Data Integrity Audits - Pitfalls, Expectations & Experiences
Avoiding Pitfalls in Audits of Employee Benefit Plans
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Transcript of Avoiding Pitfalls in Audits of Employee Benefit Plans
Avoiding Pitfalls in Audits of Employee Benefit Plans
Diane Walker, CPAPartner
February 14, 2012
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Overview
Audit of financial statements under ERISA
Common errors detected in plan audits How to prevent them How to detect them promptly when they do
occur
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Financial Statement Audit
Generally required for large plans (more than 100 participants) subject to ERISA
Auditor issues an opinion as to whether the financial statements are fairly stated, in all material respects, in accordance with stated accounting principles (typically US GAAP)
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Limited Scope vs Full Scope audit Limited scope – investments certified by trustee
or custodian and excluded from audit procedures
Financial Statement Audit
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Includes some testing of: Compliance with plan document and
ERISA Transactions and accounts at
participant level But, not a compliance audit
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Financial Statement Audit
Understand the information required Request auditor client assistance listing early Allocate list to those responsible
HR, Accounting, Investments, Outsourced provider(s)
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Assign a “point person” to coordinateEnsure auditors have access to online
systems of all key service providers (auditor’s packages)
Self assess for common audit pitfalls
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Common Audit Pitfalls
Result in adjustments to financial statements, delays and increased audit costs
Corrections need to be made (DOL\IRS)Additional contributions made to
participant accounts, and/or distributionsProblems can occur in small plans as well
– more likely to go undetected
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Common Audit Pitfalls
Plan Document UpdatesEligibilityContributions – CalculationContributions – RemittanceMonitoring of Service ProvidersUnderstanding of Plan InvestmentsOther
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Plan Document Updates
Frequent regulatory developments
Changes in operations of plan sponsor Mergers & acquisitions
Changes in service providers
Understand who is responsible for Individually designed plan vs prototype plan
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Eligibility
Certain employee groups could be excluded in operation, but not under the plan document
Employees not provided timely notification when eligibility is reached
Plan sponsor and TPA may not interpret plan provisions the same way (e.g., year of service)
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Eligibility
Review plan document to ensure HR personnel and TPA understand the terms of eligibility and are properly applying
Require employees to complete enrollment form even if they do not want to contribute (opting out) Provides documentation that employees were
given the opportunity to enroll on a timely basis
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Eligibility
Correction procedure when eligible employees improperly excluded: Plan sponsor must make a contribution to the
plan equal to 50% of average deferral rate (ADP test) times eligible compensation, plus associated employer match and lost earnings.
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Contributions – Calculation
Incorrect definition of eligible compensation used in calculations bonuses and vacation pay included or excluded?
Math errors or miscommunication with payroll vendor Correct subtotals accumulated?
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Contributions – Calculation
Review the plan document’s definition and ensure it matches with the plan sponsor’s intent, and current practice for calculating compensation
For prototype plans, ensure you have checked the correct box in selecting the definition
Ensure payroll service provider has coded wages to match the plan’s provisions
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Contributions - Remittance
Regulation requires remittal to be “as soon as can be reasonably segregated from plan sponsor’s assets,” but no later than the 15th business day of the month following the month when contributions are received by the employer, or would be otherwise paid to the participant in cash
Applies to participant contributions and loan repayments
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Contributions - Remittance
Rule frequently misunderstood – 15th business day is not a safe harbor
DOL wants to see it done as soon as possible
January 2010 - DOL announced a “safe harbor” regulation for small plans
Fewer than 100 participants, deemed to have made a timely deposit if made within 7 business days
Offers no protection for large plans One item of note - example for large plans
changed from a scenario with 10 days to 3 days
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Contributions - Remittance
Set a policy and follow it without fail DOL is looking for consistency and timeliness Money belongs to the participants as soon as
pay day – delays in remitting to the plan are considered a loan to the plan sponsor from plan assets
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Remittals deemed late = prohibited transactions Lost earnings subject to 15% excise tax Lost earnings for period from “administratively feasible”
date through date actually remitted
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Contributions - Remittance
DOL Voluntary Fiduciary Correction Program (VFCP) available if plan sponsor wants to receive a “no action” letter from the DOL Close to 90% of the applications made under
the VFCP since 2000 relate to delinquent participant contributions
Useful information, including FAQ, is available on the DOL website http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html
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Monitoring of Service Providers
Hiring and monitoring outsourced service providers is a fiduciary responsibility under ERISA
Useful guidance on DOL website for considerations when hiring a service provider
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Monitoring of Service Providers
Understand plan sponsor’s responsibilities for internal controls
Service providers generally provide a report on the design and operating effectiveness of their internal controls (SAS 70 or SOC 1)
Testing performed by an auditor hired by the service provider
Tool to assist plan auditors Plan sponsor should review report for significant issues
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Monitoring of Service Providers
“User controls” in SAS 70s\SOC 1s outline expectations for the plan sponsor to ensure no gaps in internal control
Typical responsibilities include: Reviewing reports of service providers for
completeness and accuracy Comparing reports to plan sponsor’s own records
Contribution remittances, distributions, loans Access to service provider systems (authorized
users)
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Monitoring of Service Providers
Actions to ensure they are performing the agreed-upon services (DOL website):
Reviewing the service providers’ performance; Reading any reports they provide; Checking actual fees charged; Asking about policies and practices (such as trading,
investment turnover, and proxy voting); and Following up on participant complaints.
Plan sponsor cannot completely delegate fiduciary responsibility to service providers
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Understanding Plan Investments
Increasingly complex investments in benefit plans – beyond mutual funds and standard pooled separate accounts Separately managed accounts Stable value products Insurance contracts
More complex valuation and accounting considerations
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Understanding Plan Investments
Word “fund” can be misleading
Involve internal and external resources to make sure all are clear on the nature of the investments, and the information required for Form 5500 and audit reporting
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Other Pitfalls
Failure to use Forfeitures Account needs to go to $0 once per year
Look for SSN 999-99-9999 on vendor reports Use in accordance with plan document
Hardship Withdrawals Participant loan (if available) must be taken first Suspension of salary deferrals (usually 6 months)
following the date of the hardship distribution
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Other Pitfalls
Nondiscrimination tests (ACP/ADP) Ensure complete and accurate population
(employees + compensation amounts) provided to TPA if test outsourced
Perform as soon as possible after year end so any failures can be corrected timely
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Concluding Thoughts
Plan document terms rule – make sure it is current and used as a tool in administering the plan
Perform self-assessments and testing early so any problems can be corrected promptly
Use your resources – hire and work with competent service providers (and monitor their work)
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Additional Resources
DOL– Employee Benefits Security Administration http://www.dol.gov/ebsa/
IRS http://www.irs.gov/ep Includes “fix it” guides for common problems
AICPA Employee Benefit Plan Audit Quality Center http://www.aicpa.org/ebpaqc Includes resources specifically designed for plan
sponsors
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QUESTIONS & ANSWERS
Thank You