Employee Benefit Plan Audits: What You Need To Know

Employee benefit programs differ widely between companies. Human resources managers understand that offering the right set of employee benefits can help a business attract and retain top talent. That's why an impressive 41% of business leaders will focus on improving their employee benefits packages this year, according to our 2025 Priorities for Business Leaders survey.

Audits of employee benefit plans help ensure that plans are compliant, financially sound, and effectively managing resources. They can uncover inefficiencies, prevent potential issues, and enhance employee trust by demonstrating your commitment to their wellbeing.

For some businesses, an employee benefits plan audit is a requirement. However, regularly auditing your benefits plan can also provide significant value even if not required by law.

Which Businesses Are Required To Perform Benefit Plan Audits?

Under federal law, most employee benefit plans with 100 or more eligible participants at the start of the plan year must undergo an audit. You must perform an annual benefits plan audit if your company falls into this category. This process helps employers comply with regulatory standards and optimal management of the plans.

Note that when it comes to 401(k), recently implemented methodology counts participants based on the number of participants with account balances at the beginning of the plan year rather than all “eligible” participants.

Why Do Businesses Need To Perform an Audit of Their Benefit Packages?

The audit protects the assets and financial integrity of your employee benefit plan. It helps plan administrators ensure the necessary funds are available to pay out retirement, health, and other promised benefits.

In simpler terms, the government wants to protect your employees by ensuring that funds are used appropriately. For example, deductions meant for a 401(k) should indeed go into the 401(k) account, and health insurance deductions should pay for health premiums—not be diverted elsewhere.

Even if you aren’t required to audit your benefit plans, there are still good reasons to do so.

Besides maintaining compliance, companies that perform employee benefit plan (EBP) audits can:

• Reduce financial abuse and fraud
• Streamline employee benefits offerings
• Save money
• Ensure your benefits support your employees’ overall wellbeing (physical, emotional, mental, financial)

How Often Do I Need To Perform an Audit?

Businesses must perform employee benefit plan audits annually. Some benefits require you to give notice to employees. This notice allows them to opt out in some situations or to take advantage of the offering in others. Here are a couple of examples:

• Safe Harbor 401(k) plans require a notice to be distributed 30 to 90 days before the plan year. The notice must outline rights, obligations, certain minimum benefits, and the timing and method for making salary deferral elections.
• For QSEHRAs, eligible employees must be notified at least 90 days before the beginning of the year of the permitted benefit and coverage requirements to maintain eligibility.

Who Does the Employee Benefit Plan Audit in the Company?

Businesses must work with an independent auditor to audit their employee benefit plans. The first step in conducting an audit is to find and select an independent, qualified public accountant.

You should look for an auditor who can assist with proper compliance and verify your company’s fiduciary responsibilities.

What Happens During an EBP Audit?

The employee benefit plan audit must ensure compliance with the Employee Retirement Income Security Act of 1974 (ERISA), which governs most employee benefit plans. Once an audit has been completed, the results must be included in the plan’s annual Form 5500 filing. This form is a requirement for compliance and provides details on the benefit plan’s financial condition, investments, and operations.

Audits must follow specific standards set forth by the Department of Labor (DOL) and can include both full-scope and limited-scope audits. Under certain conditions, auditors can perform limited-scope audits with less comprehensive procedures.

What’s the Difference Between a Full-Scope and Limited-Scope Employee Benefit Plan Audit?

ERISA sometimes allows benefit plan managers to choose a limited-scope audit of financial statements instead of a full-scope audit.

• In a limited-scope audit, the auditor relies on certified financial statements from a bank, trust company, or other qualified institution. This means they don’t dive into investment details like income and expenses prepared by these entities. Instead, they focus on examining other controls within the plan. A qualified institution refers to a bank, insurance carrier, or similar entity regulated by a state or federal agency.
• The auditor examines all plan areas during a full-scope audit, including operations, compliance, and investments. The auditor also prepares a full, unqualified opinion of the employee benefit plan, which they include in the Form 5500 filing.

What Information Is Looked at During the Audit?

The third-party CPA your business works with will look at records related to the employee benefit plans, including:

• Benefit payments
• Employer and employee contributions
• Investments and investment income of the EBP (in a full-scope audit)
• Administrative expenses
• Data of and loans to participants
• Allocation of participants, if applicable
• Plan obligations and liabilities

The auditor’s job is to help the plan sponsor fulfill its fiduciary duty to its participants. During the audit, they’ll identify operational errors, potential fraud risks, and weaknesses and provide insights into internal control processes.

More simply, the auditor ensures that the plans offered to employees operate as promised and that all reporting is accurate.

Are You Reporting Benefits Correctly and on Time?

Some benefits are subject to payroll taxes, while others are exempt. Employers should be sure they are factoring in the correct status when reporting on:

• Employees’ W-2s
• Quarterly employer tax returns (Form 941)

Businesses can look to IRS Publication 15-B for a list of fringe benefits and whether they’re exempt from employment taxes.

Are You Following Proper Withholding Practices?

Some benefits, such as cash bonuses, payments to employees of business expenses under a non-accountable reimbursement plan, or personal use of a company vehicle, are taxable compensation (called “supplemental wages”) to employees and are subject to withholding. Where supplemental wages are less than $1 million, there is a choice about withholding:

• Combine regular wages with supplemental wages and withhold income taxes under the usual wage withholding rules.
• Treat the supplement wages as separate amounts subject to a flat withholding of 22 percent.

Note: Withholding at the rate of 37 percent is required for supplemental wages of $1 million or more.

While understanding the importance of auditing your employee benefit plans is crucial, knowing which benefits will most effectively meet your employees’ needs and how an audit can help tailor these offerings to serve your team better is equally important.

How Do I Know What Benefits To Offer to Employees?

Regardless of the employee benefits package you offer, they should align with your budget and your employees’ needs. Conducting a benefits audit can pay off in the long run and help your business stay competitive in today’s tight job market.

Offering employee benefits is a balancing act between meeting employees’ needs and staying within your budget. Employee benefits can be an important recruitment and retention feature in this job market. From time to time, it’s a good idea to review your employee benefits package.

Am I Required To Offer Benefits to Employees?

Federal law requires some businesses to offer certain benefits to their full-time employees. However, it does not require employers to offer fringe benefits beyond the employer mandate, where large companies can choose to pay a penalty in lieu of offering health coverage.

A growing number of states are putting into place certain fringe benefit requirements. Businesses should check the state rules on the following:

• Retirement plans. Some states require certain private-sector employers without qualified retirement plans to enroll their employees in state-run programs. No employer contributions to the plans are allowed, but there are administrative costs to consider. Learn what’s happening in your state on our retirement hub.
• Paid family and medical leave. Some states require paid family and medical leave time, funded through employee, employer or a combination of both withholdings.
• Paid sick leave. Several states now require employees to offer a certain amount of paid sick leave.

What Benefits Do You Currently Offer Employees?

While federal law doesn’t require small businesses to offer most types of benefits, many offer additional perks to help their employees and stay competitive. Here are some types of benefits that you may want to consider:

• Health benefits: Many large employers offer health care coverage due to the employer shared responsibility provision under the Affordable Care Act; smaller companies not impacted by this law to offer health coverage may need to consider doing the same to stay competitive. For budget reasons, consider health savings accounts combined with high-deductible health plans or qualified small employer health reimbursement arrangements (QSEHRAs). You may also want to consider flexible spending accounts for medical costs, which don’t require employer contributions.
• Retirement savings: Help employees save for their retirement by offering a qualified retirement plan. You can do so with no significant cost to you (e.g., 401(k) plans without any employer contributions). And there’s a tax credit for the administrative costs of setting up the plan and educating employees about contributions.
• Training and development: You can pay to train employees on the job or take courses outside of work. You can set parameters for this benefit and arrange for it to be tax-free for employees. A learning management system can also enable you to provide accessible online courses to your workforce.
• Paid family and medical leave: While some states require this offering, businesses currently aren’t required by federal law to offer paid family and medical leave, but if you do so, you may be eligible for a tax credit. Employers should be familiar with any applicable state paid family leave laws.
• No-cost benefits: Don’t forget the benefits you can offer without associated costs. Consider offering flex time, permitting employees to work from home, or other alternative work arrangements that allow workers to better manage their work/life balance.

Should I Audit My Benefits Package if I’m Not Required To?

Regardless of the employee benefits package you offer, it should align with your budget and your employees’ needs. Even if you aren’t required by law, conducting a benefits audit can pay off in the long run and help your business stay competitive in today’s tight job market.

Offering employee benefits is a balancing act between meeting employees’ needs and staying within your budget. Employee benefits can be an important recruitment and retention feature in this job market. From time to time, it’s a good idea to review your employee benefits package.

Here’s a closer look at 4 signals to re-evaluate your benefits strategy:

It’s Becoming Difficult To Recruit Top Talent

Whether you’re recruiting a customer service rep or a top programmer, candidates will assess your total compensation based on their pay history and other market offers. Benefits like healthcare and retirement plans contribute to this total compensation.

If you’re struggling to attract and recruit top talent, it might be because you either don’t offer benefits or your benefits are less competitive. If prospective hires hesitate after learning about your benefits package or seeing an offer without benefits, it’s a signal to enhance your offerings.

You’re Experiencing Employee Turnover

Employees may leave their jobs for various reasons, from family demands to pursuing new career fields. However, compensation and benefits often play a significant role in their decision to stay or go.

If you are experiencing turnover, asking departing employees if benefits influenced their decision is crucial. For instance, if high healthcare costs are a concern, it might be time to evaluate whether your benefits contribute to employee attrition.

Employee Morale Is Lagging

Drops in employee morale can reveal if your benefits are inadequate. Benefits help to provide peace of mind, helping employees save for retirement and cover medical costs. When these concerns affect productivity, it’s time to reassess your benefits package.

Additionally, morale can dip when employees feel undervalued. If your key talent believes benefits should be part of their compensation package, now is the time to determine if this is feasible for your business.

The Industry Standard Has Shifted

There may have been a time when companies in your industry didn’t include benefits in their compensation packages. However, as industry best practices evolve and competition for top talent intensifies, it’s crucial to reassess your approach.

Your strategy might be outdated if a lack of employee benefits puts you behind the competition. Keeping up with industry trends can enhance your reputation and help retain the best talent.

Should I Make Changes to My Benefit Plan Offerings?

Before deciding to add any benefit plan offerings, it’s important to evaluate each benefit’s role alongside your other offerings and determine how best your HR team can manage this additional administrative work.

While mindful of budget constraints, many small businesses aim to hire and retain talented employees with a minimal benefits package that typically includes one or two offerings. However, assessing each benefit’s effectiveness is crucial if you are considering expanding or have recently added to your current offerings. You can begin your evaluation by looking at employee feedback, costs, and usage.

What Benefits Are the Right Fit for Your Organization?

Before deciding on benefits, consider overall considerations like employee interest, costs, and implementation steps. You may also want to survey your employees to see which benefits they would actually use. This helps identify the most desired benefits.

Evaluate Costs and Usage of Benefits

Assessing the cost-effectiveness of benefits is vital. For example, a wellness program might show benefits over the long term, making it difficult to evaluate its success completely over one or two budget cycles.

Costs per employee and usage rates for individual benefits can be tracked through a benefits administration system and compared to other benefits you offer. Customized reporting can also help provide analytics for annual budget evaluations.

Increase Efficiency With an Integrated System

Expanding benefits can increase administrative work for your HR team. However, an integrated human capital management (HCM) system can help simplify the process.

With an integrated HCM system, you can manage payroll and benefits in one place. For example, if you’re implementing a 401(k) plan, contribution details can seamlessly integrate with payroll data. This reduces administrative time and costs, improves reporting, helps meet fiduciary obligations, and even helps to streamline the data collection during an employee benefits plan audit.

Don’t Forget the Value of Non-Traditional Benefits

Non-traditional benefits can play a vital role in setting your business apart. You now know the positive impact that offering employee benefits can have on your business’s recruitment and retention efforts. Before and after adding any offerings, evaluating each benefit’s role and figuring out how your HR team can manage them is important. Adding non-traditional benefits can be an excellent way to round out your company’s benefit plan without overwhelming your HR team.

Here are a few examples:

• A fitness company provides employees with annual wellness retreat vouchers. This perk aligns with the brand’s mission and promotes mental and physical wellbeing, making employees feel valued and rejuvenated.
• At a publishing house, employees receive a monthly book allowance to purchase any book of their choice. This perk encourages continuous learning and personal growth, fostering a culture of curiosity and innovation within the company.
• A beer company enhances the employee experience by offering rideshare vouchers. This thoughtful perk cultivates a strong, cohesive, and safety-conscious community, showing employees their wellbeing is a top priority.

Get Help With Your Employee Benefit Plan Audit

Navigating the complexities of employee benefit plan audits, understanding the diverse benefits you can offer, and determining if an audit benefits your business may seem daunting. However, with careful planning and consideration, you can confirm if your benefit plans are compliant and valuable to your employees.

If you have any questions or need further guidance on these topics, contacting an HR professional at Paychex can provide you with the expertise and support you need to make informed decisions for your company and employees.