Employee Data – Misclassifications, incorrect compensation data, or errors in participant enrollments can lead to costly corrections. 

• Failure to Conduct Discrimination Testing – 401(k) plans must pass nondiscrimination tests to ensure that benefits do not favor highly compensated employees. 

To avoid these issues, businesses should: 

• Regularly review plan operations and compliance requirements. 

• Work closely with third-party administrators (TPAs) to ensure timely and accurate reporting. 

• Maintain clear documentation of all transactions and governance decisions. 

• Engage a qualified CPA firm with extensive EBP audit experience. 

Choosing the Right Auditor for an EBP Audit 

Selecting an experienced auditor is crucial, as poorly conducted audits can lead to DOL scrutiny and increased risk for the plan sponsor. When choosing an auditor, consider the following: 

• Experience & Specialization – The CPA firm should have a proven track record of conducting EBP audits. 

• Understanding of ERISA & DOL Requirements – Auditors should be well-versed in ERISA regulations to ensure compliance. 

• Proactive Communication & Guidance – A good auditor will not only review financials but also provide insights into compliance best practices. 

An EBP audit is not just a regulatory requirement—it’s a critical process that helps employers maintain fiduciary responsibility, protect employees' retirement and health benefits, and ensure financial integrity. By proactively preparing for audits, maintaining compliance, and working with experienced professionals, businesses can minimize risks and foster employee trust in their benefit programs. 

If your company is required to undergo an EBP audit, now is the time to ensure you have the right controls and compliance measures in place. A well-managed audit process strengthens your plan’s credibility and safeguards your organization from regulatory penalties.