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What to Expect in a Plan Audit - Part 1

Feb 13, 2010

Is your plan an ERISA Plan? If you are unsure, seek legal counsel!

Form 5500 Requirements (Prior to 1/1/09) 

  • Current Form 5500 filing requirements (for those required):
    • Limited Pension Plan Reporting for "403(b) Arrangements" — Required only to complete general information section (Lines 1 through 6 and Line 8)
    • No Form 5500 schedules required to be completed
    • No financial statement or any financial information required to be submitted
  • No audit required 
  • Timing
    • 5500 is due 7 months after the plan’s year end
    • Extension available for 2 1/2 months

Form 5500 Filing Requirement (Beginning 1/1/09) 

  • Form 5500 filings will be required for all 403(b) Plans covered by Title I of ERISA (as under previous rules)
  • They are now subject to the same 5500 annual return requirements
  • Even Plans with less than 100 participants must file Form 5500 and provide financial information, at the Plan level, never provided before
  • No change on WHO should file Form 5500
  • Change only on WHAT should be filed with Form 5500

Form 5500 Filing Requirement 

  • Starting with the 2009 Form 5500 (effective for plan year beginning January 1, 2009)
    • 1/1/09 (December year end)
    • 7/1/09 (June year end)
  • Generally an excess of 100 eligible participants at the beginning of a plan year will require an audit
  • Eligible — BE CAREFUL! — includes all employees under the Universal Availability rule and all former participants with account balances
  • 7,000 403(b) audits, 9,000 small plans with additional financial information to report

Form 5500 Requirements 

  • 80-120 rule applies in the initial 403(b) audit year
  • The Department of Labor advised in its Notice of Adoption of Final Forms Revision that 403(b) plans that were eligible to file as a small plan under DOL Reg. 29 CFR 2520.103-1(d) in the previous year and that have participant counts of fewer than 121 in the beginning of the 2009 plan year can file as small plans under the new filing rules
  • Plans with over 120 participants at the beginning of the year (01/01/09 for calendar year plans) will be required to attach audited financial statements to their 2009 Form 5500 filing

Financial Reporting Requirement — WHAT IS THE OBJECTIVE OF THE AUDIT? 

  • To express an opinion on whether the plan’s financial statements are presented fairly, in all material respects, and in conformity with U.S. generally accepted accounting principles
  • The auditor is responsible to plan and perform the audit to obtain reasonable assurance that material misstatements are detected
  • Reasonable assurance is high, but not absolute 
  • The audit is conducted in accordance with auditing standards generally accepted in the U.S.
  • Generally accepted auditing standards among other things includes:
    • gathering information to understand the Plan and its internal control environment
    • understanding the design and implementation of internal control
    • detailed testing of a Plan’s accounts and transactions
    • gathering sufficient audit evidence
    • documentation of findings
  • The financial statements are the responsibility of Plan Management, the opinion is the auditors

Financial Reporting Requirement — WHAT IS AUDITED? 

  • Two Basic Buckets (Investments and Participant Accounts & Activity)
    • Investments
    • Participants
      • Opening balance
      • Eligibility
      • Contributions
      • Distributions
      • Transfers in and out
      • Earnings allocations
      • Fund allocations
      • Vesting
      • Ending balance
  • Timeliness of Contributions
  • Prohibited transactions
  • Think in terms of the financial statement line items 
  • Statement of Net Assets Available for Benefits:
    • Investments
    • Participant loans
    • Receivables (accrual basis)
      • Participant contributions
      • Employer contributions
      • Income
    • Liabilities (not for benefits)
      • Accrued expenses
  • Statement of Changes in Net Assets Available for Benefits:
    • Contributions (received and receivable)
      • Timeliness of deferrals
    • Rollovers
    • Gains and losses/appreciation and depreciation on investments
    • Investment income
      • Interest and dividends
    • Distributions
    • Administrative expenses
    • Transfers/plan mergers

Financial Reporting Requirement — WHAT IS AUDITED? 

  • The focus of the audit is on the material account balances and major transaction classes from which the statements are derived
  • Participant activity is a major transaction class
    • Opening balance, eligibility, demographics, contributions, vesting, distributions, transfers, rollovers, fund allocations, earnings allocations, ending balance
  • Focus on investments is driven by the audit scope
  • Investments -
    • ERISA Section 103(a)(3)(c) audit — assets are held by a bank, insurance company or trust company, and are certified as to completeness and accuracy
      • Custodians certify the information as contained in their ordinary books and records — If you have more than one custodian, you will need multiple certifications 
      • Custodians generally provide values based on best information available
        • Watch "as of" dates for old information
        • Watch fair value
      • Auditor has no responsibility to test investments, investment activity and related transactions—(it is the Plan Sponsor’s responsibility to ensure that the investment values are proper)
      • Must consider applicability of the ERISA Section 103(a)(3)(c) audit audit, given the circumstances regarding the availability of the information on prior contracts—(will be discussed further in presentation) 
    • Full scope — Audit investments, investment activity and related transactions
      • Confirm existence and ownership, assure no liens, no pledges or other security interests
      • Reasonably conclude investment transactions are recorded and investments are valued in conformity with GAAP (fair value)
      • Disclosures are proper

Financial Reporting Requirements — FIRST YEAR CONSIDERATIONS 

  • DOL requires comparative statements of net assets available for benefits
  • Will need 12/31/08 or 6/30/09 statement of net assets available for benefits, at a minimum, compiled
  • A compilation is less than an audit and a compilation report will be rendered
  • Must determine that the accounting principles used by the Plan in the current and preceding year are consistent
  • Must address the opening balances at the participant level 
  • Address completeness and accuracy of participant data & records
    • Address eligibility, types of benefits, participant account balances
  • Opening balances at the participant level
    • Essentially must address multiple prior years’ activity
      • Contributions
      • Distributions
      • Other plan activity
  • Going back in time presents a unique difficulty for 403(b) Plans given the possible recordkeeping shortfalls

DOL Transition Relief 

  • FAB (Field Assistance Bulletin) 2009-02 provides transition relief for those that make a good faith effort... whereby, they do not need to treat annuity contracts and custodial accounts as part of the employer’s Title I plan assets and for purposes of ERISA’s annual reporting requirements
  • Must meet certain criteria
    • Contract was issued to a current or former employee prior to 1/1/09
    • Employer ceased to make any contributions (including salary reduction contributions) to contract or account prior to 1/1/09 (including loan repayments made by employer)
    • All rights and benefits under the contract are legally enforceable against the insurer to custodian by the individual owner without any involvement of the Employer, AND
    • The individual owner of the contract is fully vested in the contract or account
  • Field Assistance Bulletin (“FAB”) 2009-02
    • Issued July 20, 2009
    • Provides guidance to DOL Field Offices
    • Provides Enforcement Relief for 5500 filings
      • Does not provide audit relief 
    • DOL/EBSA will NOT reject a 403(b) plan form 5500 filing solely because the auditor’s report is qualified, adverse or disclaims an opinion (other than allowed under 29 CFR 2520.203-8) due to the exclusion of pre 2009 annuity contracts and/or custodial accounts
    • Regardless of the type of opinion issued, the auditor is still required to complete all other audit procedures (e.g. contributions, distributions, etc.)
  • You can use this relief to determine audit requirement – if by omitting these contracts puts the plan below the audit requirement threshold, then an audit will not have to be performed 
  • 80-120 rule also applies in determining audit requirement so look at number of participants at 1/1/08
  • The FAB allows but does not require that contracts/accounts be excluded
  • The FAB also applies to years beyond 2009
  • ERISA and current regulations require the audit to be performed in accordance with (GAAS)
  • The exclusion by the plan sponsor of contracts/accounts that meet the criteria of the FAB will likely prevent the auditor from being able to issue an unqualified opinion or ERISA Section 103(a)(3)(c) audit opinion under 29 CFR 2520.103-8
  • Some sponsors may not find a qualified, adverse or disclaimer of opinion’s acceptable
  • Some vendors will not be in a position to exclude contracts/account information that meets criteria
  • DOL’s exception is for a “good faith” effort to comply with the ERISA annual reporting requirement
  • DOL is working on additional guidance
  • AICPA 403(b) task force is working on additional tools

Preparing for the Annual Audit 

  • Generally information is available within 2 months of year end
  • A 401(k) audit from start to finish can take 1-2 months with fieldwork generally one week or less
  • 403(b) timing and fieldwork could be double, given the initial time through
  • Availability of SAS 70’s must be addressed (addressed in subsequent slide)

What Does a SAS 70 Mean to a Plan Sponsor? 

  • It is important to keep in mind that auditors, under professional standards, cannot be a part of a plan’s internal control  
  • Controls of a benefit plan are comprised of controls at the plan sponsor as well as at service organizations
  • SAS 70’s are reports on the design of internal controls (Type I) and operating effectiveness (Type II) at a service provider. Outlines what user controls are required
  • Not only useful for the Auditor
  • Review by Plan Management at least annually as part of the third party service provider monitoring effort, is good practice

Preparing For The Annual Plan Audit Complete Collaboration 

How to Prepare for the Annual Plan Audit 

  • Take control of the process! 
  • Know your responsibilities — the financial statements are those of plan management — only the opinion is the auditor’s
  • Hire a qualified independent auditor for your plan
  • If not provided by the auditor, request a list of schedules and documents the auditor will require prior to the start of the process
  • Contact service providers early each year to assure they have the necessary information TO YOU on a timely basis. If you have not already contacted them for your 2009 plan audit, CONTACT THEM NOW!
    • All individual participant contracts and account balances in your plan
    • SAS 70 Reports (Is it a type I or Type II)
    • Information needed for 2008 compiled financial statements and information needed for opening balances testing
  • Have a point person. Establish responsibility for the Plan’s financially reporting function. (HR vs. Finance)
  • Review information before it is provided to the auditor to minimize the back and forth
    • Make sure plan participant records are complete and accurate
    • Get your books and records in shape
    • Establish proper internal controls over the plan’s financial reporting process
    • Ensure that the plan has an up to date written plan document and an investment policy statement
    • Ensure that the plan is in compliance with the plan’s tax exemption
  • Expect great things! (Embrace the process)
    • Communication throughout the process
    • Innovative ideas
    • Suggestions on enhancing procedures for efficiency and minimization of risk

How to Prepare for the Annual Plan Audit — What To Expect From the Auditor? 

  • List of schedules and documents required
  • Inquiries
  • Understanding of Internal Controls
  • Risk Assessment
  • Requests for documentation of participant level information
  • Experience
  • Knowledge of plan terminology
  • Clear line of communication
  • Helpful recommendations!

How to Prepare for the Annual Plan Audit — What The Auditor is Expecting of You? 

  • Time
  • Documentation requested
  • Full analysis of vendors
  • Full analysis of participant population
  • Coordination of communication with third party providers
  • Financial statements

How to Prepare for the Annual Plan Audit — How TPA's Can Help and What Should They Provide? 

  • Share Auditor request listing with the TPA
  • Organized audit package
  • Detailed listing of participant balances
  • 157 information (assistance with information)
  • Draft Form 5500 and all related schedules
  • Compliance and discrimination testing
    • Universal availability
    • ADP (Actual Deferral Percentage Test) and Top Heavy testing not required
  • Allocation of employer contributions
  • Loan roll-forward report/delinquent loan reports
  • Distribution report
  • Transaction information
  • SAS 70 report, if available
  • Timely response to inquiries resulting from the annual audit

Challenges / Suggestions 

  • Critical to employ fiduciary best practices, somewhat lacking in the 403(b) plan area
  • Plan Committees
    • Meet regularly
    • Keep written minutes
    • Document fiduciary due diligence
  • Investment Policy Statements
  • ERISA attorney relationships
  • Monitor service providers
  • Employ effective internal controls
  • Gather complete and accurate information from all vendors, for all years
    • Former employees and former vendors
    • Orphan contracts and missing participants
  • Effectuating information sharing agreements
  • Careful documentation of data collection process is essential
  • Beginning balances require certain audit procedures

Helpful Websites & Tools 

  • Plan Sponsor Magazine
  • Profit Sharing Council of America (IPS)
  • Employee Benefit Plan Audit Quality Center
    • Website:  
      • Includes Plan Advisories for communication and research on plan responsibilities
      • Includes tools for Plan Sponsors
  • Your Third Party Provider
  • Employee Benefits Security Administration
    Office of the Chief Accountant: 202.693.8360
  • EFAST Help Line: 1.866.463.3278


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