Seven Critical Questions About Initial Audits for Employee Benefit Plans
Plan sponsors and HR teams may be caught off guard to learn they are required to file an initial mandatory Independent Qualified Public Accountant (IQPA) financial statement audit with their employee benefit plan’s annual Form 5500. That’s because plan sponsors do not receive a formal notice that an audit is required, and the rules, particularly those related to participant counts and plan changes, can be overlooked amid competing priorities. For example, a merger, acquisition, divestiture, or even rapid growth can quietly shift a retirement plan into initial audit territory before plan sponsors fully understand the implications.
Through answers to common questions, this article explains what typically triggers an initial employee benefit plan IQPA financial statement audit, what auditors expect to review, and how organizations can prepare effectively. Understanding these requirements before completing a business transaction, adding participants to the plan, or nearing key participant thresholds can significantly improve how an organization manages its initial audit. Just as important, this article positions the initial audit not merely as a one-time hurdle, but as an opportunity for plan sponsors to strengthen plan administration and compliance.
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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.
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Participant count is the most common reason an initial IQPA financial statement audit is required. Whether a plan is newly established or has provided benefits for decades, an audit is required once the plan meets the applicable participant-count threshold.
Sometimes an organization’s workforce increases gradually through hiring or more quickly due to business changes such as expanded eligibility or the addition of new employee groups. In any event, 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 100 or more 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 an organization filed as a small plan with 85 participants one year and then grew to 110 participants over the next plan year, it may elect to file as a small plan for that year (i.e., an IQPA financial statement audit would not be required).
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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.
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Yes, 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. Employee benefit plan auditors test transactions, review plan operations, and assess whether the plan is being administered in accordance with its governing documents.
What distinguishes an initial audit from subsequent audits is the added focus on opening balances and historical activity. In the first year a plan is subject to 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.
In addition, initial audits can potentially reveal longstanding operational issues, such as inconsistencies in compensation definitions or the calculation of deferrals. Identifying these issues also creates an opportunity for early correction.
Once the initial IQPA financial statement 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. In short, an initial IQPA financial statement audit involves everything an on-going standard financial statement audit of the plan does, plus a deeper look at where the plan is starting. While that added scrutiny can make the first year more demanding, it also lays the groundwork for smoother audits and stronger plan governance in the years ahead.
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Yes, an initial audit can positively affect the plan. It can provide a new view of how the plan has been operating; for some plan sponsors, this may be the first time such an in-depth review has been performed.
During the initial IQPA financial statement audit, auditors will examine the plan’s financial data, including:
Contributions
Distributions
Participant loans
Participant data, including opening balances
This data becomes particularly important when a plan has recently merged, been spun off, or exceeded the participant threshold. The level of scrutiny used in an initial audit may uncover issues that have gone undetected for years. In practice, most initial audits surface some gaps or inconsistencies, particularly in areas like eligibility, compensation definitions, or deferral calculations.
How can identifying issues result in a positive outcome? Addressing problems early can significantly reduce long-term risk. With the findings from an initial audit, plan sponsors can correct operational failures and take steps to avoid future errors. In fact, regulators offer programs that help plan sponsors self-correct certain issues.
An initial IQPA financial statement audit can help organizations improve in several critical areas, including:
Stronger cross-functional coordination leading to overall improvement in plan governance: An initial audit requires collaboration. HR, benefits, and finance teams must work together to gather data, respond to auditor requests, and evaluate plan processes and controls. This may be the first time these groups have focused on plan governance and may result in clearer roles, better documentation, and more consistent oversight going forward.
Ongoing identification and correction of plan errors: An initial audit can identify errors or inconsistencies that plan sponsors can then address, which can benefit participants and reduce compliance risk. The audit also helps organizations understand the types of errors and operational issues they should monitor on an ongoing basis, allowing them to develop more robust processes and controls in these areas.
Though mandated by law, an initial IQPA financial statement audit can help improve the overall health of the plan while positioning the company to better meet its fiduciary responsibilities.
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Plan sponsors should prepare for the initial audit before any triggering event occurs. By taking the following steps, plan sponsors can be ready when or if an initial IQPA financial statement audit is required by:
Periodically testing eligibility, enrollments, and all financials against plan terms.
Improving data quality and reconciliations.
Strengthening internal controls and reviewing governance protocols.
Early in the plan year, plan sponsors should be aware of changes to the plan that could result in an initial audit. Because there is no formal notification, it’s important to actively evaluate the following well before Form 5500 deadlines fall:
The number of participants with account balances at the start of the plan year.
Any organizational changes tied to an M&A, plan mergers, or workforce expansion.
Any proposed or implemented eligibility updates that may increase participation in the retirement plan.
Once a plan appears to require an initial audit, the plan sponsor’s focus should shift to organization and data readiness. In order to comply with the auditor’s requests and result in accurate, timely filings, plan sponsors can follow these steps:
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.
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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: always keep the possibility of an audit on your radar, especially during times of change. By identifying triggers early and taking a thoughtful, organized approach to preparation, you can reduce risk, improve processes, and set your plan up for smoother audits in the years ahead.
If your organization is nearing the 100-participant mark, preparing for a transaction, or unsure whether your plan now requires an audit, EHTC's Assurance team can help you answer that question well before your Form 5500 deadline. Our long-tenured team performs 401(k) plan audits for closely held businesses and works alongside our transaction advisory and tax professionals, so we understand how a merger, acquisition, or plan consolidation can change your filing requirements.
A short conversation now can help your HR and finance teams avoid surprises when filing season arrives. Reach out to our team with any questions about your benefit plan or audit requirements.
Some content borrowed with permission from BDO USA.
