Think of it as a structured check on whether money is flowing where it should (employee and employer contributions, premiums, claims funding), whether plan terms are being followed, and whether recordkeeping and reporting are accurate.
Which Businesses Are Required To Perform Benefit Plan Audits?
For many benefit plans, federal rules generally require an annual audit when the plan has 100 or more participants at the start of the plan year (often called the “large plan” threshold for Form 5500 purposes).
Important update for 401(k) plans: how “participants” are counted
For defined contribution retirement plans (including many 401(k) plans), participant counting shifted to focus on those with account balances, rather than everyone who is eligible. This change applies for plan years beginning on or after January 1, 2023, and can meaningfully affect whether your plan crosses the audit threshold.
Because the details can be nuanced (and exceptions can exist), it’s smart to confirm your status with your plan advisor and an experienced auditor—especially if you’re near the threshold.
Why Do Benefit Plan Audits Matter (Even If You’re Not Required)?
An audit plays a key role in protecting the financial integrity of your employee benefit plan. It helps confirm that the funds you promise for retirement, health, and other benefits are exactly where they should be—when employees need them most.
Even when not required, regular audits can help you:
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Reduce the risk of financial abuse and fraud
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Identify operational errors before they become corrections, penalties, or employee complaints
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Streamline benefits administration and improve internal controls
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Save money long term by uncovering inefficiencies
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Support employees’ physical, emotional, mental, and financial wellbeing
How Often Do You Need To Perform an Audit?
If your plan is subject to the audit requirement, the audit is generally annual and aligns with your plan year and Form 5500 filing cycle.
It’s also important to remember: some benefits require specific employee notices that have their own timing expectations, and those notice processes often become part of what auditors and advisors will look at. Two common examples:
Safe Harbor 401(k) notice: generally must be distributed 30 to 90 days before the plan year, outlining participant rights, obligations, and deferral election details.
QSEHRA notice: eligible employees generally must receive notice at least 90 days before the beginning of the year, including permitted benefit and coverage requirements.
Who Performs the Audit?
Businesses work with an independent qualified public accountant (IQPA) to conduct the audit. Selecting an auditor isn’t just a checkbox, your plan administrator has a fiduciary responsibility to hire an auditor who is qualified and independent. The U.S. Department of Labor specifically emphasizes hiring an independent qualified public accountant when an audit is required.
Many employers also prefer auditors who follow recognized professional standards and have deep experience with employee benefit plans (EBP audits are specialized).
What Happens During an EBP Audit?
The auditor’s job is to evaluate whether the plan is being operated and reported properly under ERISA and related rules, and whether the plan’s financial statements are materially accurate. The results are then included with the plan’s Form 5500 filing. DOL+1
Audits follow specific Department of Labor standards and typically fall into one of two types: full-scope or limited-scope.
Full-Scope vs. Limited-Scope: What’s the Difference?
Limited-scope audit: ERISA may allow a limited-scope audit when plan investments are held by certain regulated institutions (like a bank or trust company) that provide certified investment information. In this case, the auditor generally does not audit the certified investment information and instead focuses on other plan areas and internal controls.
Full-scope audit: the auditor examines all plan areas, including operations, compliance, and investments, and provides a full opinion included with the Form 5500 filing.
Your plan structure and custody arrangements typically drive which approach is available.
What Information Is Reviewed During an Audit?
A third-party CPA/auditor may review records such as:
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Benefit payments
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Employer and employee contributions
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Plan investments and investment income (in a full-scope audit)
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Administrative expenses
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Participant data and loans
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Allocations (if applicable)
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Plan obligations and liabilities
More broadly, auditors help plan sponsors meet fiduciary responsibilities by identifying operational errors, assessing fraud risk, and uncovering weaknesses in internal controls.
Payroll and Tax Compliance: Are You Reporting Benefits Correctly?
A surprisingly common audit pain point is tax treatment and payroll reporting. Some benefits are subject to payroll taxes; others are excluded. Employers need to be accurate when reporting benefits on:
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Employees’ Form W-2
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Quarterly employer tax returns (Form 941)
The IRS specifically publishes guidance on the employment-tax treatment of fringe benefits in Publication 15-B.
Proper withholding practices for “supplemental wages”
Certain benefits and payments—like cash bonuses, non-accountable reimbursements, or personal use of a company vehicle—may be treated as taxable compensation (“supplemental wages”) and require appropriate withholding.
Current IRS guidance explains that supplemental wages up to $1 million may generally be withheld either by combining with regular wages or using a flat 22% withholding method, while supplemental wages exceeding $1 million trigger a mandatory higher rate (currently 37% on the excess).
Do You Have the Right Benefits—and Are You Required To Offer Them?
A benefits audit often prompts a bigger question: are we offering the right package for our workforce and our budget?
Federal law requires some employers to offer certain benefits (for example, the ACA employer mandate for applicable large employers), but it generally does not require “fringe benefits” beyond those mandates. At the same time, states are increasingly creating requirements that affect benefit strategies—particularly around retirement programs and paid leave categories.
Employers should keep an eye on state rules related to:
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State-facilitated retirement programs (for employers without a qualified plan)
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Paid family and medical leave programs
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Paid sick leave requirements
Should You Audit Your Benefits Package if You’re Not Required?
Even if you don’t cross the audit threshold, regular review is a smart operational habit—especially as benefits costs rise and employee expectations shift.
Four signs it’s time to rethink your benefits strategy:
- Recruiting is getting harder. Candidates evaluate total compensation, and benefits are a core part of that value story.
- Turnover is rising. Benefits cost, access, and perceived value can heavily influence retention.
- Employee morale is lagging. When financial or health concerns spill into the workplace, benefits can either relieve stress—or amplify it.
- Your industry standard has changed. Competitive benefits evolve quickly; what was “nice to have” can become baseline.
Making Changes Without Creating Admin Chaos
Before adding new benefits, evaluate how each offering fits your current package—and whether your HR team can support the extra administration. The most effective approach is to combine employee feedback with usage and cost data.
Practical steps that improve audit readiness and benefits ROI
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Survey employees to confirm what’s valued and what’s underused
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Review costs per employee and participation rates by benefit
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Validate eligibility rules and ensure enrollment files match payroll
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Document processes for contributions, remittance timing, and corrections
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Consider an integrated system that connects payroll and benefits to reduce errors and make year-end reporting cleaner
An integrated payroll + benefits workflow can reduce administrative time, improve reporting accuracy, support fiduciary obligations, and make audit data collection far less painful.
Don’t Overlook Non-Traditional Benefits
Non-traditional benefits can help differentiate your workplace and strengthen retention without always adding major cost. Examples include flexible work arrangements, remote-work support, learning stipends, or small lifestyle perks that reinforce your culture. The key is ensuring these benefits are well-communicated, consistently administered, and aligned with what your workforce actually uses.
Get Help With Your Employee Benefit Plan Audit
Employee benefit plan audits can feel intimidating—especially if you’re approaching the 100-participant threshold, navigating the newer 401(k) counting rules, or trying to tighten payroll/benefits compliance. The right support makes a big difference.
Taylor Benefits Insurance Agency helps employers evaluate benefit plan administration, strengthen compliance readiness, and build a benefits package that’s competitive, cost-aware, and easier to manage. If you want, share your plan type (401(k), medical, both), participant count, and plan year-end, and I’ll outline a simple audit-prep checklist tailored to your situation.
