How Are Benefit Plan Audit Costs Calculated?
When preparing for a first-time benefit plan audit, many aspects of the task may be top of mind for an organization – particularly answering the question, “How much does a benefit plan audit actually cost?” As you discuss and engage with potential auditors, the subject of costs and fees is surely to be one of several focal points in the conversation and play a factor in which auditor you actually choose to do the work. The truth is that if this is your first benefit plan audit, you might experience some anxiety regarding what you’ll pay – here we break down how costs are typically calculated and how you can offset some of those costs.
Preparation is Key
Documentation can become a real challenge for organizations preparing for their first-time benefit plan audit, but proactively obtaining and organization relevant documentation can be a key strategy in helping your auditor make the best use of time. Auditors will want to review the extent of any current plan documents and amendments to the benefit plan to gain a basic understanding of the plan.
Additionally, certain areas of operational compliance should be noted, as these can result in common errors within the plan (which can impact the audit). Aside from proper documentation of the plan, such errors may include any of the following:
- Allowing ineligible employees to participate in the plan, or preventing eligible employees from participating
- Not adhering to the right service period or age limit for employees
- Failure to automatically enroll employees if the plan has the autoenrollment feature
- Failing to review and compare the plan’s definition of compensation with the plan document
- Manual calculation of an employer matching contribution or profit-sharing contribution
- Participant investment elections
- Incorrect calculation of vesting
- Timely remittance of participant contributions
- Oversight and internal controls
By addressing potential errors in the plan ahead of the audit, you may be able to impact the total number of hours an auditor spends on your first-time benefit plan audit, and potentially reduce some overall costs (as well as frustration).[1]
What Impacts the Cost of an Audit?
There are a variety of factors can impact the bottom line cost of a benefit plan audit, including what state the organization is located, how many hours and auditing staff will be needed to complete the audit, whether the auditor charges a flat fee based on the number of plan participants and whether the audit is performed remotely. If an auditor uses automation technology to collect and analyze data, this could also be a cost-effective option.
As a word of caution, it must be said that any late filings and inaccuracies could result in thousands of dollars in penalty from the IRS and the Department of Labor, which certainly impact total costs. As such, it is important to determine and choose your auditor based on other factors than cost alone. Auditors who perform more benefit plan audits annually tend to have a lower threshold for inaccuracies and a quicker turnaround.
How an ERISA Spending Account Can Help
Organizations may wish to consider implementing an ERISA spending account to help offset the costs of their benefit plan audits each year. Per ERISA guidance, plan sponsors are allowed to maintain spending accounts funded by any revenue generated from certain investment options to put toward the costs of a benefit plan, including benefit plan audits. Truthfully, many plan sponsors are unaware of this option, and it may be a challenge to implement for smaller plans. However, the generated revenue can become valuable to offset any audit costs, and administration of the ERISA spending account goes a long way to help demonstrate fiduciary responsibility regarding the plan. Any excess revenue in the account after expenses have been paid are typically returned to the participants – ERISA spending account balances are not allowed to carry over into the next plan year. If an ERISA spending account is not set up, plan sponsors may have the opportunity to pay the audit fees from the assets of the Plan. Plan sponsors should consult with their auditor or third-party advisor to explore this option.
For questions or more information about first-time benefit plan audits, contact your Windham Brannon advisor or reach out to Anne Morris.
[1] The Internal Revenue Service (IRS) provides some guidance on finding and correcting plan errors through the Employee Plans Compliance Resolution System (EPCRS).
