What to Expect During Your First Employee Benefit Plan Audit

By Jenny VanderBoon, CPA, MBA, Manager; Steve Triezenberg, CPA, MBA, Shareholder; Nicole Wojciakowski, Manager; Jennifer Onderko, CPA, Director of Accounting & Auditing Quality Control, Hungerford Employee Benefit Audit Team

As your organization grows, it may be time to navigate your first employee benefit plan audit.

Between organizing all the documents and meeting compliance deadlines, the entire process can feel time consuming and overwhelming for many companies. However, a few simple tips can turn this process into a manageable and valuable experience. It may also provide an opportunity to identify and correct operational errors before the IRS or Department of Labor becomes involved.

Here is what you can expect from your first 401(k) plan audit, including common areas of auditor focus and how to prepare internally. While this discussion addresses a 401(k) plan audit, other qualified plans have similar audit requirements, such as employee stock ownership plans, 403(b) plans, pensions and health and welfare plans.

Setting Expectations Early

First, it is important to understand the timelines and the documents you’ll need for a seamless audit.

Generally, the engagement begins with a planning meeting with your auditor, which is typically held a few months after the plan year has ended. At this meeting, the timing of each phase will be agreed upon, and fieldwork and testing dates will be set. For a plan with a calendar year end, fieldwork often occurs between April and August to ensure adequate time to complete the audit by the required due dates.

The original due date to submit Form 5500 (the tax form an organization must file for its plan) with the attached auditor’s report is seven months after year end. For example, if your plan’s year end is Dec. 31, 2025, then you have until July 31, 2026, to submit the form. You can request a 2.5-month extension which moves your deadline to Oct. 15, 2026.

It’s important to file this form on time, as you can rack up penalties quickly or risk plan disqualification.

To properly plan the audit, the documents that an auditor may request include:

• Employee census file: A listing of all those who received a paycheck during the year. It is used to select audit samples and verify eligibility and contributions.
• Payroll total reports: These are used to verify accuracy and timeliness of contributions and remittances to the Plan’s trust account.
• The plan document and amendments: Used to verify the plan rules and determine the areas needed for testing.
• Annual record-keeping reports (going back three to five years for a first-year audit): Used to verify the organization is following plan rules and participant transactions are handled correctly.
• W-2s (going back three to five years for a first-year audit): Used to verify employee compensation.

One time-saving tip during the documentation gathering phase is to grant auditor access to the recordkeeper’s website. Most recordkeepers have specific auditor access which allows them to request and download the reports they need to perform the audit. This not only saves you valuable time but ensures all required documents will be submitted to your auditor.

Common Audit Focus Areas

Once the audit is planned, the auditor normally communicates testing requests to address the most common areas of risk within a plan:

• Eligibility: Are only eligible employees participating? Your plan could have age, service length or both requirements to become eligible.
• Contributions: Are employee and employer contributions (like matches or profit sharing) calculated and deposited correctly?
• Timeliness of remittances: How quickly is your organization taking money from employees’ paychecks and putting it into the plan? Is this happening consistently?
• Payroll reconciliation: Do your payroll records match employee contributions into the plan?
• Benefit payments: Did the recipient qualify to receive money from their account?

Additionally, your auditor will review the internal processes and controls governing plan transactions. At Hungerford, we review these processes to ensure best practices are followed and offer improvements when we see areas that could benefit from stronger controls.

A very common operational issue, commonly encountered during a first-time audit, is incorrectly defining plan compensation. Many plans either incorrectly include or exclude certain forms of compensation as eligible for plan contributions. This mistake can be costly, so implementing strong controls over the setup of payroll codes is imperative.

Collaboration with Your Service Providers

To gain audit efficiency during testing, we often find it effective to communicate directly with the plan recordkeeper rather than use the company’s team members as the intermediary. This is another reason why granting auditor access is key to a smooth audit.

Not only does it save time, but it also improves accuracy, as recordkeepers have answers to transactional and technical questions that your HR or payroll department may not know. Many companies rely heavily on recordkeeping services to handle day-to-day operations, and we can work with them quickly and accurately.

How to Prepare Internally

Aside from the documents you’ll need to gather, one of the best things you can do to help your auditor is to track plan errors or decisions as they occur. This includes amendments to plan rules, changes with payroll providers, the date of each contribution remittance to the plan trust account and making sure all contributions from payroll agree to amounts received by your recordkeeper.

It’s much easier to make notes of such events in real time, rather than trying to remember what changed at the end of the year.

Furthermore, designate someone at your organization as a point of contact for the auditor, usually someone working in HR, finance or payroll. It speeds up communication when your auditor has questions or needs to clarify details.

Get Prepared for Your First Audit

The duration of the audit is significantly influenced by your organization’s preparation. Proactive communication and transparency will result in a seamless experience for everyone.

If you have never had an audit before, let’s talk. We have helped hundreds of clients navigate the process with helpful and valuable service.