Employee benefit plans (EBPs) play a crucial role in retirement for the many workers and institutions that employ them. That’s why audits of EBPs are important: to ensure that these plans operate effectively.
Here, we outline the eight areas covered in an employee benefit plan audit and lay the groundwork for understanding the audit procedures for employee benefits.
Understanding Employee Benefit Plan Audits
Oversight of Employee Benefit Plan Audits
An audit of an EBP must employ the Generally Accepted Audit Standards (GAAS) in addition to Department of Labor (DOL) and The Employee Retirement Income Security Act of 1974 (ERISA) regulations.
Specifically, the Employee Benefits Security Administration (EBSA), a designated department within the DOL, protects the integrity of an EBP with a focus on employee benefits.
ERISA requirements extend to the audit of financial statements as well as supplemental schedules. However, the regulatory authority of the DOL does not establish any framework for financial reporting concerning EBP financial statements.
An employee benefit plan audit must comply with GAAS to ensure that financial statements conform with the generally accepted accounting principles (GAAP). The American Institute of Certified Public Accountants (AICPA) Auditing Standards Board (ASB) establishes the standard for an EBP audit, and the Professional Ethics Executive Committee administers independent ethical standards.
The Current State of EBP Audits and Recent Changes
Recently, the DOL has questioned the quality and value of EBP audits, and as a result, a number of areas have been identified that highlight shortcomings in the current audit process.
Recent changes to the audit procedures for employee benefit plans seek to address these concerns, including disclosures of financial statements, procedures performed, the sufficiency of evidence and documentation.
An EBSA report for all ERISA audits in 2011 found that 39% had major audit deficiencies. The main causes of these deficiencies include contributions, internal controls, participant data and benefit payments.
While there are many potential causes for these areas of concern, the large sum of wealth covered by these audits has initiated many recent changes to audit procedures for employee benefits and are likely to continue to bring about regulatory changes.
Penalties Associated with Form 5500 Issues
An EBP audit is an important requirement in the filing of Form 5500. Failure to file a Form 5500 for your EBP, or filing a Form 5500 deemed deficient, can result in a significant fine imposed by the DOL. Penalties can include:
- Up to $2,194 per day penalty assessed to the plan administrator
- $150 per day per annual report filing penalty (up to a maximum of $50,000) for a deficient auditor report
- $100 per day per annual report filing penalty (up to a maximum of $36,500) for a report filing containing deficient financial information
- $10 daily penalty for failure to answer a question on Form 5500 (up to a maximum of $3,650)
Areas Covered in an Employee Benefit Plan Audit
Now that we’ve covered the basics of employee benefit plan audits, we’ll dive into the specific areas that an audit will cover. According to the AICPA, an EBP audit considers financial statements that cover the following areas:
- Benefit payments
- Contributions from the employee and employer
- Participant data
- Plan investments and investment income (for full-scope audits)
- Liabilities and plan obligations
- Participant allocations
- Administrative expenses
- Loans to participants
Let’s examine each of these areas in greater detail:
1. Benefit payments
A major focus in an EBP audit is determining whether payments from the plan are made in accordance with related documents and plan provisions. The audit also verifies whether payments are made only to individuals entitled to receive benefits through the EBP plan.
Assessing whether payments are approved and initiated, made from the proper account, made in the correct amount and in the proper period are necessary steps to test the benefits paid from an EBP.
2. Contributions from the employee and employer
Another critical area of an employee benefit plan audit is to determine whether the employer’s and employee’s contributions have been properly recorded, withheld, remitted timely and disclosed in the financial statements. In checking these amounts, the audit also addresses whether uncollected amounts are accounted for in the financial statements.
3. Participant data
Auditors must understand how an employee participates in an employee benefit plan, the proper employee classification, and how contributions are allocated.
An EBP auditor will apply various procedures to verify that all employees have been properly included in the plan. An auditor considers these points while concurrently working on other audit areas and will assess participant data (such as marital status, gender, period of service), payroll data, demographic data, contributions and benefit payments.
4. Investments and investment income
The method in which investments are tested depends on whether a full-scope audit or a limited-scope audit is being conducted. Because investments account for the greatest share of assets in an employee benefit plan audit, it is crucial to consider these implications.
For a full-scope audit, procedures are applied to assess whether investments are owned by the plan, properly recorded, accurately valued as at the date of the financial statements and included in the financial statements. A full-scope audit also verifies whether investment transactions and appropriate disclosures are in accordance with the investment policies established in the EBP. Lastly, the auditor analyzes the income records associated with the investments of the EBP.
In contrast, a limited-scope audit does not include auditing certified investment information. However, the allocation of investment income to participant accounts is included in a limited-scope audit. In this case, the auditor also assesses the investment information contained in financial statements and ensures the inclusion of all related disclosures.
5. Liabilities and plan obligations
Part of an EBP audit involves performing tests to determine whether plan liabilities are included in the financial statements. An auditor will also assess whether plan obligations are accurately estimated and included in the financial statements. This step generally requires the work of an actuary to test plan obligations.
6. Participant allocations
An EBP audit will ensure that transactions and net assets are allocated to participant accounts as stipulated in the plan documents. These areas include income allocations, contributions, forfeiture allocations and expense allocations.
7. Administrative expenses
Expenses are tested to verify that they follow agreements and are properly classified. Expense tests also determine whether the expenses are recorded accurately and in the proper period.
8. Loans to participants
An auditor will test the loans to participants and the resulting interest to verify that the amounts have been recorded, valued, identified and disclosed properly in the financial statements.
Get Help with Your Employee Benefit Plan Audit
Warren Averett performs audits for more than 290 employee benefit plans every year that range from under $1 million to more than $12 billion in assets for public and private companies. We can provide you cost-effective audits in a timely manner while maintaining the required high standards.