Retirement plan audits are required by law and sizable penalties exist for companies that fail to meet their obligations. Some companies try to save on the cost of audits by using their existing tax accountant or CPA, which could mean working with an inexperienced auditor who doesn’t perform all the required tests.
Sean Pierce, director of accounting and auditing services at Clarus Partners, says the Department of Labor (DOL) is paying closer attention to the quality of audits and will reject plan filings and assess penalties if filings do not meet professional standards.
Smart Business spoke with Pierce about retirement plan auditing requirements and what to look for in an auditor.
Why are retirement plan audits important?
Retirement plan audits are required by the Employee Retirement Income Security Act of 1974 (ERISA) when filing the form 5500 for large plans. Large plans are generally those that have more than 100 participants. If a plan that meets the audit requirement files a 5500 without an audit by a qualified independent auditor, the DOL can reject the filing and assess penalties up to $1,100 per day, without limit.
What do audits seek to accomplish?
An audit helps the plan administrator carry out its legal responsibility to file a complete and accurate form 5500 for the plan with the DOL and IRS. A financial statement audit provides an independent, third-party report to participants, plan management, the DOL and other interested parties that indicates whether the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. An audit may also help plan management improve and streamline plan operations and evaluating the strength of the plan’s internal control over financial reporting.
Who is required to conduct an audit?
Generally, retirement plans are required to have an audit if there are 100 participants or more at the beginning of a plan year. A participant includes any individual who is eligible to participate in the plan, regardless of their actual participation, and also retired or separated participants who are receiving benefits or have an account balance in the plan. Additionally, a deceased individual who has one or more beneficiaries who are entitled to receive benefits in the plan are considered a participant.
Church plans and governmental entities are exempt from Title 1 ERISA audit requirements.
Why is it important to hire a qualified, independent accountant to audit a retirement plan?
A recent DOL study found that firms with limited employee benefit plan audit practices have a higher rate of deficient professional work. The most common deficiency found by the DOL was failure of the auditor to perform tests unique to employee benefit plan audits.
In recent years, the DOL has significantly stepped up enforcement of the audit requirement and audit firm review for employee benefit plans. Hiring a firm that lacks knowledge of the specialized nature of the industry and skills necessary to perform plan audits conflicts with the stated goal of ERISA to protect plan participants. The DOL has the right to reject plan filings and assess penalties up to $1,100 per day, without limit, on plan administrators for deficient filings.
Who else might companies ask to audit their retirement plans if not an independent accountant? What problems does this tend to introduce?
Plan sponsors may ask their tax accountant or other CPA to perform the plan audit because it is convenient or the fees charged are more attractive to the plan sponsor. But like the recent DOL study concluded, the audit quality tends to suffer when an independent auditor is not qualified or properly trained.
What can companies learn from their retirement plan audits?
If a company has hired a qualified independent auditor, they will learn if they are in compliance with the provisions of their plan document, which governs how the plan is to be administered. Additionally, the company will find out if they are in compliance with ERISA requirements for plan operations.
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