Key Takeaways:
- Employee benefit plans may require an initial independent qualified public accountant (IQPA) financial statement audit when participant counts or business changes trigger regulatory requirements.
- Initial audits typically involve additional procedures and documentation to validate opening balances, historical activity, and plan records.
- Monitoring participant counts, coordinating across HR and finance, and preparing documentation early can help you manage audit requirements and identify operational issues.
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Plan sponsors and human resources (HR) teams may be caught off guard when they learn they must include an initial independent qualified public accountant (IQPA) financial statement audit with their employee benefit plan’s annual Form 5500 filing. That’s because plan sponsors don’t receive a formal notice when an audit becomes required, and the rules, particularly those related to participant counts and plan changes, can be overlooked amid competing priorities.
A merger, acquisition, divestiture, or period of rapid growth can quietly trigger an initial audit requirement before plan sponsors fully understand the implications. Understanding when an initial audit is required, what auditors review, and how to prepare can help you manage the process more effectively.
Q&A: What Plan Sponsors Need to Know About Initial Audits
The following Q&A addresses six common questions about initial employee benefit plan audits and explains how proactive planning can help your organization meet its requirements.
1. Which plan sponsors must file an annual employee benefit plan audit with their Form 5500?
The sponsor of an employee benefit plan that crosses applicable regulatory thresholds must include an IQPA financial statement audit with its annual Form 5500. A plan sponsor that historically filed a short-form Form 5500 may not recognize the need for an audit until late in the year, especially if the organization has undergone business changes such as plan mergers, rapid growth, or expanded workforce eligibility.
For that reason, it’s important to monitor plan status throughout the year and proactively evaluate whether the plan has become subject to an initial audit requirement.
The IQPA financial statement audit of the plan is entirely separate from the employer’s corporate financial statement audit. Although the IQPA audit includes some compliance questions and testing, it is not a compliance audit of the plan.
2. What is the participant count threshold, and why does it matter?
Participant count is a common reason an initial IQPA financial statement audit becomes necessary. Whether your plan is newly established or has provided benefits for decades, an audit may be required once it meets the applicable participant-count threshold.
Your organization’s workforce may increase gradually through hiring or more quickly because of business changes, such as expanded eligibility or the addition of new employee groups. The following criteria generally apply:
- Plans with fewer than 100 participants on the first day of the plan year are considered small plans and typically are not required to file an audit.
- Plans with more than 100 participants on the first day of the plan year are large plans that generally are required to file an annual audit.
- As of 2023, for defined contribution plans, only participants with an account balance at the beginning of the plan year are included in the headcount.
There are some exceptions to this general rule. Under the 80-120 participant rule, plans with between 80 and 120 participants may file in the same category as the previous year. For example, if your organization filed as a small plan with 85 participants one year and then grew to 110 participants the following year, it may elect to continue filing as a small plan for that year without an IQPA financial statement audit.
3. What can trigger an initial employee benefit plan audit?
Workforce and business changes can affect a plan’s participant count and, in turn, its audit requirement. It may be easy to overlook an increase or decrease in workforce, which often occurs gradually throughout the plan year for several reasons, including:
- Hiring
- Terminations and layoffs
- Expanded eligibility for benefits
- Bringing new employee groups into the plan
Business transactions are another leading trigger of an initial IQPA audit, so the need for an initial audit can sneak up on plan sponsors when attention is focused on other priorities. Plan sponsors should closely monitor the plan during events such as:
- Mergers and acquisitions (M&A): Retirement plans may be terminated, merged, operated side-by-side with the buyer’s plan or accepted by the buyer, resulting in rapid changes to participant counts.
- Divestitures and spin-offs: Separating a business unit may require establishing a new plan or restructuring an existing one.
- Plan mergers or consolidations: Rolling multiple plans into a single plan can push the combined participant count over the audit threshold and create added recordkeeping complexity.
- Expansion of plan eligibility: Adding new classes of employees such as part-time or previously excluded groups can significantly increase participation.
- Rapid workforce growth: Hiring following an expansion or restructuring can move a plan past the audit threshold earlier than anticipated.
- Establishing a new plan: New plans may grow quickly and also reach audit thresholds sooner than expected.
Responsibility for monitoring changes may be dispersed across HR, benefits, and finance teams. For example, HR may track changes in eligibility or participant counts without realizing they may have triggered an IQPA audit requirement, while finance teams may not be closely monitoring plan-level thresholds. Without coordination, important Form 5500 audit filings can be missed.
4. Is an initial audit different than subsequent audits?
Initial IQPA financial statement audits are similar in scope to annual audits, but typically involve additional procedures, greater complexity, and more plan sponsor involvement. Both initial and subsequent audits examine the same core elements of the plan, including contributions, distributions, investments, and participant data. Auditors test transactions, review plan operations, and assess whether the plan is administered in accordance with its governing documents.
The main difference is the added focus on opening balances and historical activity. During the first year a plan is subject to an audit, auditors must validate the accuracy of:
- Participant account balances coming into the audit year,
- Historical investment data and plan assets, and
- Balances transferred through plan mergers, spin-offs, or consolidations.
This is particularly important for plans affected by corporate transactions, where assets and participant data may have been moved between plans or recordkeepers. Auditors need to confirm that the data entering the audit period is complete and accurate, which generally is not revisited in the same way in subsequent years.
As a result, an initial audit often requires more time from plan sponsors because gathering historical data, reconciling records, and responding to the auditor’s document requests typically requires additional effort.
Initial audits can also reveal longstanding operational issues, such as inconsistencies in compensation definitions or deferral calculations. Identifying these issues creates an opportunity to address them early.
Once the initial audit is complete, future audits may become more streamlined and predictable. Processes are established, documentation is easier to access, and plan sponsors have a clearer understanding of auditor expectations. Although the first year can be more demanding, it also lays the groundwork for smoother audits and stronger plan governance in subsequent years.
5. Can an initial audit have positive effects on the plan?
Yes. More than another compliance requirement, an initial audit can provide a new perspective on how your plan has been operating. For some plan sponsors, it may be the first time the plan has undergone such an in-depth review.
During an initial IQPA financial statement audit, auditors examine the plan’s financial data, including:
- Contributions
- Distributions
- Participant loans
- Participant data, including opening balances
This review is particularly important when a plan has recently merged, been spun off, or exceeded the participant threshold. The scrutiny involved in an initial audit may uncover issues that have gone undetected for years, including gaps or inconsistencies in eligibility, compensation definitions, or deferral calculations.
Addressing problems early can reduce ongoing compliance risk. With the findings from an initial audit, plan sponsors can correct operational failures and take steps to prevent future errors. Regulators also offer programs that help plan sponsors to self-correct certain issues.
An initial audit can support improvements in several areas:
- Better coordination and plan governance: An initial audit requires HR, benefits, and finance teams to work together to gather data, respond to auditor requests, and evaluate plan processes and controls. This collaboration can lead to clearer responsibilities, better documentation, and more consistent oversight.
- Ongoing identification and correction of plan errors: Audit findings can help plan sponsors identify and address errors that affect participants or create compliance risk. Understanding the types of errors and operational issues that arise also helps organizations develop better processes and controls.
Although an initial IQPA financial statement audit is a regulatory requirement, it can also improve plan administration and support your organization’s fiduciary responsibilities.
6. How should plan sponsors prepare for an initial audit?
Your organization should prepare for a potential initial audit before a triggering event occurs. Taking proactive steps can help you respond efficiently when an audit becomes necessary.
Start by establishing practices that support ongoing plan readiness:
- Maintain complete and accurate documentation
- Periodically test eligibility, enrollments, and all financials against plan terms
- Improve data quality and reconciliations
- Strengthen internal controls and reviewing governance protocols
Early in each plan year, evaluate changes that could trigger an initial audit well before Form 5500 filing deadlines approach. Pay particular attention to:
- The number of participants with account balances at the beginning of the plan year
- Organizational changes involving M&A, plan mergers, or workforce expansion
- Proposed or implemented eligibility updates that could increase retirement plan participation
Once your plan appears to require an initial audit, shift your focus to organization and data readiness. To support an accurate, timely filing, you should:
- Start early and confirm audit requirements in advance
- Organize documentation before auditor requests arrive
- Establish clear roles across HR, finance, and external partners
- Stay engaged and responsive throughout the audit process
Prepare Your Organization for an Initial Employee Benefit Plan Audit
For many organizations, an initial plan IQPA financial statement Form 5500 audit is not a question of if, but when. Growth, workforce changes, and corporate transactions can quickly shift a plan into audit territory — and often warning signs are missed until filing deadlines are approaching. Strategic planning is critical to timely and well-managed compliance.
For plan sponsors, the key takeaway is simple: keep the possibility of an audit on your radar at all times, especially during times of change. By identifying triggers early and taking a thoughtful, organized approach to preparation, you can move from reactive to proactive — reducing risk, improving processes, and setting your plan up for smoother audits in the years ahead.
How MGO Can Help With Employee Benefit Plan Audits
Determining whether your employee benefit plan requires an initial audit and preparing the necessary documentation can be challenging, especially when participant counts are changing or your organization is navigating a business transaction. MGO provides employee benefit plan audit services designed to help organizations meet regulatory requirements, support fiduciary responsibilities, and improve transparency.
Our team conducts limited-scope audits under ERISA Section 103(a)(3)(C), full-scope 401(k) audits, and audits of cash balance and traditional defined benefit plans. We work with you to understand your plan’s requirements, evaluate its financial information, and provide actionable insights that can support better plan administration.
Contact us today to discuss your employee benefit plan audit requirements and how MGO can help you prepare for your initial audit.