Category: Benefit Plan Audits

Posted on Apr 20, 2016

Benefit Plan Audit - Selecting a Benefit Plan Auditor

Generally, Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series). If your employee benefit plan is required to have an audit, one of the most important duties of the plan administrator is to hire an independent qualified public accountant as the benefit plan auditor.

The sponsor of the plan is the plan administrator under the law unless another individual or entity is specifically designated to assume this responsibility. With the increased scrutiny going on currently towards benefit plan auditors, it is paramount for the plan administrator to choose a quality firm to conduct the benefit plan audit to avoid penalties from the Department of Labor (DOL) and Internal Revenue Services (IRS).

For a complete guide to selecting an auditor and the importance of hiring a quality benefit plan auditor, checkout these two whitepapers.

Selecting an Auditor CoverGuide to Selecting an Auditor

A quality audit will help protect the assets and the financial integrity of your employee benefit plan and ensure that the necessary funds will be available to pay retirement, health, and other promised benefits to your employees. A quality audit also will help you carry out your legal responsibility to file a complete and accurate annual return/report for your plan each year. Because an incomplete, inadequate, or untimely audit report may result in penalties being assessed against you as the plan’s administrator, selection of an experienced and reliable auditor is very important.

 

EBPAQC-Importance-of-Hiring-Plan-Advisory CoverThe Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit

The AICPA Employee Benefit Plan Audit Quality Center (EBPAQC) has prepared this advisory to provide you, the plan sponsor, administrator, or trustee with an understanding of the importance of hiring a quality auditor to perform your employee benefit plan financial statement audit, and information to help you select a quality auditor.

 

Selecting a Benefit Plan Auditor

Why is the choice of an auditor important?

A quality audit will help protect the assets and the financial integrity of your employee benefit plan and ensure that the necessary funds will be available to pay retirement, health, and other promised benefits to your employees. A quality audit also will help you carry out your legal responsibility to file a complete and accurate annual return/report for your plan each year. Because an incomplete, inadequate, or untimely audit report may result in penalties being assessed against you as the plan’s administrator, selection of an experienced and reliable auditor is very important.

Is a benefit plan auditor required to be licensed or certified?

Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a State regulatory authority.

Is a plan auditor required to be independent?

Auditors of employee benefit plans should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.

Should a benefit plan auditor have experience in auditing employee benefit plans?

One of the most common reasons for deficient accountants’ reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. In some instances, a less experienced auditor may be assigned to perform routine audit procedures in order to reduce audit costs. When this happens, you should confirm that an experienced employee benefit plan auditor will review his/her work, as well as perform the more complicated audit procedures. The AICPA’s Employee Benefit Plans Audit Quality Center maintains a directory of employee benefit plan auditors who have agreed to meet specific experience, training and practice monitoring requirements. See Resources section.

Should I request references and check licenses?

When engaging an auditor, you may wish to obtain references and discuss the auditor’s work for other employee benefit plan clients. If you have additional questions, you may also wish to verify with the appropriate State regulatory authority that the provider holds a valid, up-to-date license or certificate to perform auditing services.

The Audit Process

What is an engagement letter?

In preparation for the audit, the auditor will prepare a contract, referred to as an “engagement letter,” describing the audit work to be performed, the timing of the audit, and fees. This letter also should describe the responsibilities of the auditor and the plan administrator. You should review this letter carefully and resolve any questions with the auditor prior to engagement.

Can I limit what the benefit plan auditor reviews?

Federal law permits the administrator of an employee benefit plan to limit an audit when plan assets are held by banks or insurance companies and written certifications are provided by the institutions holding those assets. You should consult with your accountant, attorney, or plan advisor to determine whether limiting the scope of an audit is appropriate for your plan.

Will I have to furnish or prepare documents for the auditor?

It is generally the responsibility of the administrator to maintain plan financial and other records. Many of these records will need to be made available to the auditor for review in the course of the plan audit. If a third-party service provider maintains plan records, you will need to arrange for auditor access to these records.

The Benefit Plan Audit Report

What happens when the audit is complete?

At the conclusion of the audit, the auditor will issue a report and state an opinion on the plan’s financial statements as well as any schedules required to be included as a part of the plan’s annual report filing. Auditors will also report on significant problems, if any were found. The auditor may also suggest ways for you to improve internal controls and plan operations. This is a good time for you to ask questions about the auditor’s work.

What questions should I ask the benefit plan auditor about his/her work?

Frequently audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to employee benefit plans. Accordingly, you should make sure that your auditor considered the following areas:

  • Whether plan assets covered by the audit have been fairly valued
  • Whether plan obligations are properly stated and described
  • Whether contributions to the plan were timely received
  • Whether benefit payments were made in accordance with plan terms
  • If applicable, whether participant accounts are fairly stated
  • Whether issues were identified that may impact the plan’s tax status
  • Whether any transactions prohibited under ERISA were properly identified.

To learn more about the benefit plan audit process, download The AICPA Guide to Hiring a Quality Auditor and the IRS Guide to Selecting an Auditor.

MR HeadshotFor more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.

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Posted on Apr 13, 2016

The primary objective of a benefit plan’s financial statements is to provide information that is useful in assessing the plan’s present and future ability to pay benefits.

Benefit Plan Audit Guide

Financial reporting for employee benefit plans financial statement audits may involve many parties, including the plan sponsor’s financial accounting and human resources departments, a third-party administrator, investment trustees and custodians, an actuary, ERISA legal counsel and the independent auditor. Plan management may hire service organizations to perform record keeping and reporting functions, but the ultimate responsibility for accurate financial reporting rests with plan management.

One of the most important duties of plan management is to hire the independent auditor. In some cases the plan sponsor may have an audit committee, employee benefits committee or administrative committee that oversees the financial reporting process, including internal control over financial reporting and the appointment, compensation and oversight of the independent auditor. The plan financial reporting and audit environment is unique in many respects, including the nature of plan operations; the various laws and DOL and Internal Revenue Service (IRS) regulations with which plans must comply; and special reporting and audit requirements. These matters, which affect every plan, add to the complexity of an employee benefit plan audit. Other matters that may complicate the plan reporting and audit process may include changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations.

Purpose and Objectives of the Independent Audit

The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.

Financial statement audits provide an independent, third-party opinion to participants, plan management, the DOL and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. A financial statement audit helps protect the financial integrity of the employee benefit plan, which helps users determine whether the necessary funds will be available to pay retirement, health and other promised benefits to participants. The audit may also help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. And the audit helps the plan sponsor carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.

The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements as a whole.

To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance (see a discussion of reasonable assurance below) that material misstatements, whether caused by error or fraud, are detected. The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management. The auditor tests evidence supporting the amounts and disclosures in the plan’s financial statements and DOL-required supplemental schedules; assesses the accounting principles used and significant accounting estimates made by management; and evaluates the overall financial statement presentation to form an opinion on whether the financial statements as a whole are free of material misstatement.

General Benefit Plan Audit Considerations

The following are some general audit considerations for all employee benefit plan financial statement audits.

  • Generally Accepted Auditing Standards
  • Adequate Technical Training and Proficiency
  • Professional Skepticism
  • Auditor Independence
  • Reasonable Assurance and Materiality
  • Professional Judgment
  • Auditor Communications

Full Scope vs. Limited Scope Benefit Plan Audits

Typically, financial statement auditors are engaged to audit and report on the reporting entity’s financial statements, including all assets; liabilities and obligations; and financial activities. These audits are performed without any client-imposed scope limitation or other restriction. ERISA is unique in that, when certain criteria are met, it permits plan management to instruct the auditor to limit the scope of testing of investment information included in the financial statements. This limited scope election must be supported by a certification from a qualified entity as to both the accuracy and completeness of the plan’s investment information. Such audits are referred to as “limited scope” audits. Plan management is responsible for determining that the conditions of the limited scope audit exemption have been met.

Full Scope vs. Limited Scope Image

Benefit Plan Audit Areas

The financial statement audit for employee benefit plans typically cover employee and employer contributions; benefit payments; plan investments and investment income (full scope audits); participant data; participant allocations; liabilities and plan obligations; loans to participants; and administrative expenses. In addition, the auditor considers other matters that may affect the financial statements, as shown below.

Benefit Plan Audit Areas

EBPAQC-Plan-Advisory-on-EBP-Financial-Statement-Audit CoverTo learn more about benefit plan audits, and to find out if one is required for your company’s 401(k) plan, download the whitepaper here: Guide to Employee Benefit Plans – Financial Statement Audits Whitepaper The Whitepaper includes:

  • Plan Financial Reporting and Audit Process and Management’s Responsibilities
  • Purpose, Objectives, and Benefits of an Independent Audit
  • General Audit Considerations
  • Full Scope vs. Limited Scope
  • Audit Areas
  • The Audit Process
  • Auditor’s Report
  • Your Role in the Audit Process
  • Additional Resources

For more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.

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Posted on Mar 17, 2016

2016 ushers in a few changes to the tax laws that govern benefits, as the IRS recently laid out in its annual “Tax Guide to Fringe Benefits.” The document features important clarifications, not just identifying which benefits are and aren’t tax-exempt to employees, but also the fine points of tests that tax-exempt employee benefits must satisfy to maintain that status.

Here are some of the changes and reminders for 2016 from the Tax Guide to Employee Benefits.

Mileage. The deduction for the business use of a personal vehicle dipped from 57.5 cents per mile last year, to 54 cents per mile currently. When employers reimburse workers for using their own cars for business (such as for traveling to a required out-of-town seminar or delivering documents for the boss), mileage pay might be considered a benefit to the extent it exceeds the actual cost to the employee of operating the vehicle. In spite of the roughly 6% decrease in the 2016 mileage rate and in light of the slide in gas prices during the past year, this benefit could add up nicely for employees.

Public transit. At the end of 2015, the dollar limit on monthly excludable public transit benefits nearly doubled, from $130 previously to $250 for all of 2015 (retroactive to January 1, 2015). The purpose of the retroactive increase was to have the limit match the benefit available in 2015 for employees who carpooled in a “commuter highway vehicle.” (The IRS is issuing guidance on how employers can address the impact of the retroactive 2015 increase on payroll taxes already withheld.)

For 2016, the public transit benefit rose again, to $255, the same as the 2016 limits for employees that carpool in commuter highway vehicles and for qualified parking. Qualified parking includes parking near your place of work as well as using parking lots next to mass transit stops.

Taxable or Not

In its overall guidance on employee benefits, the IRS reminds employers that its default position is that the value of benefits is taxable to the employee — unless the benefit is one specifically identified as excludable. In other words, you can be as creative as you want in providing benefits, but you need to inform your employees that they might be taxed on the value of anything which isn’t on the IRS approved list.

An exception is made for “de minimis” benefits. Such a benefit, according to the IRS, is “any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable.”

Examples include the personal use of a cell phone provided for business use, “low market value” holiday gifts, parties, and meals or cash to pay for them “provided to enable an employee to work overtime,” and life insurance worth no more than $2,000.

Excludable Employee Benefits

Here’s a list of other excludable benefits beyond the most familiar categories, like health and retirement plans, subject to clearly defined limits:

Achievement awards. The exclusion doesn’t apply to cash and cash-equivalent (for example, vacations, lodging) awards.

Adoption assistance. The plan must be clearly documented. Limits apply to highly compensated employees.

Athletic facilities. The exclusion applies only to on-premises facilities (or other locations that your company owns) if “substantially all” of the use is by employees, their spouses and dependents. Company-owned resort locations are excluded.

Dependent care assistance. The rules governing these programs are essentially the same as those which employees must satisfy to take a dependent care tax credit. Generally, an employee can exclude from gross income up to $5,000 of benefits received under a dependent care assistance program. IRS Publication 503 provides more details.

Educational assistance. These benefits, which can’t cover graduate education, must have “a reasonable relationship to your business,” and be part of a degree program.

Employee discounts. Among other limits, the discount can’t be more than 20% or the percentage of profit built into the price you charge regular customers.

Group term-life insurance. A variety of rules limit this benefit, including a $50,000 ceiling on the death benefit.

Health savings accounts. Employer contributions cannot be used to fund medical expenses that will be “reimbursable by insurance or other sources … and won’t give rise to medical expense reductions” on employee tax returns.

Lodging on your business premises. The basic requirements are that the lodging is furnished for the employer’s convenience and that the employee must accept it as a condition of employment.

Moving expense reimbursements. If you reimburse an employee for moving expenses, those expenses must be such that the employee could deduct them if he or she had paid or incurred them without reimbursement.

Stock options. Many rules apply here for all three categories: incentive stock options, employee stock purchase plan options, and nonqualified stock options.

No-additional-cost services. An example is an airline giving an employee a free seat on a flight if the flight had empty seats.

Working condition benefits. This applies to property and services provided to an employee, such as a company car, “to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it.”

Some things that didn’t change.

Finally, the annual limit on untaxed employee salary reduction contributions to flexible spending accounts remains capped at $2,550. Also, the 0.9% Medicare payroll surtax still kicks in when an employee’s cumulative salary for the year exceeds $200,000.

This simplified overview might provide a catalyst to review your entire menu of tax-favored employee benefits. While the availability of a tax exclusion can deliver higher value benefits for employees than straight compensation, the benefits must still make sense in light of your employees’ needs and your own human resource strategies.

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