Employee Benefit Plan Audits: What You Need To Know

Employee benefit programs can 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 can help ensure that plans are compliant, financially sound, and effectively manage 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?

If your company offers a health, retirement, or other benefits plan with 100 or more eligible participants at the start of the plan year, federal law requires an annual benefits plan audit. This process ensures compliance with regulatory standards and helps you manage your plans more effectively.

For 401(k) plans, participants are now counted based on those 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 plays a critical role in protecting the financial integrity of your employee benefit plan. It can help ensure that the funds you promise for retirement, health, and other benefits are exactly where they need to be when your employees need them most. These audits ensure that funds like 401(k) contributions and health insurance premiums go directly where they’re intended and are not diverted elsewhere.

Even if you're not legally required to conduct an audit, there are still plenty of compelling reasons to do so.

Regular employee benefit plan (EBP) audits can help you:

• Reduce financial abuse and fraud
• Streamline employee benefits offerings
• Save money in the long run
• Support your employees’ physical, emotional, mental, and financial wellbeing

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. Companies may choose to work with accountants who are members of the American Institute of Certified Public Accountants (AICPA) as their professional code of conduct may reassure you in their qualifications.

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 required form 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.

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 (such as an insurance carrier or similar government-regulated agency). 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.
• During a full-scope audit, the auditor examines all plan areas, 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 an 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
• Participant data and loans
• Allocation of participants, if applicable
• Plan obligations and liabilities

The auditor’s role is to help plan sponsors meet their fiduciary responsibilities to participants. They identify operational errors, assess fraud risks, and uncover weaknesses in internal controls.

Are You Reporting Benefits Correctly?

Some benefits are subject to payroll taxes, while others are exempt.

Employers should be sure to accurately classify benefits 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?

Certain benefits like cash bonuses, non-accountable reimbursements, or personal use of a company vehicle are considered taxable compensation (called "supplemental wages") and are subject to withholding.

For supplemental wages less than $1 million, there is a choice about withholding:

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

For supplemental wages exceeding $1 million, a mandatory 37% withholding rate applies.

How Do I Know What Benefits To Offer to Employees?

Regardless of the benefits package you offer, it should fit both your budget and your employees' needs.

Offering valuable benefits is a key strategy for attracting and keeping top talent in today’s competitive job market. To stay ahead, it’s essential to regularly review your employee benefits package. This ensures your offerings not only motivate and engage your team but also remain cost-effective for your business.

Am I Required To Offer Benefits to Employees?

Federal law requires some businesses to offer certain benefits to their full-time employees and their eligible dependents, including full-time equivalents 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. Employers are unable to contribute to the plans, 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 employers 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 support their employees’ well-being and stay competitive. Here are some of the benefits you may want to consider offering:

• Health benefits: Providing health coverage can make your business more competitive, even if you're not required to under federal law.
  • Offer health savings accounts combined with high-deductible health plans or qualified small employer health reimbursement arrangements (QSEHRAs).
  • Consider flexible spending accounts, which don’t require employer contributions.
• Retirement savings: Help your team plan for a secure future without big expenses for your business.
  • Offer 401(k) plans with optional employer contributions.
  • Take advantage of tax credits to cover administrative costs and inform employees about their retirement contribution options.
• Training and development: Investing in your employees’ growth benefits both them and your business.
  • Fund on-the-job training or external courses with parameters to make these arrangements tax-free for employees.
  • Use a learning management system to provide accessible online courses to your workforce.
• Employee Stock Ownership Plans (ESOP): Offer stock ownership opportunities through and give employees a vested interest in your company’s success.
• Paid family and medical leave: Demonstrate care and support for your employees’ work-life balance by providing paid leave.
  • While not federally required, paid family and medical leave boosts morale and may help you qualify for tax credits.
  • Check state laws to ensure compliance where paid leave is mandated.
• No-cost benefits: Support work-life balance without associated costs.
  • Consider offering flex time, remote work options, or alternative work arrangements to enhance employee satisfaction.

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

Even if it’s not legally required, regularly reviewing your benefits package is always a smart move. Striking the right balance between meeting employees’ needs and staying on budget is essential.

Here are 4 signs it’s time to rethink 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 aren’t offering enough benefits or don’t offer any at all. If prospective hires are hesitant, it’s time 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, ask departing employees if benefits influenced their decision. 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 might be telling you that your benefits package needs a refresh. Benefits can help to provide peace of mind by helping your team save for retirement and cover medical expenses. If worries like these are seeping into the workplace, it’s time to reevaluate what you’re offering.

Morale can also take a hit when employees feel undervalued. If your employees see benefits as an essential part of their compensation, it’s worth exploring whether your current package aligns with their expectations and your business goals.

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.

Should I Make Changes to My Benefit Plan Offerings?

Before adding new benefits to your offerings, it’s critical to evaluate how each one complements your existing package and whether your HR team can handle the extra administrative work.

Many small businesses work within tight budgets, offering just one or two benefits to attract and retain talented employees. If you’re thinking about expanding your package or have already made changes, make sure to assess each benefit’s impact. Start by gathering employee feedback, reviewing costs, and analyzing 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 define 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. Offering creative perks shows employees that you care about their well-being while boosting your recruitment and retention efforts.

Here are a few standout examples of companies getting it right:

• Annual wellness retreats: A fitness company gives employees vouchers for wellness retreats, promoting mental and physical health. This aligns with their brand mission and leaves employees feeling valued and refreshed.
• Monthly book allowance: A publishing house provides a book budget, helping employees foster personal growth and a culture of continuous learning.
• Rideshare perks: A beer company offers rideshare vouchers, prioritizing safety, convenience, and a sense of community for its team.

Evaluating your employee benefits isn’t just about staying compliant; it’s about creating a caring, engaging workplace.

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 your business needs an audit may seem daunting. However, with careful planning and consideration, you can feel assured in your benefit plans compliance and value.

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.