BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. Employee Benefit Plan Audit Training EBP Fundamentals – Part III Robert Lavenberg Beth Lee Garner Joanne Szupka
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EBP Audit Training – Participant Testing
BDO USA, LLP, a Delaware limited liability partnership, is the U.S.
member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
Employee Benefit Plan Audit TrainingEBP Fundamentals – Part III
• Provides an understanding of ERISA, types of plans, filing requirements, plan documents, basic plan provisions, and resources available
Part II
• Provides an understanding of planning and risk assessment for EBP audits
Part III
• Provides an understanding of participant-level testing
Part IV
• Provides an understanding of general EBP financial statements and procedures associated with concluding an EBP audit
EBP Audit Training – EBP Fundamentals – Part III
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Today’s Instructors
Robert Lavenberg
• National Partner In Charge of EBP Audit Quality
Beth Lee Garner
• Director, Assurance
JoanneSzupka
• Director, Assurance
EBP Audit Training – EBP Fundamentals – Part III
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Agenda
Obtain Audit Evidence (Folder 4)
EBP Audit Issues
Concluding Remarks
EBP Audit Training – EBP Fundamentals – Part III
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Course Objectives
EBP Fundamentals
Part III
Identify how key plan document provisions impact audit testing
procedures
Recognize appropriate audit
procedures applicable for
participant testing
Identify applicable procedure(s) to be
performed in response to errors
identified in participant testing
Recognize examples of appropriate audit
documentation
Obtain Audit Evidence
(Folder 4)
EBP Audit Training – EBP Fundamentals – Part III
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Obtain Audit Evidence (Folder 4)
These areas will be
covered in Part IV
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Obtain Audit Evidence
APT defaults to common EBP audit
procedures (automatically
appear in audits plans of related FSAs or
GAAs)
Customization of audit tests rarely needed
Planned assurance
levels for each FSA assertion are not pre-populated
Customized audit plans
will roll forward in
future years
EBP Audit Training – EBP Fundamentals – Part III
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Cash
EBP Audit Training – EBP Fundamentals – Part III
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Cash
Cash within plan
Cash outside plan
Interest bearing
Non-interest bearing
EBP Audit Training – EBP Fundamentals – Part III
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Cash - Assertions
All cash amounts are recorded and exist
Cash is owned by the plan and is free of restrictions
Cash is properly presented and disclosed in plan financial statements
EBP Audit Training – EBP Fundamentals – Part III
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Cash - WCGWs• Omitted from financial statements since certain cash accounts may not
be included in trust statements
• Not reconciled to plan financial statements and/or prior year balances
may not reconcile to current year
• Not properly accounted for in plan financial statements due to significant
amounts of uncashed checks to participants held outside plan
Cash - Procedures• For material cash balances held by the plan, substantive audit procedures
are normally appropriate
• Inquire of plan management about any omitted balances that may be held
by plan sponsor, trustee or custodian
Uncashed, outstanding benefit checks
held by trustee or custodian (in trustee /
custodian’s assets) ARE plan assets –
obtain listing to see if any are material
EBP Audit Training – EBP Fundamentals – Part III
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Cash - Considerations
• For limited scope audits, cash is
generally covered by the certification
o If not, full-scope procedures may
be necessary
• Show interest-bearing cash as
investment
o FinRec recommendation
o Form 5500 instruction
• Show interest-bearing cash as
investment on Form 5500,
Schedule H, line 4i - Schedule
of Assets Held (At End of Year)
EBP Audit Training – EBP Fundamentals – Part III
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Investments (and Related Income/Loss)
EBP Audit Training – EBP Fundamentals – Part III
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Common EBP Investments
Mutual Funds
Common Stock
Common / Collective
Trusts
Insurance Company Products
Self-Directed Accounts
Bonds
Alternative or Hard-to-Value Investments
Master Trusts
Unitized Stock Funds
Separately Managed Accounts
Omnibus Accounts
Exchange-Traded Funds
Refer to our EBP
Common
Investments
training course
for further
guidance
EBP Audit Training – EBP Fundamentals – Part III
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Audit Scope Considerations
Full Scope
• Audit procedures extend to all financial statement areas
Limited Scope
• Audit procedures extend to all financial statement areas except plan-level investments and related investment earnings, which are covered by an appropriate certification
Audit scope has no impact on ASC 820 disclosures (fair value) or
SOC 1 report reliance
ASC 820 disclosures
and SOC 1 report
considerations are
applicable
regardless whether
full or limited scope
audit procedures
are performed
EBP Audit Training – EBP Fundamentals – Part III
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Limited Scope Audit Exemption
• Plan administrator can direct auditor to not audit plan-level investments,
investment income and investment transactions
• Requirements for the certification
o Certification must be from a qualified entity that holds the assets and
executes the transactions
• “Qualified entity” – this is an entity that is regulated, supervised and
subject to periodic examination by a federal or state agency
o If entity does not appear to be qualified, may have to perform full scope
audit
o Must certify that statements are “complete and accurate”
o Certification may not appropriately extend to all investments - as such,
auditor may have to perform full scope procedures for those investments
• Self-directed investments - are often held by broker-dealer and may not
be covered by qualifying certification
• Notes receivable from participants
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Qualifying Entities
These entities do NOT qualify for exemption (full scope procedures are required)
• Broker-dealers
• Investment companies
• Service bureaus
These entities generally DO qualify for the limited scope exemption
• Banks
• Regulated savings and loans
• Trust companies
• Credit unions
• Insurance companies
EBP Audit Training – EBP Fundamentals – Part III
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Is the certification signed by a
qualifying entity? Need to
understand the relationship to
the plan
Is there any qualifying
language? *
Which of the investments are properly covered
by the limited scope
certification?
Complications Associated With Certifications
* “To the best of our knowledge and belief” is a commonly-used phrase
in certifications - this phrase is generally NOT considered qualifying
language
EBP Audit Training – EBP Fundamentals – Part III
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Excerpt of Limited Scope Disclaimer Audit ReportBasis for Disclaimer of Opinion
As permitted by 29 CFR 2520.103-8 of the Department of Labor’s (DOL) Rules and Regulations for Reporting
and Disclosure under the Employee Retirement Income Security Act of 1974, the plan administrator
instructed us not to perform, and we did not perform, any auditing procedures with respect to the
information summarized in Note X, which was certified by XYZ Trust Company, the trustee of the Plan,
except for comparing such information with the related information included in the financial statements.
We have been informed by the plan administrator that the trustee holds the Plan’s investment assets and
executes investment transactions. The plan administrator has obtained a certification from the trustee as
of December 31, 20XX and 20XX, and for the year ended December 31, 20XX, that the information provided
to the plan administrator by the trustee is complete and accurate.
Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we
have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
Accordingly, we do not express an opinion on these financial statements.
Other Matter
The supplemental schedule, Schedule H, Line 4i - Schedule of Assets (Held at End of Year) as of December
31, 20XX is required by the DOL’s Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974 and is presented for the purpose of additional analysis and is not a
required part of the financial statements. Because of the significance of the matter described in the Basis
for Disclaimer of Opinion paragraph, we do not express an opinion on this supplemental schedule.
EBP Audit Training – EBP Fundamentals – Part III
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Investments - Assertions
Investments and investment transactions
are initiated in accordance with
established investment policies and comply with plan provisions
All investments are recorded and exist
All investments are owned by the plan free of liens,
pledges, and other security interests or, if not, whether security
interests are identified and properly disclosed
All investments are valued as of plan year-
end
Investment principal and income
transactions (including net appreciation) are recorded and properly
valuedWhether plan has any intention of seeking to dispose of or terminate
any investment agreements or
contracts
Derivatives are properly recorded as assets or
liabilities
Information about investments is properly
presented and disclosed
EBP Audit Training – EBP Fundamentals – Part III
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Investments - WCGWs
• Investment information from trust
(custodian) statement does not
reconcile to plan sponsor records (trial
balance), financial statements, or
other recordkeeper reports
• Investment manager reports do not
reconcile to trustee (custodian)
reports
• Investment transactions not recorded
by trustee (custodian) or not recorded
on a timely basis
• Improper authorization of investment
purchase and sale transactions prior to
initiation or not in accordance with
plan provisions or investment policies
• Investments recorded in financial
statements do not exist or are not
owned by the plan
• Incorrect calculation of gains and
losses on sales of investments
• Investment income recorded at
incorrect amount
• Investments not properly recorded at
fair value as of reporting date
• Investment details incorrectly entered
into investment management system
upon purchase
EBP Audit Training – EBP Fundamentals – Part III
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Full Scope Audit
• Confirm assets directly with custodian
• Year-end market value testing
• Investment transaction testing (sales and purchases)
• Investment income (interest, dividends) testing
Limited Scope Audit
• Ensure certification contains appropriate language (no audit procedures are performed on investments)
• Reconcile certified investment information to Plan’s financial statements and Form 5500
Investments - Procedures
Both Full and Limited Scope Audits
• Obtain understanding of plan management’s internal controls and processes for valuation; are ASC levels and classifications appropriate?
• Investigate unusual investment balances or transactions; test investment income allocation to participants
• Determine FS and supplemental schedules comply with DOL requirements
• Determine that plan FS and disclosures comply with GAAP (and with PCAOB, for Form 11-K filings)
EBP Audit Training – EBP Fundamentals – Part III
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Investments – Considerations
• Obtain adequate understanding of
investments owned by plan
• Obtain and read copies of any
investment contracts
• Inquire about changes in investments
held from prior year
• Identify whether there are hard-to-
value investments
o Document understanding of the
valuation of such investments
EBP Audit Training – EBP Fundamentals – Part III
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Example Investments – Full Scope Valuation Testing
EBP Audit Training – EBP Fundamentals – Part III
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Example Investments – Transaction Testing (Purchases)
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Example Investments – Transaction Testing (Sales)
Note: Recalculation is for a unitized fund that cannot be traced
to a published source.
EBP Audit Training – EBP Fundamentals – Part III
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Eligibility and Contributions
EBP Audit Training – EBP Fundamentals – Part III
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Eligibility and Contributions
Eligibility
Payroll
Contributions, Contributions Receivable and Remittances
EBP Audit Training – EBP Fundamentals – Part III
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Eligibility and Contributions - Assertions
Contributions
Amounts received or due appropriately
determined, recorded, and disclosed in plan
financial statements in the proper period
Contributions
Appropriate allowance made for uncollectible
plan contributions receivable
Contributions
Proper authorization and execution of participant
contributions (proper amount, proper period, in accordance with plan
provisions, at participant’s direction)
Eligibility
All active participants properly included in employee eligibility
reports and contribution records
Payroll
Appropriate and accurate participant data, including payroll
information, utilized in determining amounts contributed to plan
Participants who
are contributing
or eligible for
employer
contribution
EBP Audit Training – EBP Fundamentals – Part III
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Eligibility - WCGWs
• Employees not appropriately included or excluded based upon plan provisions
o Employees not provided timely notification of eligibility
o Certain groups excluded in operation, but not under plan terms
o Insufficient tracking of certain classes of employees (leased, part-time,
temporary)
Eligibility - Procedures
• Determine whether employees are eligible in accordance with plan
provisions or collective bargaining agreement
EBP Audit Training – EBP Fundamentals – Part III
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Eligibility - Considerations
• Plan document specifies eligibility
requirements (e.g., who is in / who is out)
o Understand eligibility requirements per
executed plan document provisions (not
SPD)
• Eligibility requirements may vary for different
contribution types to same plan (e.g.,
participant, ER match, ER profit sharing)
• Plan provisions may be more generous than ERISA-mandated minimum standards
o One year of service (or two years in certain plans) or age 21
o Semi-annual entry dates
o Participants allowed to enter plan within six months of satisfying eligibility
o Reliance on summaries of plan provisions instead of plan document
o Transition periods (e.g., changes to payroll system, in house
administrators and third-party service providers)
• Profit sharing contributions or ESOP allocations not properly recorded
• Excess contributions (including failure to pass actual deferral percentage test)
not properly determined or recorded
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Contributions and Contributions Receivable -
Procedures• Apply appropriate analytical
procedures
• Determine whether different
contribution types are in accordance
with plan provision rates or formulas
• Determine whether minimum funding
requirements are met (as required by
ERISA), if applicable
• Compare ER contribution with amount
approved by board of directors, if
applicable
• Test allocation of ER contribution to a
sample of individual participant
accounts
• Determine whether contributions are
invested according to participant
election• Review criteria used by plan in
accruing ER / EE contributions
receivable and determine whether
accruals were recorded appropriately
• Trace subsequent receipt of
contributions receivable to supporting
documentation
• Evaluate reasonableness of plan
allowance for uncollectible amounts
(based on testing of subsequent
collections and review of status of
unpaid amounts)
Consider SOC 1 report and
relevant controls
EBP Audit Training – EBP Fundamentals – Part III
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Contributions and Contributions Receivable -
Considerations• Definition of compensation within plan document is critical
o Understand how compensation is defined before testing begins
• Watch for:
o Multiple definitions (e.g., deferral, match, etc.)
o Inclusion/exclusion of various elements (e.g., bonuses, overtime,
commissions, tips, stock option compensation)
o True-up contributions (e.g., for plans with matching formula based
on percentage of salary deferred, participant may receive an
additional contribution)
o Employee elections made electronically (fund and deferral elections)
• If there is no audit evidence, may need to use participant
confirmations
EBP Audit Training – EBP Fundamentals – Part III
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Contributions and Contributions Receivable –
Considerations (continued)
• Forfeitures may be used to offset
employer contributions
• Contributions are limited per IRC
• Corrective distributions may be
required if employee contributions
exceed contribution limitations
o Record as liability as of plan year-end
and reflect on Statement of Changes
In Net Assets Available For Benefits
(as offset to contributions)
EBP Audit Training – EBP Fundamentals – Part III
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Example Contributions Testing
EBP Audit Training – EBP Fundamentals – Part III
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Example Contributions Testing (continued)
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Example Contributions Testing (continued)
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Rollover Contributions - WCGWs
• Same as Contributions and Contributions Receivable WCGWs
• Review plan document to determine whether rollovers are allowed• Obtain a schedule of rollovers and reconcile to the plan financial statements• Test that participant investment elections have been complied with, as
applicable• Review participant records to determine that rollover amount is properly
reflected (e.g., pre-tax, after-tax, and/or Roth)
Rollover Contributions - Procedures
Rollover Contributions - Considerations
• If the dollar amount of the rollover is below performance materiality, it may
not be subject to sampling, but would ordinarily be tested for regulatory
compliance purposes
EBP Audit Training – EBP Fundamentals – Part III
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Example Rollover Contributions Testing
EBP Audit Training – EBP Fundamentals – Part III
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Contribution Remittances - WCGWs
• Participant contributions and loan repayments are not remitted in a timely
manner
• Participant contributions and loan repayments are not remitted in accordance
with collective bargaining agreements (multiemployer DC plans)
• Obtain a schedule of the timeliness of employee salary deferral contribution
remittances (and loan repayments, if applicable) to plan and, if necessary,
applying additional audit procedures
• Vouch contributions to wire transfer notices or other supporting evidence
Contribution Remittances - Procedures
EBP Audit Training – EBP Fundamentals – Part III
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Contribution Remittances - Considerations• Applies to both employee deferrals and loan
repayments
• ERISA requires plan sponsors to remit salary
deferrals and participant loan repayments to
the plan as of the earliest date on which such
amounts can reasonably be segregated from
employer’s general assets, but no more than
15 business days following end of the month in
which amounts were withheld
o Does NOT mean that plan can remit by 15th business day of following
month (DOL has reiterated this repeatedly)
o 15th business day of following month is NOT A SAFE HARBOR
• DOL’s EBSA Safe Harbor for Small Plans (e.g., generally not subject to audit):
o Provides a safe harbor period for participant contributions to a small pension
or welfare plan and participant loan payments of 7 business days
EBP Audit Training – EBP Fundamentals – Part III
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Contribution Remittances – Considerations
(continued)
• Concept of “outliers”
o Responsibility of plan sponsor to make determination as to whether
outliers are considered late remittances (e.g., prohibited transactions)
o Sponsor may need to obtain assistance of ERISA legal counsel in making
determination
• NEVER the auditor’s responsibility to make this determination
o If sponsor determines to be late, outliers must be disclosed in a footnote
and on a Schedule of Late Remittances to be attached to plan financial
statements and Form 5500
• Possible causes for late remittances
o Employer lacks sufficient understanding of rules and their application
o No reconciliation of contributions between payroll and trust
o Transition periods (e.g., payroll provider changes, key personnel changes)
EBP Audit Training – EBP Fundamentals – Part III
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Example Remittance Testing
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts – Assertions
Allocation of net assets to individual participant accounts is accurate and in accordance with
plan provisions
Participant accounts (including forfeiture account) are complete
and the valuation is accurate
Participant transactions are properly authorized and accurate
(e.g., executed at proper amount, in proper period and in accordance with plan provisions
and at participant direction)
Participant accounts
are generally
applicable to DC
plans only
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts – WCGWs
• Overstated or understated accounts due to investment options or salary
deferral amounts that are not in accordance with participant's stated
elections
• Overstated or understated accounts due to inaccurate allocations of income
or expenses
• Missing contributions or improper allocations due to a lack of reconciliations
or improperly prepared reconciliations
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts – Types of Allocations
Investment income / loss
Administrative expenses
Forfeitures
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts - Allocations
If SOC 1 report addresses testing of internal controls over these areas, consider extent of reliance available
to possibly reduce substantive testing
Factors affecting SOC reliance include: 1) assessed level of control risk for completeness and accuracy relating to transactions processed by
recordkeeper and 2) what is covered by SOC 1 report
Allocation testing is performed for both full and limited scope audits
Plan sponsor or service provider should perform periodic reconciliations (between individual participant balances
and net assets)
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts - Investment Income/Loss
Allocation
Allocation of investment income/loss
Daily change in investment value
Participant-directed plan,
daily valued with fully-automated
systems and recordkeeper SOC
1 report
SOC reliance: analytically review
individual participant statements
No SOC reliance: substantive tests of allocation to
individual participant accounts
Dividend and interest income
Not performed daily
Test allocation to individual participant accounts
EBP Audit Training – EBP Fundamentals – Part III
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Participant Accounts – Investment Income/Loss
Allocation Procedures
• Compare participant earnings with plan earnings for same investment
o Select time period for plan year (e.g., month or quarter) and recalculate
applicable income/loss for participant and fund for that period
o For selected investment, compare investment income/loss percentage
allocated to participant account with overall income/loss percentage allocated
to plan
o For full scope engagements, also compare earnings with an outside pricing
source
Participant Accounts – Investment Income/Loss
Allocation Considerations
• Test 10-20 % of participants selected for contributions testing
EBP Audit Training – EBP Fundamentals – Part III
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Example Participant Accounts – Income Allocation Testing
Comparison of investment return to outside pricing source
generally only performed for Full Scope audits
EBP Audit Training – EBP Fundamentals – Part III
Page 64
Participant Accounts – Expense Allocation
Refer to Administrative Expenses section of
training for discussion regarding allocation of
plan expense testing (along with an example
of testing performed)
EBP Audit Training – EBP Fundamentals – Part III
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Forfeitures – Assertions
Exist andare properly recorded
Properly presented and disclosed in financial
statements (e.g., forfeitures used to offset future employer contributions are shown as a
reduction of employer contribution receivable)
Used only in accordance with the plan document
EBP Audit Training – EBP Fundamentals – Part III
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Forfeitures – WCGWs• Incorrectly allocated to individual participant accounts or investment funds
• Unvested amounts are not calculated correctly
• Not used in accordance with plan document or applicable regulations.
o Misuse may result in plan qualification issues and possible fraudulent financial
reporting
• A partial plan termination (where 20 percent or more of participants are
involuntarily terminated) occurred, but participants were not 100 percent vested
Forfeitures - Procedures• Review plan provisions for forfeitures use (e.g., pay plan expenses, reallocated to
current participants, used to reduce future employer contributions)
• Obtain detail of forfeiture activity for current period, rollforward from BOY to
EOY and trace activity to supporting documentation
• Administrative expenses invoices, intra-plan offsets against contributions, and
summaries of reallocations to remaining participants
EBP Audit Training – EBP Fundamentals – Part III
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Forfeitures - Considerations
• Review results of procedures performed for
contributions and distributions that relate to
testing of forfeiture calculations and
allocations
• Consult plan ERISA counsel or adviser if
forfeitures not used in accordance with plan
document/applicable regulations or in a timely
manner
• Understand composition of forfeitures account (e.g., forfeited amounts, stale
checks)
o Ensure forfeitures account detail is maintained when switching service
providers
• Disposition of forfeitures depends on plan document terms:
• Must be used annually (per IRS Revenue Ruling 80-155, all DC plan funds should
be allocated)
EBP Audit Training – EBP Fundamentals – Part III
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Example Language From Plan Document
Excerpt above is from a plan adoption agreement
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments
Acceptable distributable events
• Severance from employment
• Hardship (if permitted; safe-harbor or facts/circumstances)
• Attainment of age 59½ or age 70½ (required minimum distribution)
• Retirement (usually age 65) or Early Retirement (if allowed)
• Disability or Death
If participant does not provide direction:
• Amounts under $1,000 - no authorization needed to distribute
• Amounts between $1,000 and $5,000 - may be disbursed to an IRA in participant’s name
EBP Audit Training – EBP Fundamentals – Part III
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VestingGenerally, either 3-year cliff or 2-6 year graded
• Plan may provide for a faster vesting schedule
May exclude service years before plan was established and
before age 18
Breaks in service may affect vesting
EBP Audit Training – EBP Fundamentals – Part III
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Break In Service
Distinction between “twelve-month period following the hire date” and “plan year”
Calculation of hours
• Actual hours versus “equivalency” hours
• Incorrect census data provided to service provider
Often source of operational errors
EBP Audit Training – EBP Fundamentals – Part III
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Hardship DistributionsIf permitted by plan, distributions may be available if needed to pay:
• Medical expenses
• Purchase of principal residence
• Repair of damage to principal residence
• Post-secondary education (up to 12 months)
• To prevent eviction
• Funeral expenses
Distribution will be deemed necessary if:
• Immediate and heavy financial need
• All other opportunities (e.g. loans) have been exhausted
• Distribution cannot exceed amount of need (may be grossed up for related taxes)
• Participant cannot defer salary for six months after distribution
EBP Audit Training – EBP Fundamentals – Part III
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Required Mandatory Distributions (RMD)
RMDs must begin no later than April 1 following the later of:
• Calendar year when participant turns 70½
• Calendar year when participant retires
If participant continues as an employee after age 70½ , distributions are not required until actual retirement
• Exception does NOT apply to 5% owners
EBP Audit Training – EBP Fundamentals – Part III
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Qualified Domestic Relation Orders (QDROs)
Any assignment of retirement interests to a spouse, former spouse, child or other dependent must comply with ERISA and
IRC
Retirement interests may be assigned only if judgment, decree, or order constitutes a QDRO
QDROs provide right for alternate payee to receive all or portion of benefits payable to a plan participant when the
participant has a distributable event
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments - Assertions
Benefit payments, hardship withdrawals, in-service withdrawals, and QDROsare made in accordance
with plan provisions
Payments are made authorized and made to or on behalf of eligible
participants and beneficiaries
Transactions are recorded in proper
account, amount, and period
Payments are properly presented and disclosed
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments – WCGWs
• Not properly authorized or in accordance with plan document
provisions
• Not recorded or recorded for incorrect amount
• Amounts per trustee do not agree to recordkeeper
• Calculated incorrectly (non-recognition of loans or vested balance)
• Not in accordance with participant election
• Not recorded in correct participant account
• Made to an ineligible participant or beneficiary
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments – Procedures
• Obtain schedule of all participants and
beneficiaries receiving distributions or
withdrawals for current plan year and
select a sample
• Determine if distribution / withdrawal
was authorized (e.g., participant
withdrawal election form/beneficiary
designation or plan-initiated
distribution event)
• Examine type and amount of payment,
including form of distribution (e.g.,
lump sum, installments, or annuity
contract)
• Examine propriety of:
o Approvals for distributions requiring
plan administrator approval and/or
spousal consent, etc.
o QDRO distributions
o Hardship withdrawals
o Death and disability distributions
o Distributions related to mandatory
cash-out provisions (e.g., RMDs)
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments – Procedures (continued)
• Determine participant or beneficiary
eligibility:
o Does payee meet plan eligibility
requirements?
o Determine / review vested
percentage
• Compare evidence of age,
employment dates, credited service,
earnings (if applicable)
• Recompute payments (including tax
withholding) based on plan provisions
and related documents and relevant
inputs (e.g., option elected, age, and
participant service history)
• Recompute forfeited participant
balances based on plan vesting
provisions and participant service
history
• If plan requires contribution
suspension for period following
hardship distribution, determine if
participant deferrals and company
match (if applicable) were
appropriately suspended
EBP Audit Training – EBP Fundamentals – Part III
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Benefit Payments – Procedures (continued)
• If participants receive payments
directly, test for appropriate receipt
using one or more of the following:
o Confirm payment directly with
selected participants or
beneficiaries
o Compare canceled checks with
cash disbursement records
(including review of endorsement)
o Compare payee or account name
(for electronic funds transfers) to
participant or beneficiary name
o Consider inquiry regarding
participant complaints regarding
distributions (indicator of potential
fraud or errors)
• Determine continued eligibility of
participants or beneficiaries to
receive benefits
o Individuals should be removed
from benefit rolls upon death
o Are payments made over an
unusually long period still
appropriate?
• Investigate long-outstanding benefit
checks (may indicate duplicate
payments or deceased/missing
participants)
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Benefit Payments – Procedures (continued)
• Obtain and test reconciliation of total
benefits paid per disbursement register
to trustee reports and financial
statements
• Compare individual disbursements with
participant account records
• Review plan policy/provisions
regarding recording benefit payments
and determine whether payments were
recordedConsider SOC 1
report and relevant
controls
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Benefit Payments – Considerations
• If purchase of an annuity contract is a payment
option, consider procedures regarding annuity
contracts
• Practical testing tips:
o Know types of benefit payments permitted
and when payments are allowed
o Obtain complete listing of all benefit
payments during plan year showing a) type
of payment and b) participant or beneficiary
to whom it was paid
Refer to Payroll Procedures
for more details
• Review listing for unusual items and perform inquiries
o Each type of benefit payment generally would be tested
o Ensure sponsor appropriately resolves/explains any issues noted from three-
way reconciliation of benefit payments
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Benefit Payments – Considerations (continued)
• Determine if spousal consent was required and, if so, obtain
• Tax Consequences – understand requirements for withholding, if any
• Fraud risk
o Employee may be able to initiate, authorize, and record a transaction or
have custody of assets within benefit payments process such that employee
is able to perpetrate and conceal an error or irregularity, causing duplicate
or fictitious benefit payments or withdrawals to be recorded
o Lack of segregation of duties
o Consider specific facts and circumstances of plan’s control environment
related to financial reporting or misappropriation of assets
o Consider additional audit procedures
• Nature, timing, and extent of procedures should consider level of
assessed risks of material misstatement due to fraud
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Benefit Payments – Common Issues
Failure to properly apply plan vesting
provisions
• Service provider lacks proper participant data needed to calculate service time
• Reliance on summaries of plan provisions instead of plan document
• No consideration of rehire dates
Improper hardship distributions or deferrals not suspended
• Sponsor lacks sufficient understanding of hardship rules and their application
• Lack of controls over plan administration and payroll (e.g., communication to suspend deferrals)
Lack of benefit calculation
documentation for DB plans
• Complex calculations often performed by actuaries
• Lack of records maintained by plan sponsor
• A change in actuary where the calculation was performed by predecessor
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Example Benefit Payments Testing
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Example Benefit Payments Testing (continued)
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Example Benefit Payments Testing (continued)
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Example Benefit Payments Testing (continued)
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Example Benefit Payments Testing (continued)
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Example Benefit Payments Testing (continued)
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Notes Receivable
from Participants (Participant
Loans)
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Notes Receivable from Participants
Loans represent assets of a DC plan (e.g., note
receivable)
Plan document will state if participant loans are allowed; amounts are subject to regulatory limits
May be documented in a separate loan policy document
Loan accounting typically performed by trustee/custodian
or recordkeeper
For loans typical of
403(b) plans, refer to
403(b) Plans – Their
Background, History and
Changing Environment
training course
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Regulatory Limits
Maximum loan amount: lesser of $50,000 or 50% of vested account balance at issuance date
Maximum repayment term: five years except for primary residence purchase
Non-military leave of absence exception -may suspend payments up to one year, but cannot extend overall repayment period
Military leave of absence exception – in addition to suspending payments during leave period, may also
extend repayment period by length of service period
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Regulatory Limits
At least quarterly amortization; subject to similar timely remittance requirements as contributions
Must be included in plan provisions if sponsor intends to allow loans
Loans to disqualified persons are prohibited transactions unless certain requirements are met (see below)
Requirements: available to all participants/beneficiaries and for same amount for HCEs and other employees, made per plan provisions, bear
reasonable rate of interest and be adequately secured
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Deemed Distributions
Defaulted loans are taxable to participant as income when employee receives a 1099-R
Recordkeeper generally maintains loan on books (e.g., reported on Statement of Net Assets) until
distributable event occurs
For financial reporting purposes, a loan is written off when “deemed
distributed”
Distributable event includes termination, retirement, death,
disability, etc.
Refer to AICPA Audit and Accounting Guide – Employee Benefit Plans
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Notes Receivable from Participants – Assertions
Properly authorized, recorded and exist
Properly valued and disclosed
Initiated in accordance with plan provisions
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Notes Receivable from Participants – WCGWs
• Not initiated in accordance with plan provisions (e.g., not recorded properly)
• Not reconciled between recordkeeper and trustee on a timely basis
• Loan details (such as amount, repayment period, interest rate, and residential
or nonresidential loan) incorrectly entered into recordkeeper system
• Loan repayments not properly calculated or properly / timely withheld from
payroll
• Loan repayments not recorded in correct participant account
• Loans in default not properly reclassified as "deemed" distributions
• In instances of a plan merger, loans not properly transferred to the new plan
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Notes Receivable from Participants – Procedures
• Understand plan loan provisions and examine loan documentation and whether
it was issued in accordance with plan provisions
• Confirm loan balances and terms directly with plan participants
• Test that repayments and interest income are properly calculated and
recorded
• Obtain rollforward of participant loans from recordkeeper
o Test reconciliation of loan activity from rollforward to trustee (custodian)
statement (which includes disbursements, principal repayments, deemed
distributed, and ending balance)
• Review financial statement classification:
o Participant loans reported as “notes receivable from participants”
o Interest income recorded as “interest income on notes receivable from
participants”
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Notes Receivable from Participants – Considerations• Generally, select sample from listing of all participant
loans issued during plan year and determine if issued
in accordance with plan provisions
o Participant loans issued in prior periods are
reviewed to determine if payments are current and
interest is being appropriately calculated and
remitted
• For Form 5500 purposes, participant loans are reported as Investment on
Schedule H and included in Schedule H, line 4i—Schedule of Assets (Held at End
of Year)
• For limited scope audit, ensure loans are properly maintained and certified by a
qualifying institution and properly disclosed in financial statements
• Due to regulatory compliance component, loans initiated by plan would ordinarily
be scoped back in even if below materiality
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Notes Receivable from Participants – Common Issues
Common Issues
• Participant originated more loans than plan allows
• Defaulted loans not accounted for properly
• Repayments not set up properly in payroll
Contributing Factors
• Sponsor lacks sufficient understanding of loan rules and application
• Reliance on plan provision summaries instead of loan policy document
• Lack of communication between plan administrator and payroll
• Transition periods (changes to payroll system, etc.)
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Example Participant Loan Testing
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Example Participant Loan Testing
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Example Participant Loan Testing
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Administrative Expenses
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Administrative Expenses
Determine from plan document who pays
• Plan participants (e.g., loan fees) and/or
• Sponsor
Determine whether expenses are allowed by Plan document
• Allocations to participants should be proper and in accordance with plan document
• Must be for benefit of plan participants
• Certain expenses must NOT be paid by Plan (such as costs for formation or Plan design, actuarial valuation for plan sponsor, etc.)
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Administrative Expenses – Assertions
Paid in accordance with the plan provisions and properly
authorized
Paid in accordance with service provider agreements
Recorded in the proper account, amount, and period
Presented and disclosed
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Administrative Expenses - WCGWs
• Do not represent allowable expenses per plan document or regulatory provisions
• Paid to fictitious vendors
• Not properly accrued or classified
• Not calculated in accordance with service provider agreements
• Incorrect apportionment of allocated expenses between plans or plan sponsor
• Not properly authorized prior to recording and payment
• Not properly recorded by the trustee or custodian
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Administrative Expenses - Procedures
• Review plan provisions and board minutes to determine whether
administrative expenses were properly authorized and allowed by plan
• Perform analytical procedures for recurring types of expenses (e.g., routinely
paid out of plan from year to year)
• Analyze expenses and examine supporting invoices, documents, and
computations
• Review service agreement and determine whether contracted services were
performed and payments made in accordance with agreement terms
• If plan expenses are allocated among several plans sponsored by same plan
sponsor or a multiemployer plan:
o Review allocation to determine if appropriate
o Determine if method of allocation used was approved by board of trustees
or administrative committee
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Administrative Expenses – Procedures (continued)
• Determine if fees charged (by trustees, investment advisers, etc.) are in
accordance with agreements / regulations
o In multiemployer plans, trustees may be reimbursed by plan for meetings
and other expenses associated with plan operations
• Any fees or expenses paid to related parties or parties in interest need to be
considered for disclosure under FASB ASC 850, as well as ERISA regulations
o Expenses paid by plan that are not allowed by plan provisions OR
excessive fees (regardless of materiality) may be deemed a prohibited
transaction requiring further testing and/or disclosure
• For example, fees paid by one plan on behalf of another plan as a
result of errors or inappropriate allocations and fees paid by plan for
certain services provided to plan sponsor (e.g., trustee fees, etc.)
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Administrative Expenses - Considerations
• DOL’s expectation: certain participant transactions (e.g.,
expenses) should be tested, regardless of materiality
o Scope Expenses FSA back in (even if immaterial $) and
perform applicable tests
o In testing expenses allocated to participants, generally
suggest selecting participants tested for other FSAs (e.g.,
Loans, Distributions) and ensure proper expense amount
charged to participant account based on fees per plan
document
• As part of planning and risk assessment, obtain understanding of allowable plan
expenses and develop audit procedures based on what plan provisions allow
• Consider review of service provider agreements to understand fee arrangements
o Consider additional inquiries with plan management and service providers
• For plans invested in a master trust, investment-related expenses are generally
allocated among respective plans (certain other expenses are charged directly to