Trends In Retirement Plan Audits: An Auditor's Perspective

Sunday, July 1, 2007 - 01:00
Amper, Politziner & Mattia, LLP
Diane Wasser

Editor: Please tell our readers about your professional background and experience.

Wasser: I started out at Touche Ross once I graduated from college in 1984. I worked there for four years and came to Amper, Politziner & Mattia P.C. (Amper). I began assisting benefit plans with their auditing requirements and as time progressed, I gravitated more and more towards the benefit plans area. More and more companies began to provide employees with retirement programs of one form or another so the need for auditing services grew.

Editor: Would you tell our readers about the services that Amper's Pension Services Group offers to clients?

Wasser: Primarily, we provide auditing and consulting services for defined contribution plans, defined benefit plans and health and welfare plans. Generally, the Department of Labor requires certain plans, depending on their size, to engage an independent certified public accountant to conduct an audit as part of the plan's annual Form 5500 filing. Through our consulting services we advise plan sponsors on a host of problems that they may uncover with their plans. For example, a plan may not deposit employee deferrals on time, they may not comply with plan document requirements, or they may not include all eligible employees in their plans. It is important for companies to become compliant in these areas, regardless of the amount of time they have been out of compliance, and our team works with them during this process.

Editor: How does Amper assist plan sponsors in fulfilling their fiduciary responsibilities as retirement plan sponsors?

Wasser: Everyone became much more concerned with plan fiduciaries when the Enron scandal took place. Fiduciaries are defined by a functional role and must comply with five general standards in the administration of a plan, (1) acting solely in the interests of plan participants and beneficiaries and with the exclusive purpose of providing benefits to them, (2) exercising prudence in running the plan, (3) making sure the investments are diversified, (4) adhering to plan documents and (5) paying only reasonable plan expenses. We work with clients to assist them to adhere to those standards and impress on them certain best practices for compliance.

Editor: Do you work with clients to establish retirement plan compliance programs?

Wasser: Yes. That ties into the consulting services that our group provides where we walk clients through their fiduciary responsibilities including filing requirements. A lot of times clients ask us to look at their processes. This involves an agreed upon procedures engagement where we engage in an in depth analysis of a particular aspect of plan operations. For instance, the company may ask us to test their procedures for allowing participants to change fund allocations. We would pick a random sample of participants and test the procedures to make sure they are doing the right things.

Certain problems that are uncovered can be addressed through the IRS's various compliance programs including the self correction and the voluntary compliance programs. In the self correction area, a plan is permitted to correct certain mistakes without having to report them to the IRS. The Voluntary Fiduciary Correction Program enables correction for specific errors and is administered through the Labor Department. The ability to take advantage of these programs is driven by the facts and circumstances surrounding each case.

Editor: What are the audit requirements for retirement plans?

Wasser: Generally a plan is required to include audited financial statements with its Form 5500 filing if it has more than 100 eligible participants at the beginning of a plan year. This number includes eligible employees who have not chosen to defer into a company's retirement plan. This is an area where many companies have gotten in trouble in the past because they may assume that they only need to include plan participants with account balances in the calculation.

A company that is moving in and out of the 100 eligible participant requirement should contact an accountant or record keeper to analyze their status and determine whether an audit is necessary for that year. For growing companies who have between 80 and 120 eligible participants, an audit is not required until they have more than 120 eligible participants. So during this initial phase these employers do not have to worry about completing an audit. However, once an employer crosses the 121 eligible participants mark, they will be required to complete an audit annually, even if the number falls in subsequent years to below 121 and above 100.

Editor: What are the common mistakes that you have seen clients make when fulfilling annual auditing and reporting requirements?

Wasser: The most common mistake is that a company does not complete an audit on a yearly basis. Another common mistake is for a company to hire an accounting firm that is not qualified in this area. They may complete the audit in a manner inconsistent with generally accepted auditing standards (GAAS) so there is a good chance the Form 5500 filing will be rejected. Filing a form 5500 with financial statements not completed under GAAS will result in a rejection by the Labor Department and possibly a $50,000 penalty for the plan sponsor.

Editor: Does the Labor Department provide a grace period for companies to correct improperly filed statements?

Wasser: Generally when notices are sent, the Department of Labor offers between 30 and 45 days to comply with their audit requirements. If the Form 5500 filing is not corrected within that time frame, the company will face a $50,000 penalty.

Generally, it may be possible to amend filings within this time frame to comply but it is important for companies to respond quickly to the Department of Labor so that they are aware of the situation. The Department is more willing to work with plan sponsors who demonstrate a desire to correct deficiencies.

Editor: Are there other penalties that companies or plan trustees need to worry about?

Wasser: If the form 5500 is not filed on time the Department of Labor charges $1,100 for each day the filing is late. The IRS imposes separate penalties as well. Nevertheless, the Department of Labor has a delinquent-filer voluntary compliance program. Under that program late penalties are capped at $2,000 per year, per filing for large plans and $750 per year, per filing for small plans. If a company has a plan that has not filed for several years the penalties for large plans for all delinquent years capped at $4,000 and $1,500 for small plans. The idea is to encourage companies to file.

Editor: What are the common deficiencies that the Department of Labor raises in retirement plan audits?

Wasser: The Department of Labor has been auditing the auditors in cycles over the past ten or so years and unfortunately they're finding deficiencies in a lot of areas. In many instances the deficiencies relate to insufficient procedures on participant balances. Participant accounts have to be subject to audit as far as contributions, distributions, investment earnings allocation, and fund allocation to make sure they are in accordance with actual fund performance and what the participants want.

The Labor Department has also uncovered misunderstandings on how to audit investments. Audit procedures on parties in interest and prohibited transactions are also an area the Labor Department feels is not properly audited. Auditors need to perform procedures to address prohibited transactions with parties in interest.

Editor: Do plan sponsors also face the potential for a Department of Labor audit?

Wasser: Among other red flags, a plan could be audited for late deferrals, where a company fails to contribute money withheld from participants to the plan in accordance with Labor Department guidelines . Otherwise, plans may be selected for a random audit or a plan may be audited based on a complaint by a participant.

Editor: If facing an audit from a government entity, what steps should a plan sponsor take to prepare?

Wasser: A lot of the materials requested include information that a prudent fiduciary should have already gathered. Decision making and processes should be documented so there is a record of how the plan is managed. If plans include investments that are performing inadequately, there should be a record demonstrating the rationale behind continuing to include those investments. Each plan should have a plan committee that meets regularly and takes minutes so the process is documented. Even if there is a mistake, having a documented process demonstrates that a fiduciary is attempting to act in the best interest of the plan participants. These steps need to be taken well in advance of an audit.

Editor: Did the Pension Protection Act of 2006 establish new audit requirements that plan sponsors have to comply with?

Wasser: There are a few changes for defined-benefit plan funding that will probably impact disclosure.

For 2008 there is a possibility that 403(b) plan sponsors, which include not-for-profits, will have to have an audit performed. The concern is that these plans have never had to complete a mandatory audit as part of their annual filings and records may not be available. During initial audits it is important to become comfortable with the opening balances in total and at the participant level so entities sponsoring these plans should start now to test their procedures and records.

Editor: Would it make sense for these organizations to sit down with an experienced auditor and review their plans?

Wasser: Yes. Many not-for-profits are hiring CPA firms to perform agreed upon procedures engagements now. They want to make sure they have the proper records and that things are functioning properly before the audit so that they can take care of any issues now rather than later.

Editor: Would you tell our readers about the AICPA Employee Benefit Plan Audit Quality Center and how it helps plan sponsors effectively address plan audits?

Wasser: The quality center is one of three centers between the profession and the AICPA with a mission to improve the quality of audits of benefits plans, public companies, and tax-exempt organizations. I am on the second year of my term on the executive committee of the Employee Benefit Plan Audit Quality Center. This is a wonderful center with invaluable resources for auditors and plan sponsors. It provides educational services, including an online forum and webcasts for auditors. The Center's website also includes a section dedicated to plans sponsors. For instance, a plan sponsor can research information on how to choose an auditor and how to prepare a request for proposal. It walks sponsors through the entire process of selecting an auditor. Those interested in learning more about the Center can visit its website:

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