Audit Procedures for Pension Plans: Guidelines and Pandemic Impacts

Written by Missy Herbert on February 3, 2021

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Many aspects of business have changed due to the COVID-19 pandemic, and pension plans are no exception.

As employees and employers face financial hardships, plan sponsors should review their plans and consult their advisors to understand audit procedures for pension plans and opportunities.

Audit procedures for pension plans seek to ensure the plan sponsor fulfills its fiduciary duty to the plan’s participants, provide insight into the sponsor’s control environment and internal control processes, and identify possible weaknesses, operational errors and potential fraud risks.

Determining if an audit is required for your pension plan

Employee Retirement Income Security Act (ERISA) guidelines generally require plans with 100 or more participants at the beginning of the plan year to have an audit of the plan’s financial statements. The IRS requires all plans that must be audited to attach those financial statements to its Form 5500 tax filing.

Department of Labor (DOL) regulations exempt small employee benefit plans (generally those with fewer than 100 participants at the beginning of the plan year) from that audit requirement. However, beginning in 2021, the DOL established additional conditions small pension plans must meet to be exempt.

Additional conditions for small pension plans beginning in 2021

Those additional conditions include:

  1. As of the last day of the preceding plan year, at least 95% of the plan’s assets must be “qualifying plan assets.” If less than 95% are qualifying plan assets, then any person who handles the non-qualifying assets must be bonded in an amount at least equal to the value of the assets they handle. The DOL’s FAQs on the Small Pension Plan Audit Waiver Regulationincludes a definition of qualifying plan assets.
  2. The plan must include the following information in its Summary Annual Report:
    • The name of each regulated financial institution holding or issuing qualifying plan assets and the value of such assets reported by the institution at the end of the plan year
    • The name of the surety company issuing the fidelity bond, if the plan has more than five percent of its assets in non-qualifying plan assets
    • A notice indicating that participants and beneficiaries may request proof of the required bond and statements from the financial institutions describing the qualified plan assets
    • A disclosure stating that participants and beneficiaries should contact the DOL’s Employee Benefits Security Administration Regional Office if they are unable to examine or obtain copies of the financial institution statements or evidence of the required bond
  1. When requested, the plan administrator must provide copies of statements the plan receives from the regulated financial institutions holding or issuing the plan’s “qualifying plan assets” and evidence of any required fidelity bond to plan participants.

COVID-19 Implications for Pension Plan Audits

The pandemic’s economic fallout has led to cash flow problems, layoffs, and even bankruptcy for many plan sponsors.

Meanwhile, pandemic relief legislation includes several provisions affecting plan participants and sponsors. As a result, pension plan audits will likely include pandemic-related events that may require additional audit procedures or financial statement disclosures.

Here are a few considerations:

  • Going concern issues. Plan sponsors that are having financial difficulties may not be able to fund defined benefit plans. Auditors may need to evaluate whether the plan will continue as a going concern – which can be difficult if the firm that audits the pension plan does not also audit the plan sponsor.
  • Temporary waiver of funding deficiencies. Employers who cannot make a timely required minimum contribution to a defined benefit plan due to business hardships may receive a temporary waiver of funding deficiency from the IRS. Funding deficiencies may need to be disclosed in the plan’s financial statements. For this purpose, business hardships include:
    1. A plan sponsor operating at an economic loss
    2. Substantial unemployment or underemployment in the industry
    3. Sales and profits are depressed or declining in the industry
    4. It is reasonable to expect that the plan will not be able to continue if the waiver is not granted
  • Partial plan terminations. A partial plan termination occurs when more than 20% of the plan’s participants are laid off in a particular year. For defined benefit plans, a partial plan termination requires immediate 100 percent vesting, to the extent funded, for affected employees.
  • Investment value declines.  If investment values have fallen since the plan’s year-end, that decline may need to be disclosed in the financial statements.
  • The 80 to 120 Participant Rule. This rule states if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120 and the plan sponsor filed a small plan annual report for the prior year, the plan administrator may elect to continue filing as a small plan.
  • Layoffs. Plan sponsors who experienced significant layoffs may be able to avoid the cost of obtaining a pension plan audit if their plan has dipped below the 100-employee limit due to layoffs. However, it’s important to remember that the determination is made on the first day of the plan year. Therefore, pandemic-related layoffs may only affect audit procedures for pension plans for plan years beginning later in 2020 or 2021.

Moving forward with the administrative requirements

The pandemic and subsequent relief programs have created significant administrative requirements for plan sponsors, and employers should start reviewing their plans and consider any necessary changes or communications as soon as possible.

The good news is that there are experts available to help you sort it all out. As charter members of the AICPA Employee Benefit Plan Audit Quality Center, a voluntary membership to help CPAs meet the challenges of performing quality audits, Warren Averett has the expertise you need to ensure quality audits in this complex field. Contact us today and let us help you prepare for tomorrow.

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