Benefit plans with a year ending after December 15, 2021, are required to follow a new auditing standard (see our overview of the new standard). Statement of Auditing Standard No. 136, Forming an Opinion and Reporting on Financial Statements of Employee benefit Plans Subject to ERISA, provides clarity over management and auditor requirements performed as part of the audit and additional transparency in reporting.
Best Practices for Preparing for the New Standard
Determine whether the plan qualifies for an ERISA Section 103(a)(c)(3) audit.
Management needs to obtain and evaluate the investment information and certification obtained for the plan year.
- The information must be prepared by a qualified institution (generally, a bank, insurance company, or trust company).
- The certification must be signed by an authorized representative of the institution and certify both the accuracy and completeness of the information.
- Management should carefully evaluate to ensure what investment information is included and whether the entire audit period is covered by the certification and whether the investment information is appropriately measured for financial statement purposes.
Be prepared for additional information requests.
Auditors will need to obtain current plan documents, evaluate significant plan provisions, and design the audit to assess whether the plan is operating consistent with the provisions of the plan document.
- Ensure current plan document and amendments are executed and provided to the audit team.
- Ensure all required amendments have been executed by consulting with a third-party administrator or document provider.
- Compare the plan document with internal processes to ensure the plan is operating in accordance with the provisions of the plan document.
- Common areas of noncompliance include late enrollment of newly eligible participants, incorrect plan compensation used in calculating contributions, incorrect vesting schedules utilized in distribution calculations and errors with automatic enrollment escalation provisions.
- Review record retention policies to ensure sufficient records are maintained to determine participant benefits. It is not uncommon for certain records such as payroll or participant data to be maintained by the employer, but other records such as distribution or vesting records are often maintained by the third-party administrator. Ensure you know where plan records are located and how long they are being retained.
- Set a deadline for the 5500 draft with the Form 5500 preparer to ensure the audit team has a copy of the full Form 5500 draft before the end of audit fieldwork. Expediting the completion of a Form 5500 compliance questionnaire can be a great way to ensure the audit completion is not delayed.
Be open to additional audit feedback for ways to strengthen your plan.
Auditors are now required to communicate reportable findings in writing at the conclusion of the audit. Your audit team is a great resource to provide feedback and recommendations for internal control improvement or best practices. Begin educating plan committees or others overseeing the plan that it is more likely to have written recommendations now and that these recommendations will add value to the plan.
Contact your CSH advisor with questions or if you need assistance.