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Meeting the ERISA Plan Audit Requirement

January 20, 2011


Certain benefit plans must include an independent audit with the annual report required under the Employee Retirement Income Security Act. Click “Full Article” for a rundown of the requirements and exemptions.

Large Plans Are Most Affected

When filing the Form 5500 annual report for employee benefit plans that is required under the Employee Retirement Income Security Act, employer-sponsors must also be sure to include a financial statement audit for certain types of plans.

The audit, which must be made by an independent qualified public accountant, is aimed at ensuring that a plan’s financial statements are presented fairly in all material respects and that they conform to U.S. generally accepted accounting principles (GAAP).

Pension and 401(k)-type plans typically fall under the audit requirement. While both large and small plans must file Form 5500 annually, typically only large plans need an audit. “Large” generally means plans with more than 100 eligible participants at the beginning of the plan year. (See right-hand box for discussion of audit waivers for small plans.)

Because the focus is on eligible participants, former employees who remain in the plan with balances or benefits, and active employees who are eligible but choose not to participate, count toward the 100-participant threshold. This is an important distinction in 401(k) plans.

Plans that fluctuate in size between 80 and 120 participants may be able to use the “80-120 rule.” This rule allows plans that have participants within the numerical range use the same small or large category they used the previous year when they file their annual reports. This can affect the audit requirement, so consult with your benefits professional to be sure the rule is being applied correctly.

A “limited-scope audit” is available in cases where a bank, trust company or insurance company, acting as a plan trustee or custodian, certifies that the investment information on the plan is complete and accurate. In these circumstances, the independent accountant doesn’t have to audit the certified financial information.

However, this is not an exemption from the audit requirement. It is simply a reduction in the scope of the auditor’s responsibilities. That can streamline the audit and cut costs. The accountant still must audit non-investment information, such as contributions and participant data, as well as assets that aren’t held by a certifying institution.

Auditors must be licensed or certified as public accountants by the state regulatory authority and cannot have a financial interest in the plan or the sponsoring employer. The selection of the auditor is a fiduciary task for the plan sponsor, so care should be taken. The Labor Department provides guidance on the auditor selection process on its Web site.

The Employee Benefit Plan Audit Quality Center, maintained by the American Institute of Certified Public Accountants (AICPA), provides information on audit importance and quality. It also provides detailed recommendations for crafting the Request for Proposal used to choose an auditor. These recommendations can be found on the AICPA Web site.

(Note: Welfare benefits plans — medical, dental, disability and the like — require an audit only if they are funded. If your company’s plan pays those benefits through some other means, check with your benefits professional to determine whether the plan requires an audit.)

Small Plan Waivers

Small plans were once automatically exempt from audits. But the Labor Department amended the regulations and now small plans must meet certain conditions for an audit waiver.

By and large, small plans don’t require an audit, but they must disclose that they are waiving the audit on Form 5500 Schedule I. To claim the waiver, at least 95 percent of the plan’s assets must be “qualifying assets” such as employer securities, assets held by regulated financial institutions, or shares of a registered investment company.

If that is not the case, any person handling nonqualifying assets must be bonded in an amount at least equal to the value of those assets. Additional disclosure requirements also apply.

For more information contact QPAC at [email protected].

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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