Employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) with 100 or more eligible participants at the beginning of the plan year are generally required to have an annual audit. For some companies, though, this important function can be an afterthought that can later rise up to bite them.
“Many companies view these audits as a commodity,” says Paul O’Grady, partner-in-charge of the benefit plan practice group at Armanino McKenna LLP. “Prudent employers treat them not as a commodity but as an essential component of the organization’s process for monitoring its duties and responsibilities for its benefit plan under ERISA.”
The Department of Labor generally requires an audit for large plans (100 or more eligible participants at the beginning of the plan year). Although, in limited circumstances, small plans may also be subject to the audit requirement.
Smart Business spoke with O’Grady about how taking a proactive rather than a reactive approach to employee benefit audits can turn this required task into an integral part of an organization’s employee benefit oversight function.
What are the responsibilities of benefit plan sponsors?
The primary fiduciary responsibility of the plan sponsor is to run the plan solely in the best interests of the participants and to administer the plan for the exclusive purpose of providing benefits and paying plan expenses. This includes diversifying the plan’s investments to minimize the risk of large losses and carefully following the terms of the plan documents consistent with the provisions of ERISA. Fiduciaries who do not act in the best interests of plan participants can be personally liable to restore losses to the plan and/or to restore profits resulting from improper use of plan assets.
What does the audit encompass?
There are two types of benefit plan audits that can be performed under the current ERISA regulations. The first type, a limited-scope audit, requires that the plan investments be certified as to their completeness and accuracy by a trust company or similarly approved entity and allows the auditor to apply limited procedures to the plan investments. As a result of the limited testing of investments, a limited-scope audit provides less auditor assurance and is generally less expensive to perform than a full-scope audit.
A full-scope audit applies more extensive procedures to the plan investments and includes audit procedures relating to the existence, valuation and completeness of the investments. Plans that are required to file with the Securities and Exchange Commission generally, plans that offer employer securities as an investment option to the plan’s participants must perform a full-scope audit and must also file form 11K with the SEC.
What are the pitfalls of treating this audit as a commodity?
Companies may look to the low-cost provider to perform the audit. While cost is an important consideration, experience offering these types of audits, which are very specialized, is crucial and can proactively identify potential problem areas. The Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants provides an auditor selection tool to help companies choose an auditor.
Plans can run into trouble in areas such as the timely remittance of participant contributions. Participant contributions must be remitted to the plan as soon as they can reasonably be segregated from the employer’s general assets and no later than the 15th business day of the month following the month of withholding. I’ve seen instances where sponsors have been required to remit amounts in the tens of thousands to restore lost earnings to the plan as a result of failing to remit participant contributions in a timely manner.
Additional pitfalls range from problems applying the definition of participant compensation, which impacts participant and employer contributions to the plan, to a lack of understanding surrounding the investment fees being charged to participants. I’ve seen companies pay fines as high as $50,000 per year for failure to comply with a plan’s operational requirements or for failing to administer the plan properly. Misunderstanding the application of these and other rules can become a costly oversight for a company.
How can companies mitigate issues before a benefit plan audit?
Companies should stay current and engaged with their third-party administrative service providers and plan auditor throughout the year to stay informed of problem areas and ongoing regulatory developments, such as the recently passed Pension Protection Act.
Companies can arrange for an operational review, which will take a look at the plan from an operational perspective and provide feedback covering items that need to be corrected. Companies can also utilize technical resources, such as the Department of Labor Web site and the Employee Benefit Plan Audit Quality Center, which are good means for staying current. Finally, plan sponsors should be receiving periodic training on the workings of these plans.
PAUL O’GRADY is partner-in-charge of the benefit practice group at Armanino McKenna LLP in San Ramon. Contact Paul at (925) 790-2766 or Paul.OGrady@amllp.com.