Employee Benefit Plan Audit Training

EBP Audit Training – Participant Testing

BDO USA, LLP, a Delaware limited liability partnership, is the U.S.

member of BDO International Limited, a UK company limited by

guarantee, and forms part of the international BDO network of

independent member firms. BDO is the brand name for the BDO

network and for each of the BDO Member Firms.

Employee Benefit Plan Audit TrainingEBP Fundamentals – Part III

Robert Lavenberg

Beth Lee Garner

Joanne Szupka

EBP Audit Training – EBP Fundamentals – Part III

Introduction

• Welcome

• Overview of BDO EBP audit training programs

• Objective: Provide a variety of training

opportunities utilizing available technology to

maximize flexibility and meet the needs of EBP

auditors in our local practice offices and

Alliance Firms

• Visit the comprehensive EBP Training Program

Site:

• http://www.bdo.com/cpd/ebp/index.html

• Training Roadmap

• Existing library of all online EBP self-study

courses

http://www.bdo.com/cpd/ebp/index.html


EBP Fundamentals Training Series

Understanding EBPs

Audit Planning and Risk Assessment

Obtain Audit Evidence

Financial Statements and Concluding the

Audit

Part

I

Part

IIPart

III

Part

IV


EBP Fundamentals Training Series

Part I

• Provides an understanding of ERISA, types of plans, filing requirements, plan documents, basic plan provisions, and resources available

Part II

• Provides an understanding of planning and risk assessment for EBP audits

Part III

• Provides an understanding of participant-level testing

Part IV

• Provides an understanding of general EBP financial statements and procedures associated with concluding an EBP audit


Today’s Instructors

Robert Lavenberg

• National Partner In Charge of EBP Audit Quality

Beth Lee Garner

• Director, Assurance

JoanneSzupka

• Director, Assurance


Agenda

Obtain Audit Evidence (Folder 4)

EBP Audit Issues

Concluding Remarks


Course Objectives

EBP Fundamentals

Part III

Identify how key plan document provisions impact audit testing

procedures

Recognize appropriate audit

procedures applicable for

participant testing

Identify applicable procedure(s) to be

performed in response to errors

identified in participant testing

Recognize examples of appropriate audit

documentation


(Folder 4)


Obtain Audit Evidence (Folder 4)

These areas will be

covered in Part IV



APT defaults to common EBP audit

procedures (automatically

appear in audits plans of related FSAs or

GAAs)

Customization of audit tests rarely needed

Planned assurance

levels for each FSA assertion are not pre-populated

Customized audit plans

will roll forward in

future years


Cash


Cash

Cash within plan

Cash outside plan

Interest bearing

Non-interest bearing


Cash - Assertions

All cash amounts are recorded and exist

Cash is owned by the plan and is free of restrictions

Cash is properly presented and disclosed in plan financial statements


Cash - WCGWs• Omitted from financial statements since certain cash accounts may not

be included in trust statements

• Not reconciled to plan financial statements and/or prior year balances

may not reconcile to current year

• Not properly accounted for in plan financial statements due to significant

amounts of uncashed checks to participants held outside plan

Cash - Procedures• For material cash balances held by the plan, substantive audit procedures

are normally appropriate

• Inquire of plan management about any omitted balances that may be held

by plan sponsor, trustee or custodian

Uncashed, outstanding benefit checks

held by trustee or custodian (in trustee /

custodian’s assets) ARE plan assets –

obtain listing to see if any are material


Cash - Considerations

• For limited scope audits, cash is

generally covered by the certification

o If not, full-scope procedures may

be necessary

• Show interest-bearing cash as

investment

o FinRec recommendation

o Form 5500 instruction

• Show interest-bearing cash as

investment on Form 5500,

Schedule H, line 4i - Schedule

of Assets Held (At End of Year)


Investments (and Related Income/Loss)


Common EBP Investments

Mutual Funds

Common Stock

Common / Collective

Trusts

Insurance Company Products

Self-Directed Accounts

Bonds

Alternative or Hard-to-Value Investments

Master Trusts

Unitized Stock Funds

Separately Managed Accounts

Omnibus Accounts

Exchange-Traded Funds

Refer to our EBP

Common

Investments

training course

for further

guidance


Audit Scope Considerations

Full Scope

• Audit procedures extend to all financial statement areas

Limited Scope

• Audit procedures extend to all financial statement areas except plan-level investments and related investment earnings, which are covered by an appropriate certification

Audit scope has no impact on ASC 820 disclosures (fair value) or

SOC 1 report reliance

ASC 820 disclosures

and SOC 1 report

considerations are

applicable

regardless whether

full or limited scope

audit procedures

are performed


Limited Scope Audit Exemption

• Plan administrator can direct auditor to not audit plan-level investments,

investment income and investment transactions

• Requirements for the certification

o Certification must be from a qualified entity that holds the assets and

executes the transactions

• “Qualified entity” – this is an entity that is regulated, supervised and

subject to periodic examination by a federal or state agency

o If entity does not appear to be qualified, may have to perform full scope

audit

o Must certify that statements are “complete and accurate”

o Certification may not appropriately extend to all investments - as such,

auditor may have to perform full scope procedures for those investments

• Self-directed investments - are often held by broker-dealer and may not

be covered by qualifying certification

• Notes receivable from participants


Qualifying Entities

These entities do NOT qualify for exemption (full scope procedures are required)

• Broker-dealers

• Investment companies

• Service bureaus

These entities generally DO qualify for the limited scope exemption

• Banks

• Regulated savings and loans

• Trust companies

• Credit unions

• Insurance companies


Is the certification signed by a

qualifying entity? Need to

understand the relationship to

the plan

Is there any qualifying

language? *

Which of the investments are properly covered

by the limited scope

certification?

Complications Associated With Certifications

* “To the best of our knowledge and belief” is a commonly-used phrase

in certifications - this phrase is generally NOT considered qualifying

language


Excerpt of Limited Scope Disclaimer Audit ReportBasis for Disclaimer of Opinion

As permitted by 29 CFR 2520.103-8 of the Department of Labor’s (DOL) Rules and Regulations for Reporting

and Disclosure under the Employee Retirement Income Security Act of 1974, the plan administrator

instructed us not to perform, and we did not perform, any auditing procedures with respect to the

information summarized in Note X, which was certified by XYZ Trust Company, the trustee of the Plan,

except for comparing such information with the related information included in the financial statements.

We have been informed by the plan administrator that the trustee holds the Plan’s investment assets and

executes investment transactions. The plan administrator has obtained a certification from the trustee as

of December 31, 20XX and 20XX, and for the year ended December 31, 20XX, that the information provided

to the plan administrator by the trustee is complete and accurate.

Disclaimer of Opinion

Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we

have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Accordingly, we do not express an opinion on these financial statements.

Other Matter

The supplemental schedule, Schedule H, Line 4i - Schedule of Assets (Held at End of Year) as of December

31, 20XX is required by the DOL’s Rules and Regulations for Reporting and Disclosure under the Employee

Retirement Income Security Act of 1974 and is presented for the purpose of additional analysis and is not a

required part of the financial statements. Because of the significance of the matter described in the Basis

for Disclaimer of Opinion paragraph, we do not express an opinion on this supplemental schedule.


Investments - Assertions

Investments and investment transactions

are initiated in accordance with

established investment policies and comply with plan provisions

All investments are recorded and exist

All investments are owned by the plan free of liens,

pledges, and other security interests or, if not, whether security

interests are identified and properly disclosed

All investments are valued as of plan year-

end

Investment principal and income

transactions (including net appreciation) are recorded and properly

valuedWhether plan has any intention of seeking to dispose of or terminate

any investment agreements or

contracts

Derivatives are properly recorded as assets or

liabilities

Information about investments is properly

presented and disclosed


Investments - WCGWs

• Investment information from trust

(custodian) statement does not

reconcile to plan sponsor records (trial

balance), financial statements, or

other recordkeeper reports

• Investment manager reports do not

reconcile to trustee (custodian)

reports

• Investment transactions not recorded

by trustee (custodian) or not recorded

on a timely basis

• Improper authorization of investment

purchase and sale transactions prior to

initiation or not in accordance with

plan provisions or investment policies

• Investments recorded in financial

statements do not exist or are not

owned by the plan

• Incorrect calculation of gains and

losses on sales of investments

• Investment income recorded at

incorrect amount

• Investments not properly recorded at

fair value as of reporting date

• Investment details incorrectly entered

into investment management system

upon purchase


Full Scope Audit

• Confirm assets directly with custodian

• Year-end market value testing

• Investment transaction testing (sales and purchases)

• Investment income (interest, dividends) testing

Limited Scope Audit

• Ensure certification contains appropriate language (no audit procedures are performed on investments)

• Reconcile certified investment information to Plan’s financial statements and Form 5500

Investments - Procedures

Both Full and Limited Scope Audits

• Obtain understanding of plan management’s internal controls and processes for valuation; are ASC levels and classifications appropriate?

• Investigate unusual investment balances or transactions; test investment income allocation to participants

• Determine FS and supplemental schedules comply with DOL requirements

• Determine that plan FS and disclosures comply with GAAP (and with PCAOB, for Form 11-K filings)


Investments – Considerations

• Obtain adequate understanding of

investments owned by plan

• Obtain and read copies of any

investment contracts

• Inquire about changes in investments

held from prior year

• Identify whether there are hard-to-

value investments

o Document understanding of the

valuation of such investments


Example Investments – Full Scope Valuation Testing


Example Investments – Transaction Testing (Purchases)


Example Investments – Transaction Testing (Sales)

Note: Recalculation is for a unitized fund that cannot be traced

to a published source.


Eligibility and Contributions


Eligibility and Contributions

Eligibility

Payroll

Contributions, Contributions Receivable and Remittances


Eligibility and Contributions - Assertions

Contributions

Amounts received or due appropriately

determined, recorded, and disclosed in plan

financial statements in the proper period

Contributions

Appropriate allowance made for uncollectible

plan contributions receivable

Contributions

Proper authorization and execution of participant

contributions (proper amount, proper period, in accordance with plan

provisions, at participant’s direction)

Eligibility

All active participants properly included in employee eligibility

reports and contribution records

Payroll

Appropriate and accurate participant data, including payroll

information, utilized in determining amounts contributed to plan

Participants who

are contributing

or eligible for

employer

contribution


Eligibility - WCGWs

• Employees not appropriately included or excluded based upon plan provisions

o Employees not provided timely notification of eligibility

o Certain groups excluded in operation, but not under plan terms

o Insufficient tracking of certain classes of employees (leased, part-time,

temporary)

Eligibility - Procedures

• Determine whether employees are eligible in accordance with plan

provisions or collective bargaining agreement


Eligibility - Considerations

• Plan document specifies eligibility

requirements (e.g., who is in / who is out)

o Understand eligibility requirements per

executed plan document provisions (not

SPD)

• Eligibility requirements may vary for different

contribution types to same plan (e.g.,

participant, ER match, ER profit sharing)

• Plan provisions may be more generous than ERISA-mandated minimum standards

o One year of service (or two years in certain plans) or age 21

o Semi-annual entry dates

o Participants allowed to enter plan within six months of satisfying eligibility

requirement(s)

• Break in service for rehired employees

• Generally a five-year cutoff

If plan is more generous than

ERISA, then plan provisions

must be followed


Example Eligibility Testing


Why Consider Payroll?

Involves application, hiring, pay rate/salary and termination / separation / retirement

Employee eligibility

Computation, withholding and remittance of employee contributions

Withholding and remittance of participant loan repayments

Computation and remittance of employer contributions


Payroll - WCGWs

• Inaccurate participant deferral (including catch-up) percentages entered into

payroll

• Validity of payroll system (e.g., fictitious employees)

Payroll - Procedures

• Obtain and review three-way reconciliation of total contributions from trustee

or custodian reports to BOTH of the following:

• Contributions per payroll or other records AND• Contributions per recordkeeper reports (e.g., participant account

statements)

Trustee / Custodian ReportPayroll Contribution

RecordsRecordkeeper Contribution

Report


Payroll - Considerations• Walkthrough of payroll process is not required (if payroll

is not a significant part of the contribution or participant

data process), but always highly encouraged

• Payroll documentation memo must cover entire cycle

(e.g., application through termination)

• Consider leveraging off commercial audits

o Early coordination with commercial audit team is

necessary

o Generally, commercial audit procedures do not test participant data detail as

necessary for EBP engagements (refer to Plan Sponsor EBP Efficiency Steps document

located in BIE>Assurance>EBP>Tools & Templates)

o Include documentation in EBP working papers

• Payroll-related procedures are applicable to DB plans where payroll is a factor in

determining benefits

• Immaterial differences noted in the three-way reconciliation of total contributions

(trust, payroll, and recordkeeper) may indicate contributions were not accurately

recorded


Example Payroll Testing


Contributions

Contributions

Contributions Receivable

Rollover Contributions

Contribution Remittances

Participant Accounts


Types of Contributions

Employee

• Pre-tax

• After-tax

• Roth

• Catch-up

Rollovers

• Transfer of contributions from another qualifiedplan or Individual Retirement Account (IRA)

Employer

• Discretionary

• Matching

• Profit sharing

• Required

• Cash or non-cash


Contributions and Contributions Receivable -

WCGWs

• Not properly calculated, accurate, complete, authorized, recorded in proper

period or remitted in accordance with plan provisions

• Incorrect contributions due to different definition of compensation from plan

provisions

o Various definitions of compensation for different purposes (e.g.,

employee deferral, employer match, profit sharing)

o Reliance on summaries of plan provisions instead of plan document

o Transition periods (e.g., changes to payroll system, in house

administrators and third-party service providers)

• Profit sharing contributions or ESOP allocations not properly recorded

• Excess contributions (including failure to pass actual deferral percentage test)

not properly determined or recorded



Procedures• Apply appropriate analytical

procedures

• Determine whether different

contribution types are in accordance

with plan provision rates or formulas

• Determine whether minimum funding

requirements are met (as required by

ERISA), if applicable

• Compare ER contribution with amount

approved by board of directors, if

applicable

• Test allocation of ER contribution to a

sample of individual participant

accounts

• Determine whether contributions are

invested according to participant

election• Review criteria used by plan in

accruing ER / EE contributions

receivable and determine whether

accruals were recorded appropriately

• Trace subsequent receipt of

contributions receivable to supporting

documentation

• Evaluate reasonableness of plan

allowance for uncollectible amounts

(based on testing of subsequent

collections and review of status of

unpaid amounts)

Consider SOC 1 report and

relevant controls



Considerations• Definition of compensation within plan document is critical

o Understand how compensation is defined before testing begins

• Watch for:

o Multiple definitions (e.g., deferral, match, etc.)

o Inclusion/exclusion of various elements (e.g., bonuses, overtime,

commissions, tips, stock option compensation)

o True-up contributions (e.g., for plans with matching formula based

on percentage of salary deferred, participant may receive an

additional contribution)

o Employee elections made electronically (fund and deferral elections)

• If there is no audit evidence, may need to use participant

confirmations


Contributions and Contributions Receivable –

Considerations (continued)

• Forfeitures may be used to offset

employer contributions

• Contributions are limited per IRC

• Corrective distributions may be

required if employee contributions

exceed contribution limitations

o Record as liability as of plan year-end

and reflect on Statement of Changes

In Net Assets Available For Benefits

(as offset to contributions)


Example Contributions Testing


Example Contributions Testing (continued)


Rollover Contributions - WCGWs

• Same as Contributions and Contributions Receivable WCGWs

• Review plan document to determine whether rollovers are allowed• Obtain a schedule of rollovers and reconcile to the plan financial statements• Test that participant investment elections have been complied with, as

applicable• Review participant records to determine that rollover amount is properly

reflected (e.g., pre-tax, after-tax, and/or Roth)

Rollover Contributions - Procedures

Rollover Contributions - Considerations

• If the dollar amount of the rollover is below performance materiality, it may

not be subject to sampling, but would ordinarily be tested for regulatory

compliance purposes


Example Rollover Contributions Testing


Contribution Remittances - WCGWs

• Participant contributions and loan repayments are not remitted in a timely

manner

• Participant contributions and loan repayments are not remitted in accordance

with collective bargaining agreements (multiemployer DC plans)

• Obtain a schedule of the timeliness of employee salary deferral contribution

remittances (and loan repayments, if applicable) to plan and, if necessary,

applying additional audit procedures

• Vouch contributions to wire transfer notices or other supporting evidence

Contribution Remittances - Procedures


Contribution Remittances - Considerations• Applies to both employee deferrals and loan

repayments

• ERISA requires plan sponsors to remit salary

deferrals and participant loan repayments to

the plan as of the earliest date on which such

amounts can reasonably be segregated from

employer’s general assets, but no more than

15 business days following end of the month in

which amounts were withheld

o Does NOT mean that plan can remit by 15th business day of following

month (DOL has reiterated this repeatedly)

o 15th business day of following month is NOT A SAFE HARBOR

• DOL’s EBSA Safe Harbor for Small Plans (e.g., generally not subject to audit):

o Provides a safe harbor period for participant contributions to a small pension

or welfare plan and participant loan payments of 7 business days


Contribution Remittances – Considerations

(continued)

• Concept of “outliers”

o Responsibility of plan sponsor to make determination as to whether

outliers are considered late remittances (e.g., prohibited transactions)

o Sponsor may need to obtain assistance of ERISA legal counsel in making

determination

• NEVER the auditor’s responsibility to make this determination

o If sponsor determines to be late, outliers must be disclosed in a footnote

and on a Schedule of Late Remittances to be attached to plan financial

statements and Form 5500

• Possible causes for late remittances

o Employer lacks sufficient understanding of rules and their application

o No reconciliation of contributions between payroll and trust

o Transition periods (e.g., payroll provider changes, key personnel changes)


Example Remittance Testing


Participant Accounts – Assertions

Allocation of net assets to individual participant accounts is accurate and in accordance with

plan provisions

Participant accounts (including forfeiture account) are complete

and the valuation is accurate

Participant transactions are properly authorized and accurate

(e.g., executed at proper amount, in proper period and in accordance with plan provisions

and at participant direction)

Participant accounts

are generally

applicable to DC

plans only


Participant Accounts – WCGWs

• Overstated or understated accounts due to investment options or salary

deferral amounts that are not in accordance with participant's stated

elections

• Overstated or understated accounts due to inaccurate allocations of income

or expenses

• Missing contributions or improper allocations due to a lack of reconciliations

or improperly prepared reconciliations


Participant Accounts – Types of Allocations

Investment income / loss

Administrative expenses

Forfeitures


Participant Accounts - Allocations

If SOC 1 report addresses testing of internal controls over these areas, consider extent of reliance available

to possibly reduce substantive testing

Factors affecting SOC reliance include: 1) assessed level of control risk for completeness and accuracy relating to transactions processed by

recordkeeper and 2) what is covered by SOC 1 report

Allocation testing is performed for both full and limited scope audits

Plan sponsor or service provider should perform periodic reconciliations (between individual participant balances

and net assets)


Participant Accounts - Investment Income/Loss

Allocation

Allocation of investment income/loss

Daily change in investment value

Participant-directed plan,

daily valued with fully-automated

systems and recordkeeper SOC

1 report

SOC reliance: analytically review

individual participant statements

No SOC reliance: substantive tests of allocation to

individual participant accounts

Dividend and interest income

Not performed daily

Test allocation to individual participant accounts


Participant Accounts – Investment Income/Loss

Allocation Procedures

• Compare participant earnings with plan earnings for same investment

o Select time period for plan year (e.g., month or quarter) and recalculate

applicable income/loss for participant and fund for that period

o For selected investment, compare investment income/loss percentage

allocated to participant account with overall income/loss percentage allocated

to plan

o For full scope engagements, also compare earnings with an outside pricing

source

Participant Accounts – Investment Income/Loss

Allocation Considerations

• Test 10-20 % of participants selected for contributions testing


Example Participant Accounts – Income Allocation Testing

Comparison of investment return to outside pricing source

generally only performed for Full Scope audits


Participant Accounts – Expense Allocation

Refer to Administrative Expenses section of

training for discussion regarding allocation of

plan expense testing (along with an example

of testing performed)


Forfeitures – Assertions

Exist andare properly recorded

Properly presented and disclosed in financial

statements (e.g., forfeitures used to offset future employer contributions are shown as a

reduction of employer contribution receivable)

Used only in accordance with the plan document


Forfeitures – WCGWs• Incorrectly allocated to individual participant accounts or investment funds

• Unvested amounts are not calculated correctly

• Not used in accordance with plan document or applicable regulations.

o Misuse may result in plan qualification issues and possible fraudulent financial

reporting

• A partial plan termination (where 20 percent or more of participants are

involuntarily terminated) occurred, but participants were not 100 percent vested

Forfeitures - Procedures• Review plan provisions for forfeitures use (e.g., pay plan expenses, reallocated to

current participants, used to reduce future employer contributions)

• Obtain detail of forfeiture activity for current period, rollforward from BOY to

EOY and trace activity to supporting documentation

• Administrative expenses invoices, intra-plan offsets against contributions, and

summaries of reallocations to remaining participants


Forfeitures - Considerations

• Review results of procedures performed for

contributions and distributions that relate to

testing of forfeiture calculations and

allocations

• Consult plan ERISA counsel or adviser if

forfeitures not used in accordance with plan

document/applicable regulations or in a timely

manner

• Understand composition of forfeitures account (e.g., forfeited amounts, stale

checks)

o Ensure forfeitures account detail is maintained when switching service

providers

• Disposition of forfeitures depends on plan document terms:

• Must be used annually (per IRS Revenue Ruling 80-155, all DC plan funds should

be allocated)


Example Language From Plan Document

Excerpt above is from a plan adoption agreement


Benefit Payments


Benefit Payments

Acceptable distributable events

• Severance from employment

• Hardship (if permitted; safe-harbor or facts/circumstances)

• Attainment of age 59½ or age 70½ (required minimum distribution)

• Retirement (usually age 65) or Early Retirement (if allowed)

• Disability or Death

If participant does not provide direction:

• Amounts under $1,000 - no authorization needed to distribute

• Amounts between $1,000 and $5,000 - may be disbursed to an IRA in participant’s name


VestingGenerally, either 3-year cliff or 2-6 year graded

• Plan may provide for a faster vesting schedule

May exclude service years before plan was established and

before age 18

Breaks in service may affect vesting


Break In Service

Distinction between “twelve-month period following the hire date” and “plan year”

Calculation of hours

• Actual hours versus “equivalency” hours

• Incorrect census data provided to service provider

Often source of operational errors


Hardship DistributionsIf permitted by plan, distributions may be available if needed to pay:

• Medical expenses

• Purchase of principal residence

• Repair of damage to principal residence

• Post-secondary education (up to 12 months)

• To prevent eviction

• Funeral expenses

Distribution will be deemed necessary if:

• Immediate and heavy financial need

• All other opportunities (e.g. loans) have been exhausted

• Distribution cannot exceed amount of need (may be grossed up for related taxes)

• Participant cannot defer salary for six months after distribution


Required Mandatory Distributions (RMD)

RMDs must begin no later than April 1 following the later of:

• Calendar year when participant turns 70½

• Calendar year when participant retires

If participant continues as an employee after age 70½ , distributions are not required until actual retirement

• Exception does NOT apply to 5% owners


Qualified Domestic Relation Orders (QDROs)

Any assignment of retirement interests to a spouse, former spouse, child or other dependent must comply with ERISA and

IRC

Retirement interests may be assigned only if judgment, decree, or order constitutes a QDRO

QDROs provide right for alternate payee to receive all or portion of benefits payable to a plan participant when the

participant has a distributable event


Benefit Payments - Assertions

Benefit payments, hardship withdrawals, in-service withdrawals, and QDROsare made in accordance

with plan provisions

Payments are made authorized and made to or on behalf of eligible

participants and beneficiaries

Transactions are recorded in proper

account, amount, and period

Payments are properly presented and disclosed


Benefit Payments – WCGWs

• Not properly authorized or in accordance with plan document

provisions

• Not recorded or recorded for incorrect amount

• Amounts per trustee do not agree to recordkeeper

• Calculated incorrectly (non-recognition of loans or vested balance)

• Not in accordance with participant election

• Not recorded in correct participant account

• Made to an ineligible participant or beneficiary


Benefit Payments – Procedures

• Obtain schedule of all participants and

beneficiaries receiving distributions or

withdrawals for current plan year and

select a sample

• Determine if distribution / withdrawal

was authorized (e.g., participant

withdrawal election form/beneficiary

designation or plan-initiated

distribution event)

• Examine type and amount of payment,

including form of distribution (e.g.,

lump sum, installments, or annuity

contract)

• Examine propriety of:

o Approvals for distributions requiring

plan administrator approval and/or

spousal consent, etc.

o QDRO distributions

o Hardship withdrawals

o Death and disability distributions

o Distributions related to mandatory

cash-out provisions (e.g., RMDs)


Benefit Payments – Procedures (continued)

• Determine participant or beneficiary

eligibility:

o Does payee meet plan eligibility

requirements?

o Determine / review vested

percentage

• Compare evidence of age,

employment dates, credited service,

earnings (if applicable)

• Recompute payments (including tax

withholding) based on plan provisions

and related documents and relevant

inputs (e.g., option elected, age, and

participant service history)

• Recompute forfeited participant

balances based on plan vesting

provisions and participant service

history

• If plan requires contribution

suspension for period following

hardship distribution, determine if

participant deferrals and company

match (if applicable) were

appropriately suspended



• If participants receive payments

directly, test for appropriate receipt

using one or more of the following:

o Confirm payment directly with

selected participants or

beneficiaries

o Compare canceled checks with

cash disbursement records

(including review of endorsement)

o Compare payee or account name

(for electronic funds transfers) to

participant or beneficiary name

o Consider inquiry regarding

participant complaints regarding

distributions (indicator of potential

fraud or errors)

• Determine continued eligibility of

participants or beneficiaries to

receive benefits

o Individuals should be removed

from benefit rolls upon death

o Are payments made over an

unusually long period still

appropriate?

• Investigate long-outstanding benefit

checks (may indicate duplicate

payments or deceased/missing

participants)



• Obtain and test reconciliation of total

benefits paid per disbursement register

to trustee reports and financial

statements

• Compare individual disbursements with

participant account records

• Review plan policy/provisions

regarding recording benefit payments

and determine whether payments were

recordedConsider SOC 1

report and relevant

controls


Benefit Payments – Considerations

• If purchase of an annuity contract is a payment

option, consider procedures regarding annuity

contracts

• Practical testing tips:

o Know types of benefit payments permitted

and when payments are allowed

o Obtain complete listing of all benefit

payments during plan year showing a) type

of payment and b) participant or beneficiary

to whom it was paid

Refer to Payroll Procedures

for more details

• Review listing for unusual items and perform inquiries

o Each type of benefit payment generally would be tested

o Ensure sponsor appropriately resolves/explains any issues noted from three-

way reconciliation of benefit payments


Benefit Payments – Considerations (continued)

• Determine if spousal consent was required and, if so, obtain

• Tax Consequences – understand requirements for withholding, if any

• Fraud risk

o Employee may be able to initiate, authorize, and record a transaction or

have custody of assets within benefit payments process such that employee

is able to perpetrate and conceal an error or irregularity, causing duplicate

or fictitious benefit payments or withdrawals to be recorded

o Lack of segregation of duties

o Consider specific facts and circumstances of plan’s control environment

related to financial reporting or misappropriation of assets

o Consider additional audit procedures

• Nature, timing, and extent of procedures should consider level of

assessed risks of material misstatement due to fraud


Benefit Payments – Common Issues

Failure to properly apply plan vesting

provisions

• Service provider lacks proper participant data needed to calculate service time

• Reliance on summaries of plan provisions instead of plan document

• No consideration of rehire dates

Improper hardship distributions or deferrals not suspended

• Sponsor lacks sufficient understanding of hardship rules and their application

• Lack of controls over plan administration and payroll (e.g., communication to suspend deferrals)

Lack of benefit calculation

documentation for DB plans

• Complex calculations often performed by actuaries

• Lack of records maintained by plan sponsor

• A change in actuary where the calculation was performed by predecessor


Example Benefit Payments Testing


Example Benefit Payments Testing (continued)


Notes Receivable

from Participants (Participant

Loans)


Notes Receivable from Participants

Loans represent assets of a DC plan (e.g., note

receivable)

Plan document will state if participant loans are allowed; amounts are subject to regulatory limits

May be documented in a separate loan policy document

Loan accounting typically performed by trustee/custodian

or recordkeeper

For loans typical of

403(b) plans, refer to

403(b) Plans – Their

Background, History and

Changing Environment

training course


Regulatory Limits

Maximum loan amount: lesser of $50,000 or 50% of vested account balance at issuance date

Maximum repayment term: five years except for primary residence purchase

Non-military leave of absence exception -may suspend payments up to one year, but cannot extend overall repayment period

Military leave of absence exception – in addition to suspending payments during leave period, may also

extend repayment period by length of service period


Regulatory Limits

At least quarterly amortization; subject to similar timely remittance requirements as contributions

Must be included in plan provisions if sponsor intends to allow loans

Loans to disqualified persons are prohibited transactions unless certain requirements are met (see below)

Requirements: available to all participants/beneficiaries and for same amount for HCEs and other employees, made per plan provisions, bear

reasonable rate of interest and be adequately secured


Deemed Distributions

Defaulted loans are taxable to participant as income when employee receives a 1099-R

Recordkeeper generally maintains loan on books (e.g., reported on Statement of Net Assets) until

distributable event occurs

For financial reporting purposes, a loan is written off when “deemed

distributed”

Distributable event includes termination, retirement, death,

disability, etc.

Refer to AICPA Audit and Accounting Guide – Employee Benefit Plans


Notes Receivable from Participants – Assertions

Properly authorized, recorded and exist

Properly valued and disclosed

Initiated in accordance with plan provisions


Notes Receivable from Participants – WCGWs

• Not initiated in accordance with plan provisions (e.g., not recorded properly)

• Not reconciled between recordkeeper and trustee on a timely basis

• Loan details (such as amount, repayment period, interest rate, and residential

or nonresidential loan) incorrectly entered into recordkeeper system

• Loan repayments not properly calculated or properly / timely withheld from

payroll

• Loan repayments not recorded in correct participant account

• Loans in default not properly reclassified as "deemed" distributions

• In instances of a plan merger, loans not properly transferred to the new plan


Notes Receivable from Participants – Procedures

• Understand plan loan provisions and examine loan documentation and whether

it was issued in accordance with plan provisions

• Confirm loan balances and terms directly with plan participants

• Test that repayments and interest income are properly calculated and

recorded

• Obtain rollforward of participant loans from recordkeeper

o Test reconciliation of loan activity from rollforward to trustee (custodian)

statement (which includes disbursements, principal repayments, deemed

distributed, and ending balance)

• Review financial statement classification:

o Participant loans reported as “notes receivable from participants”

o Interest income recorded as “interest income on notes receivable from

participants”


Notes Receivable from Participants – Considerations• Generally, select sample from listing of all participant

loans issued during plan year and determine if issued

in accordance with plan provisions

o Participant loans issued in prior periods are

reviewed to determine if payments are current and

interest is being appropriately calculated and

remitted

• For Form 5500 purposes, participant loans are reported as Investment on

Schedule H and included in Schedule H, line 4i—Schedule of Assets (Held at End

of Year)

• For limited scope audit, ensure loans are properly maintained and certified by a

qualifying institution and properly disclosed in financial statements

• Due to regulatory compliance component, loans initiated by plan would ordinarily

be scoped back in even if below materiality


Notes Receivable from Participants – Common Issues

Common Issues

• Participant originated more loans than plan allows

• Defaulted loans not accounted for properly

• Repayments not set up properly in payroll

Contributing Factors

• Sponsor lacks sufficient understanding of loan rules and application

• Reliance on plan provision summaries instead of loan policy document

• Lack of communication between plan administrator and payroll

• Transition periods (changes to payroll system, etc.)


Example Participant Loan Testing


Administrative Expenses


Administrative Expenses

Determine from plan document who pays

• Plan participants (e.g., loan fees) and/or

• Sponsor

Determine whether expenses are allowed by Plan document

• Allocations to participants should be proper and in accordance with plan document

• Must be for benefit of plan participants

• Certain expenses must NOT be paid by Plan (such as costs for formation or Plan design, actuarial valuation for plan sponsor, etc.)


Administrative Expenses – Assertions

Paid in accordance with the plan provisions and properly

authorized

Paid in accordance with service provider agreements

Recorded in the proper account, amount, and period

Presented and disclosed


Administrative Expenses - WCGWs

• Do not represent allowable expenses per plan document or regulatory provisions

• Paid to fictitious vendors

• Not properly accrued or classified

• Not calculated in accordance with service provider agreements

• Incorrect apportionment of allocated expenses between plans or plan sponsor

• Not properly authorized prior to recording and payment

• Not properly recorded by the trustee or custodian


Administrative Expenses - Procedures

• Review plan provisions and board minutes to determine whether

administrative expenses were properly authorized and allowed by plan

• Perform analytical procedures for recurring types of expenses (e.g., routinely

paid out of plan from year to year)

• Analyze expenses and examine supporting invoices, documents, and

computations

• Review service agreement and determine whether contracted services were

performed and payments made in accordance with agreement terms

• If plan expenses are allocated among several plans sponsored by same plan

sponsor or a multiemployer plan:

o Review allocation to determine if appropriate

o Determine if method of allocation used was approved by board of trustees

or administrative committee


Administrative Expenses – Procedures (continued)

• Determine if fees charged (by trustees, investment advisers, etc.) are in

accordance with agreements / regulations

o In multiemployer plans, trustees may be reimbursed by plan for meetings

and other expenses associated with plan operations

• Any fees or expenses paid to related parties or parties in interest need to be

considered for disclosure under FASB ASC 850, as well as ERISA regulations

o Expenses paid by plan that are not allowed by plan provisions OR

excessive fees (regardless of materiality) may be deemed a prohibited

transaction requiring further testing and/or disclosure

• For example, fees paid by one plan on behalf of another plan as a

result of errors or inappropriate allocations and fees paid by plan for

certain services provided to plan sponsor (e.g., trustee fees, etc.)


Administrative Expenses - Considerations

• DOL’s expectation: certain participant transactions (e.g.,

expenses) should be tested, regardless of materiality

o Scope Expenses FSA back in (even if immaterial $) and

perform applicable tests

o In testing expenses allocated to participants, generally

suggest selecting participants tested for other FSAs (e.g.,

Loans, Distributions) and ensure proper expense amount

charged to participant account based on fees per plan

document

• As part of planning and risk assessment, obtain understanding of allowable plan

expenses and develop audit procedures based on what plan provisions allow

• Consider review of service provider agreements to understand fee arrangements

o Consider additional inquiries with plan management and service providers

• For plans invested in a master trust, investment-related expenses are generally

allocated among respective plans (certain other expenses are charged directly to

each plan)


Administrative Expenses – Considerations (continued)

• Multiemployer plans often share expenses with related plans and the

sponsoring union

o Consider review of methods utilized to allocate expenses to determine

whether plan under audit paid its appropriate share

• Generally, analytics alone for plan expenses are not considered sufficient

• If plan expenses are deemed immaterial, the following are the ONLY audit

steps that may be omitted:

If the expenses are material, select a sample of expenses and perform the

following:

a. Obtain documentation that the expenses are allowed by the plan and

are in accordance with the respective terms of the service contract or

agreement, and

b. Agree the expense to supporting documentation, including the invoice

and fee schedule in contract or agreement.


Typical Administrative Expenses / Fees

Loan processing Trustee / CustodianRecord-keeping and

compliance

Investment management / advice

/ educationProfessional

Transaction and processing


Example Expense / Expense Allocation Testing


Example Expenses Testing (continued)

Example of an analytic that could be

performed (along with testing)

EBP Audit Issues


EBP Audit Issues

“Normal” audit issues

• Similar to commercial audits

• Planning

• Audit documentation

• Timely archiving

• Appropriate engagement team signoffs

• Proper and complete financial statement disclosures

• Compliance with BDO’s privacy policies

Regulatory issues

• Plan document and operational issues not expected to materially affect amounts in financial statements

• Require corrective action

• Jeopardize tax qualified status of plan (if not voluntarily corrected through various programs)

• Expose plan sponsor / fiduciaries to additional liability for excise taxes, user fees and penalties

• Warrant additional footnote disclosures and/or required ERISA supplemental schedules


Typical Areas of Concern

EligibilityEligible

compensationTiming of

remittances

Employer contributions

Application of plan’s vesting

provisions

Use of plan forfeitures

Notes receivable from participants


When Errors Are Identified

In-Scope Audit Work

•Part of original fee quote to client

•Vet difference / potential error within engagement team as appropriate

•Communicate with plan sponsor ASAP

•Client’s responsibility to investigate and quantify

•Understand root cause

Out-of-Scope Audit Work

•Consider additional billing to client

•Consult with National EBP Group/Comp & Benefits

•Determine RMM to financial statements and footnote disclosures

•Document in working papers the amount of issue/error, consultations, client’s resolution, additional audit procedures performed and our conclusion

•Evaluate and conclude regarding need for AU-C 265 communication

Separate Engagements

•Consider using Comp & Benefits Group to assist with corrective action

Refer to EBP training course,

Auditor’s Responsibility for

Regulatory Matters


Reminder

Comply with AU-C 230

documentation requirements -

if not documented in working

papers, then it is not

considered to have been

performed


Additional Resources

BDO-U EBP-specific training courses

• http://www.bdo.com/cpd/ebp/index.html

BDO USA Audit Manual Chapter 53, Employee Benefit Plans

AICPA Audit and Accounting Guide – Employee Benefit Plans (latest version)

AICPA Audit Risk Alert – Employee Benefit Plans Industry Developments

DOL - Employee Benefits Security Administration

• www.dol.gov/ebsa

IRS

• www.irs.gov/Retirement-Plans

EBP Audit Help Desk

• [email protected]


To Be Continued….

EBP Fundamentals

Part IV

• Provides an understanding of general EBP financial statements and procedures associated with concluding an EBP audit

EBP Audit Training – Participant Testing

BDO USA, LLP, a Delaware limited liability partnership, is the U.S.

member of BDO International Limited, a UK company limited by

guarantee, and forms part of the international BDO network of

independent member firms. BDO is the brand name for the BDO

network and for each of the BDO Member Firms.

Concluding Remarks

Spring 2015

Employee Benefit Plan Audit Training

Documents

Transcript of Employee Benefit Plan Audit Training