Employee Benefit Plan Audit Red Flags: The Top Mistakes That Cost Clients Money

How Can Employee Benefits Plans Trigger An Audit?

Ever wonder how a tiny payroll hiccup can snowball into a costly compliance issue? We dig into the real-world mechanics of employee benefit plans—401(k), 403(b), and pensions—and show how small process gaps turn into late remittances, missed enrollments, and broken match formulas. With Audit Senior Meghan Boone guiding the way, we translate ERISA audit thresholds, timing expectations, and plan document nuances into clear, workable steps any HR, payroll, or finance team can use.

We break down when an audit becomes mandatory and why the 100 and 120 eligible participant thresholds matter more than most realize. From there, we go straight to the hotspot errors: deposits that don’t reach the trust “as soon as administratively possible,” compensation definitions that don’t match what the plan document actually says, and eligibility rules that fail silently when systems aren’t in sync. You’ll hear practical guardrails—automation between payroll and the trust, cycle-by-cycle reconciliations, eligibility reporting, and staff training—that shrink risk and make audits faster and cleaner.

When issues surface, speed and transparency are everything. We walk through scoping the impact, calculating lost earnings, and choosing the right path with the IRS EPCRS or DOL programs. Beyond fixes, we emphasize building a year-round compliance rhythm: quarterly reviews tying payroll, trust, and recordkeeper data together; tight communication between HR, payroll, and finance; and documenting every amendment, approval, and change so controls are provable. The result is fewer findings, stronger participant protection, and a plan that stands up to scrutiny without the drama.

If this conversation helps you tighten your process or avoid a late deposit, share it with your HR and finance teammates. Subscribe for more practical guidance, leave a quick review to tell us what helped most, and send us your toughest benefits question for a future episode.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Transcript

Welcome And Host Introductions

SPEAKER_00 0:01

Welcome to the Knowing What Counts Podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started. Because success begins with knowing what counts.

SPEAKER_02 0:25

When it comes to employee benefit plans, small missteps can lead to big financial consequences. Welcome back, everyone. I'm Sophia Yvette, co-host and producer, back in the studio with Megan Boone, Audit Senior here at MPCPAs. How's it going today, Megan?

SPEAKER_01 0:43

I'm good. How are you?

SPEAKER_02 0:45

I'm good. Now, Megan, let's go ahead and get into it. But before we do, why don't you introduce yourself to the audience?

SPEAKER_01 0:55

Okay. Well, my name is Megan Boone. I'm a senior associate here at MP, and I've been with the firm for about five years now. I primarily work in our audit practice, handling compilations, reviews, and audits for a range of clients, including for-profits and nonprofit organizations, charter schools, as well as employee benefit plans.

SPEAKER_02 1:15

Now, what exactly are employee benefit plans and how do these plans differ?

SPEAKER_01 1:22

So at a high level, employee benefit plans are programs that employers set up to help employees safer retirement, and even in some cases to provide other post-employment benefits. So you have 401 plans. So these are common in the private sector. So employees can contribute pre-tax dollars, often employer matched, and those funds grow tax deferred until withdrawal. And then you have 403B plans, which are very similar to 401 plans, but these are typically offered by public schools, hospitals, nonprofits, and other tax-exempt organizations. And then you have pension plans or defined benefit plans, and these are a bit different. So these plans promise a specific monthly benefit for retirement. And these monthly benefits are usually based on a formula involving salary and years of service. And with those types of plans, the employer actually shoulders the risk, the investment risk in those situations. So the key distinction among these types of plans are who offers them, who carries the investment risk, and how the benefits are calculated.

SPEAKER_02 2:29

Now, what triggers the need for an employee benefit plan audit in the first place?

SPEAKER_01 2:35

So this is dependent on the number of eligible participants. So under ERISA rules, plans with 100 or more eligible participants at the beginning of the plan year must have an annual audit. These types of plans are referred to as large plans. And then you have small plans, which are plans that are under that 100 eligible participant threshold. And these plans can qualify for that small plan audit exemption, which just simply means that they are not required to have an annual audit. But there is a nuance. So once a plan exceeds 120 eligible participants, it's required to stay in that large plan category and continue annual audits. So it's very important to monitor the headcount each year.

SPEAKER_02 3:17

Now, can you provide examples of errors auditors frequently uncover during employee benefit plan audits?

SPEAKER_01 3:25

Yeah, so some of the most common findings that we see are late remittances. So this happens when payroll deductions aren't deposited into the plan's trust promptly. Even a few days late can result in a department of labor finding. We also see incorrect definition of compensations. So within each plan's plan document is the definition of what is considered compensation. So many plans define compensation differently for contributions and testings, and payroll systems don't always apply the right definition. We also see misenrollments. Sometimes eligible employees aren't added to the plan when they become eligible, which in turn results in miss contributions. And lastly, another error we see is inconsistent employer match calculations. So this can happen if payroll formulas are outdated or even not updated if the plan made an amendment. So these are typical processing errors, but there can be financial consequences for both the employer and the employee if not fixed.

SPEAKER_02 4:32

Now, how serious are late reminences and how can companies avoid it?

SPEAKER_01 4:39

So it's one of the most common errors, but it's also the most avoidable. So once funds are withheld from a participant's paycheck, every day that those funds aren't remitted into the plan is another day that those funds can't perform in the market. So the Department of Labor expects those funds to be remitted as soon as administratively possible. So the rule of thumb for large plans is to have those funds remitted within three business days, while small plans have to remit those funds within seven business days. So to avoid labor remittances, companies should automate contribution transfers directly from payroll to the plant trust. Companies should also be reconciling every payroll cycle to confirm funds were cleared and simply just document your process. So if there are any delays that happen, you want proof of reasonable cause. Because as mentioned, even minor delays can require corrections and loss earning calculations to make up for earnings the participant missed out on. So timely deposits are just an easy win for compliance.

SPEAKER_02 5:44

Now, how do eligibility errors happen? And what should organizations watch out for?

SPEAKER_01 5:52

So eligibility mistakes usually happen when HR and payroll aren't perfectly aligned. So for example, an employee might reach that one year mark or complete 1,000 hours of service as required by the plan document for the participant to participate in the plan, but they aren't automatically enrolled. So to prevent situations like this, companies should look to automate eligibility tracking through payroll or HR systems. They should also look to run periodic eligibility reports just to double check who should be in the plan and who shouldn't be in the plan. And lastly, just simply training HR staff on your plan provisions, especially if a company is experiencing a lot of turnover in the HR department or even if you have part-time employees involved, just making sure that everyone is on the same page. If you discover misenrollments, the IRS has correction methods that often involve making qualified non-elective contributions, otherwise known as CUNICs, just to make the participant whole.

SPEAKER_02 6:52

Now, how can organizations prevent these kinds of errors?

SPEAKER_01 6:59

So prevention really comes down to internal controls and regular monitoring. So companies can do this by just keeping plan documents current and making sure HR and payroll staff understand those eligibility and contribution roles. Also, automating contributions as much as possible. This will mitigate timing errors or even just human errors. Performing periodic reconciliations between your payroll, your trust, and record keeper data. Also, training staff regularly on procedure changes and compliance deadlines. Also, just documenting everything. Approvals, communication, and amendments should always be easy to trace. And lastly, consistency and documentation go a long way towards reducing audit findings.

SPEAKER_02 7:45

Now, what's the best way to correct errors?

Correcting Errors The Right Way

SPEAKER_01 7:50

Just simply act quickly. The longer an issue lingers, the more complicated it can get. So the general steps for correction would be just to identify the scope, determine which employees and periods are affected, correct the error, so just making adjustments to contributions, allocations, and distributions as needed. File a corrective action plan if needed. So some errors do require filing through the IRS's employee plans compliance resolution system or notifying the DOL. And lastly, the DOL's website also provides guidance and programs to aid in the correction of errors. So auditors appreciate transparency. So if a plan sponsor does identify and corrects an error proactively, that does reflect well on the organization's controls.

SPEAKER_02 8:37

Now, what's your best advice for listeners, especially HR or finance professionals, to minimize errors and keep the plans audit ready all year round?

SPEAKER_01 8:50

So treat plan compliance as an ongoing process rather than a once-a-year event. So companies can perform quarterly reviews, just reconciling payroll contributions and trust activity regularly. Stay current on plan amendments and law changes. Even a small rule update can affect eligibility or contribution limits. Also ensure just regular communication between your HR, payroll, and finance departments, as most audit findings happen because of communication breakdowns. And lastly, just document everything. If it's not documented, it didn't happen. So just remember that auditors aren't there to per se catch you. They're there to help ensure that participants' retirement funds are accurate and secure.

SPEAKER_02 9:33

Well, Megan, we'll see you next time. Have a great rest of your day. Thank you.

Year-Round Audit Readiness And Closing

SPEAKER_00 9:40

Thanks for listening to the Knowing What Counts Podcast. Ready to optimize your wealth and protect your future? Visit the MPgroupCPA.com or call 413 739 1800 to connect with our team of experts. Remember, success is about knowing what counts.