When Do Health and Welfare Plans Require an Audit?

A health and welfare plan generally needs an independent audit when it covers 100 or more participants at the start of the plan year and is funded, such as when assets are held in a trust. Large unfunded or fully insured plans may still have a Form 5500 filing requirement, but they are generally exempt from attaching audited financial statements. Two factors work together to trigger the requirement: participant count and how the plan is funded.

That distinction catches many sponsors off guard, largely because they expect the 100-participant headcount alone to settle the question the way it does for retirement plans. Funding status is the deciding factor for welfare plans, and it can change without anyone realizing it.

What Is a Health and Welfare Plan?

A health and welfare plan is any employer-sponsored benefit that falls outside retirement savings. Medical, dental, and vision coverage all qualify, along with life insurance, disability, severance, and accidental death and dismemberment benefits. Under the Employee Retirement Income Security Act (ERISA), these arrangements count as welfare benefit plans, and many carry annual reporting duties.

Counting participants matters more than counting employees. A participant is generally an enrolled employee, a former employee on COBRA, or a former employee eligible to elect COBRA. Spouses and dependents generally do not count, and an employee who is eligible but declines coverage is generally not a participant either. A company with 300 employees might run a dental plan with only 80 enrolled participants, which changes the filing picture entirely.

When a Health and Welfare Plan Audit Is Required

Two factors determine whether a health and welfare plan audit applies. First is size. A plan is considered large once it covers 100 or more participants on the first day of the plan year. Second is funding. A Plan is considered “funded” when it holds assets in a trust, and a funded large plan must attach audited financial statements to its Form 5500.

Unfunded and fully insured plans get a break. Even with more than 100 participants, they file the form but are exempt from the accountant’s report under Department of Labor rules. The 80-120 participant rule commonly associated with retirement plan audit determinations generally should not be relied on to avoid the audit requirement for a funded large welfare plan.

Why Health and Welfare Audits Catch Sponsors Off Guard

Sponsors tend to watch their 401(k) audit obligations closely and assume health benefits follow the same playbook. They do not. A common surprise involves how employee contributions flow. Amounts withheld from paychecks are technically a plan asset, and if those dollars are placed in a separate trust rather than applied directly to premiums, the plan can become funded without anyone intending it. Section 125 cafeteria plan contributions receive special treatment under DOL Technical Release 92-01, which is another wrinkle that surprises HR and finance teams.

The result is a late scramble. A plan crosses into funded, large-plan territory, the Form 5500 deadline approaches, and the sponsor suddenly needs an EBP audit with no time built in for it.

How to Prepare for a Health and Welfare Plan Audit

A little upfront work removes most of the stress. Start early by confirming the participant count, reviewing the plan’s funding structure, and gathering documents an auditor will need.

Confirm Your Participant Count and Plan Structure

Pull an accurate participant count as of the first day of the plan year, using the ERISA definition rather than a raw headcount. Confirm how many separate plans you sponsor, since a wrap document can combine several benefits into a single filing.

Determine Whether Your Plan Is Funded or Unfunded

Trace where the money goes. Benefits paid from general assets or insurance premiums point to unfunded status. Contributions parked in a trust point to funded status and a likely audit. When the answer is murky, bring in ERISA counsel or an experienced advisor before the deadline arrives.

Gather Plan Documents and Financial Records

Assemble plan documents, the summary plan description, trust statements, and carrier Schedule A data ahead of fieldwork. Our guide on key documents a plan sponsor should maintain can help you build that file.

How Insero Supports Health and Welfare Plan Audits

Few things derail a benefits team faster than a surprise audit deadline, and that’s where Insero steps in. We deliver employee benefit plan audit services built around early planning, secure data portals, and responsive communication that keeps last-minute requests off your plate. Our experienced team audits more than 150 benefit plans nationwide, spanning defined contribution, defined benefit, and health and welfare plans, and we rank among the top 1% of firms based on plan assets audited. A dedicated partner leads every engagement, so you always know who to call.

If a health and welfare plan audit is on your horizon, schedule an appointment with us, and we can map out the timeline together.

Resources:

• www.irs.gov/retirement-plans/form-5500-corner
• www.dol.gov/general/topic/retirement/erisa
• www.dol.gov/general/topic/health-plans/cobra
• www.irs.gov/government-entities/federal-state-local-governments/faqs-for-government-entities-regarding-cafeteria-plans
• www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/92-01