Avoiding Pitfalls in Audits of Employee Benefit Plans

Avoiding Pitfalls in Audits of Employee Benefit Plans

Diane Walker, CPAPartner

[email protected]

February 14, 2012

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Overview

Audit of financial statements under ERISA

Common errors detected in plan audits How to prevent them How to detect them promptly when they do

occur

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Financial Statement Audit

Generally required for large plans (more than 100 participants) subject to ERISA

Auditor issues an opinion as to whether the financial statements are fairly stated, in all material respects, in accordance with stated accounting principles (typically US GAAP)

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Limited Scope vs Full Scope audit Limited scope – investments certified by trustee

or custodian and excluded from audit procedures

Financial Statement Audit

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Includes some testing of: Compliance with plan document and

ERISA Transactions and accounts at

participant level But, not a compliance audit

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Financial Statement Audit

Understand the information required Request auditor client assistance listing early Allocate list to those responsible

HR, Accounting, Investments, Outsourced provider(s)

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Assign a “point person” to coordinateEnsure auditors have access to online

systems of all key service providers (auditor’s packages)

Self assess for common audit pitfalls

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Common Audit Pitfalls

Result in adjustments to financial statements, delays and increased audit costs

Corrections need to be made (DOL\IRS)Additional contributions made to

participant accounts, and/or distributionsProblems can occur in small plans as well

– more likely to go undetected

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Common Audit Pitfalls

Plan Document UpdatesEligibilityContributions – CalculationContributions – RemittanceMonitoring of Service ProvidersUnderstanding of Plan InvestmentsOther

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Plan Document Updates

Frequent regulatory developments

Changes in operations of plan sponsor Mergers & acquisitions

Changes in service providers

Understand who is responsible for Individually designed plan vs prototype plan

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Eligibility

Certain employee groups could be excluded in operation, but not under the plan document

Employees not provided timely notification when eligibility is reached

Plan sponsor and TPA may not interpret plan provisions the same way (e.g., year of service)

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Eligibility

Review plan document to ensure HR personnel and TPA understand the terms of eligibility and are properly applying

Require employees to complete enrollment form even if they do not want to contribute (opting out) Provides documentation that employees were

given the opportunity to enroll on a timely basis

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Eligibility

Correction procedure when eligible employees improperly excluded: Plan sponsor must make a contribution to the

plan equal to 50% of average deferral rate (ADP test) times eligible compensation, plus associated employer match and lost earnings.

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Contributions – Calculation

Incorrect definition of eligible compensation used in calculations bonuses and vacation pay included or excluded?

Math errors or miscommunication with payroll vendor Correct subtotals accumulated?

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Contributions – Calculation

Review the plan document’s definition and ensure it matches with the plan sponsor’s intent, and current practice for calculating compensation

For prototype plans, ensure you have checked the correct box in selecting the definition

Ensure payroll service provider has coded wages to match the plan’s provisions

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Contributions - Remittance

Regulation requires remittal to be “as soon as can be reasonably segregated from plan sponsor’s assets,” but no later than the 15th business day of the month following the month when contributions are received by the employer, or would be otherwise paid to the participant in cash

Applies to participant contributions and loan repayments

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Contributions - Remittance

Rule frequently misunderstood – 15th business day is not a safe harbor

DOL wants to see it done as soon as possible

January 2010 - DOL announced a “safe harbor” regulation for small plans

Fewer than 100 participants, deemed to have made a timely deposit if made within 7 business days

Offers no protection for large plans One item of note - example for large plans

changed from a scenario with 10 days to 3 days

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Contributions - Remittance

Set a policy and follow it without fail DOL is looking for consistency and timeliness Money belongs to the participants as soon as

pay day – delays in remitting to the plan are considered a loan to the plan sponsor from plan assets

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Remittals deemed late = prohibited transactions Lost earnings subject to 15% excise tax Lost earnings for period from “administratively feasible”

date through date actually remitted

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Contributions - Remittance

DOL Voluntary Fiduciary Correction Program (VFCP) available if plan sponsor wants to receive a “no action” letter from the DOL Close to 90% of the applications made under

the VFCP since 2000 relate to delinquent participant contributions

Useful information, including FAQ, is available on the DOL website http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html

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Monitoring of Service Providers

Hiring and monitoring outsourced service providers is a fiduciary responsibility under ERISA

Useful guidance on DOL website for considerations when hiring a service provider

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Monitoring of Service Providers

Understand plan sponsor’s responsibilities for internal controls

Service providers generally provide a report on the design and operating effectiveness of their internal controls (SAS 70 or SOC 1)

Testing performed by an auditor hired by the service provider

Tool to assist plan auditors Plan sponsor should review report for significant issues

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Monitoring of Service Providers

“User controls” in SAS 70s\SOC 1s outline expectations for the plan sponsor to ensure no gaps in internal control

Typical responsibilities include: Reviewing reports of service providers for

completeness and accuracy Comparing reports to plan sponsor’s own records

Contribution remittances, distributions, loans Access to service provider systems (authorized

users)

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Monitoring of Service Providers

Actions to ensure they are performing the agreed-upon services (DOL website):

Reviewing the service providers’ performance; Reading any reports they provide; Checking actual fees charged; Asking about policies and practices (such as trading,

investment turnover, and proxy voting); and Following up on participant complaints.

Plan sponsor cannot completely delegate fiduciary responsibility to service providers

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Understanding Plan Investments

Increasingly complex investments in benefit plans – beyond mutual funds and standard pooled separate accounts Separately managed accounts Stable value products Insurance contracts

More complex valuation and accounting considerations

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Understanding Plan Investments

Word “fund” can be misleading

Involve internal and external resources to make sure all are clear on the nature of the investments, and the information required for Form 5500 and audit reporting

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Other Pitfalls

Failure to use Forfeitures Account needs to go to $0 once per year

Look for SSN 999-99-9999 on vendor reports Use in accordance with plan document

Hardship Withdrawals Participant loan (if available) must be taken first Suspension of salary deferrals (usually 6 months)

following the date of the hardship distribution

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Other Pitfalls

Nondiscrimination tests (ACP/ADP) Ensure complete and accurate population

(employees + compensation amounts) provided to TPA if test outsourced

Perform as soon as possible after year end so any failures can be corrected timely

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Concluding Thoughts

Plan document terms rule – make sure it is current and used as a tool in administering the plan

Perform self-assessments and testing early so any problems can be corrected promptly

Use your resources – hire and work with competent service providers (and monitor their work)

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Additional Resources

DOL– Employee Benefits Security Administration http://www.dol.gov/ebsa/

IRS http://www.irs.gov/ep Includes “fix it” guides for common problems

AICPA Employee Benefit Plan Audit Quality Center http://www.aicpa.org/ebpaqc Includes resources specifically designed for plan

sponsors

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QUESTIONS & ANSWERS

Thank You