Common Mistakes to Avoid During a Benefit Plan Audit

Employee benefit plans (EBPs) are a critical part of a company's benefits package. As a plan administrator, you must ensure it complies with all applicable laws and regulations. Through our experience conducting EBP audits, we've compiled a list of common mistakes plan sponsors and administrators make that you should be on the lookout for.
What is an employee benefit plan?
An employee benefit plan refers to any arrangement, agreement, or program established or maintained by an employer to provide employees with various benefits, such as retirement plans, health insurance, life insurance, disability benefits, and more. These plans are governed by the Employee Retirement Income Security Act (ERISA), which sets forth rules and regulations to protect employees' rights and ensure the proper administration of these plans.
The Importance of an Employee Benefit Plan Audit
One of the critical tools in achieving compliance is conducting regular EBP audits. These are specialized types of audits conducted on the financial statements of employee benefit plans, such as 401(k) plans, pension plans, and health and welfare plans. It is an independent examination of financial statements, operations, and administrative procedures.
These audits aren’t just about checking boxes. They help identify potential errors or noncompliance issues and allow for timely corrections, avoiding penalties, litigation, and reputational damage.
Common Mistakes to Avoid
1. Late Remittance of Employee 401(k) Deferrals
One of the most frequent mistakes observed in employee benefit plan audits is the late remittance of employee 401(k) deferrals, including 401(k) loan repayments. ERISA requires that these contributions be deposited as soon as they can be reasonably segregated from the employer's general assets.
Delays in remittance can lead to compliance issues and penalties. To avoid this, establish a clear remittance policy with automated systems, define timelines and approval processes, and ensure effective communication between payroll and benefits administration teams.
2. Inadequate Plan Documents and Amendments
Insufficient or improper plan documentation is another frequent compliance issue. ERISA imposes strict record-keeping requirements, including Summary Plan Descriptions (SPDs), plan amendments, and annual reports. Failure to have accurate and up-to-date records can result in compliance violations. Establish a systematic process for reviewing and updating plan documents to prevent this. Conduct regular audits of plan documents, maintain a record of all amendments, and ensure they are properly executed and stored.
3. Compensation Definition Errors
Misunderstanding or misinterpreting the plan's definition of eligible compensation can lead to incorrect contribution calculations and discrimination testing failures. Each plan has its own definition, and even minor clerical errors in the payroll system can cause noncompliance. To avoid this mistake, regular training should be provided to HR and payroll teams to ensure a clear understanding of the definition of compensation and update systems accordingly.
4. Incorrect Determination of Eligible Employees
Determining the participant count for an audit is a critical step in compliance. The methodology for determining the audit requirement changed in 2023, and it is essential to identify the number of eligible employees accurately. Failure to do so can result in noncompliance with audit requirements and potential penalties. Stay updated on the current regulations and work with an experienced auditor to ensure accurate participant count determination.
5. Insufficient Documentation for Hardship Distributions
Hardship distributions, or withdrawals made before the age of 59 1/2 due to urgent financial needs, are permitted in some employee benefit plans under specific circumstances. However, insufficient documentation for hardship distributions is a common mistake identified during audits. Failing to maintain adequate records of the hardship request, review, approval, and financial information can lead to qualification failures. Establish a robust system for documenting hardship distributions, including supporting documentation, to ensure compliance with IRS requirements.
6. Failure to Address Discrimination Testing Failures
Discrimination testing is a critical aspect of EBP compliance. These tests aim to ensure that highly compensated employees do not disproportionately benefit from the plan compared to non-highly compensated employees. If a discrimination test fails, corrective action must be taken to bring the plan back into compliance. Regularly monitor participation rates and contribution levels among employees to identify and address any potential discrimination testing failures.
Remember, ensuring compliance with ERISA and other applicable regulations is an ongoing process. Regular audits, diligent record-keeping, and proactive measures to address potential issues are essential for maintaining a compliant and well-managed employee benefit plan.
Stay Compliant With Lutz’s Employee Benefit Plan Audit Services
Partnering with experienced professionals, such as auditors and consultants specializing in employee benefit plans, can provide valuable expertise and guidance throughout the compliance journey. Lutz offers employee benefit plan services that provide the highest quality audit. Please contact us if you have questions.

- Activator, Adaptability, Ideation, Context, Learner
Nate Jones
Nate Jones, Audit Manager, began his career in 2016 as an intern with Lutz. He has developed comprehensive expertise in assurance services, serving as the technical lead for the employee benefit plan audit practice.
Specializing in financial reporting, Nate provides audit and assurance services to clients with a focus on the nonprofit and services sectors. He thrives on helping clients navigate changes and growth, adapting quickly to their evolving needs. His ability to thoroughly understand the context of a client’s business enables him to address complex challenges effectively.
Nate lives in Omaha with his wife, daughter, and two dogs. Outside the office, he can be found golfing, playing chess, and keeping up with his toddler's ever-changing interests.
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