How to maintain compliance in your employee benefit plan.
By Kris Tveit
Employee benefit plan (EBP) audits require special handling by HR professionals because of their complexity and recent changes by regulators in the United States. The potential risks involved with benefit plans are primarily due to Department of Labor (DOL) concerns about compliance with the Employee Retirement Income Security Act (ERISA) regulations and with EBP audits themselves.
The Employee Benefit Security Administration’s (EBSA) Office of Chief Accountant has increased audit quality inspections of accounting firms that provide EBP audits to ensure that they are being conducted thoroughly and properly. The Office of Chief Accountant has been particularly interested in multi-employer plans, single-employer defined benefit pension plans, health and welfare plans, employee stock ownership plans, and 403(b) plans. Every ERISA audit, however, should be performed by an auditor with specific abilities:
• EBP expertise;
• Experience in DOL findings;
• Knowledge of accounting and auditing standards; and
• An understanding of high-risk EBP audit areas.
EBP sponsors should know when audits are required, how to hire a qualified auditor, what an audit entails, how to prepare for an audit, common EBP audit pitfalls, and how to approach audit issues.
When audits are required. New EBPs are required by the EBSA to undergo audits if they have more than 100 eligible participants at the beginning of the plan year, and the plan sponsor must file an IRS Form 5500 with that independent auditor’s report. An ongoing plan does not need to be audited until it includes 120 eligible participants at the beginning of the year.
How to hire a qualified auditor. Because of the risks involved with non-compliance—employers are subject to costly penalties and could face potential legal action—it’s important to select an auditor who understands EBP audit practices that can reduce regulatory risks. Properly preparing for an EBP audit can also help to hold down audit costs. Hiring a qualified EBP auditor will help to ensure that Form 5500 is complete and accurate, as well as protect EBP assets.
The EBSA offers some guidance on selecting the appropriate third-party professional for your organization:
• Federal law requires that the auditor be licensed or certified as a
public accountant. This can be confirmed with the state regulatory authority.
• The auditor should not have any financial interests in the plan or
the plan sponsor that would introduce conflicts of interest.
• An auditor with training and experience in EBP audits provides
superior knowledge with plan practices and operations, as well as with any special auditing standards and rules.
• Speaking with client references can provide a roadmap of what the
auditor can deliver.
What an audit entails. A high-quality audit will result in a timely, comprehensive auditor’s report with minimum disruption to the plan sponsor. The auditor’s engagement letter will describe the audit work, time frame, fees, auditor’s responsibilities, and plan administrator’s role. A limited-scope audit is performed if the EBP investment data is certified by an insurance company, trust company, financial institution, or other institution specified by ERISA. A full-scope audit includes an audit of investment balances and transactions.
How to prepare for an audit. In most cases, the plan sponsor establishes an audit timeline with the auditor and the service organizations involved. The auditor then sends a request letter to the plan sponsor outlining the documentation the auditor will need to review before the audit engagement and during the onsite engagement.
It’s important for plan sponsors to examine their records and address discrepancies before the audit. If changes are made to the plan, they should be shared with the auditor. In addition, a statement on standards for attestation engagements (SSAE) 16 report on internal controls can decrease the amount of testing that is needed for the audit. The plan sponsor also should document EBP internal controls. Plan sponsors also need to watch for audit and accounting updates, including fair value disclosures (accounting standards codification [ASC] 820) and reporting on supplementary information (Statement on Auditing Standards [SAS] 118, 119 and 120).
The audit will be most efficient if all documents are organized and easy to access when the auditor arrives. Online access to information before the onsite audit is highly recommended to save on costs and increase efficiencies.
Common EBP audit pitfalls. EBP audits fall under scrutiny of the Office of Chief Accountant when the auditor fails to test areas specific to benefit plans. EBP audits need to include fair valuation of plan assets, descriptions of plan obligations, tax status, and identification of transactions prohibited by ERISA.
Pitfalls with EBP audits commonly involve issues of governance, compensation and participant eligibility, participant distributions due to hardship, and contributions.
Fundamental Responsibility Governance requires plan administrators to perform responsibilities as fiduciaries, including delegating fiduciary responsibility, interpreting plan documents, determining eligibility, selecting service providers, and managing expenses paid with EBP assets. In short, fiduciaries oversee EBP operations and are responsible for operating the plan for the benefit of plan participants.
By designating an oversight committee in addition to the plan administrator, the plan sponsor can ensure that administrative functions, investments, audits, internal reviews, selection of vendors and service providers, and legal compliance are documented and managed appropriately.
A second pitfall with EBP audits involves defining and calculating employee compensation, deferrals, and contributions. The plan document governs the inclusion of payments such as bonuses, vacation, overtime, fringe benefits, and commissions in compensation. Not adhering to the definition of compensation in the plan document results in tax qualification matters that can be costly to correct.
Just as the plan document provides specific information about employee compensation for plan purposes, it also covers hardship distributions to participants. Hardship distributions must include documentation that supports the participant’s request for a distribution. In addition, deferral contributions are not allowed for six months following a distribution of this kind.
Several key considerations are involved in the timing of contributions. It is vital that plan assets representing participant deferral contributions and participant loan repayments be segregated from general plan assets in a timely manner. The DOL has specific information pertaining to segregation of assets, including length of time allowed for remitting employee deferral contributions.
Contributions and loan repayments should be remitted on the earliest date on which the contributions can be segregated from general assets. Employee salary deferrals must be segregated by the 15th business day of the month following the month in which they would have been payable to the participant in cash. For small plans, employers meet the safe harbor requirement if they remit funds seven days after payroll; safe harbor does not apply to large plans. Based on recent audits, the DOL may expect assets to be remitted within three business days after payroll or when payroll taxes are remitted.
Plan sponsors should be actively involved in the audit process and understand audit requirements, procedures, potential deficiencies and how to correct them, and how findings can impact financial statements and tax status. The most effective audit is one in which the plan sponsor maintains open communication with the auditor and other key stakeholders throughout the process.
Kris Tveit, CPA, is a partner with CliftonLarsonAllen, a national accounting and consulting firm with 90 offices across the country.