Employee benefit plans subject to the
Employee Retirement Income Security
Act (ERISA) with 100 or more eligible participants at the beginning of the plan year
are generally required to have an annual
audit. For some companies, though, this
important function can be an afterthought
that can later rise up to bite them.
“Many companies view these audits as a
commodity,” says Paul O’Grady, partner-in-charge of the benefit plan practice group at
Armanino McKenna LLP. “Prudent employers treat them not as a commodity but as
an essential component of the organization’s
process for monitoring its duties and responsibilities for its benefit plan under ERISA.”
The Department of Labor generally
requires an audit for large plans (100 or more
eligible participants at the beginning of the
plan year). Although, in limited circumstances, small plans may also be subject to
the audit requirement.
Smart Business spoke with O’Grady about
how taking a proactive rather than a reactive
approach to employee benefit audits can turn
this required task into an integral part of an
organization’s employee benefit oversight
function.
What are the responsibilities of benefit plan
sponsors?
The primary fiduciary responsibility of the
plan sponsor is to run the plan solely in the
best interests of the participants and to
administer the plan for the exclusive purpose
of providing benefits and paying plan expenses. This includes diversifying the plan’s
investments to minimize the risk of large
losses and carefully following the terms of
the plan documents consistent with the provisions of ERISA. Fiduciaries who do not act
in the best interests of plan participants can
be personally liable to restore losses to the
plan and/or to restore profits resulting from
improper use of plan assets.
What does the audit encompass?
There are two types of benefit plan audits
that can be performed under the current
ERISA regulations. The first type, a limited-scope audit, requires that the plan investments be certified as to their completeness
and accuracy by a trust company or similarly
approved entity and allows the auditor to
apply limited procedures to the plan investments. As a result of the limited testing of
investments, a limited-scope audit provides
less auditor assurance and is generally less
expensive to perform than a full-scope audit.
A full-scope audit applies more extensive
procedures to the plan investments and
includes audit procedures relating to the
existence, valuation and completeness of the
investments. Plans that are required to file
with the Securities and Exchange Commission — generally, plans that offer employer securities as an investment option to the
plan’s participants — must perform a full-scope audit and must also file form 11K with
the SEC.
What are the pitfalls of treating this audit as a
commodity?
Companies may look to the low-cost
provider to perform the audit. While cost is
an important consideration, experience
offering these types of audits, which are very
specialized, is crucial and can proactively
identify potential problem areas. The
Employee Benefit Plan Audit Quality Center
of the American Institute of Certified Public Accountants provides an auditor selection
tool to help companies choose an auditor.
Plans can run into trouble in areas such as
the timely remittance of participant contributions. Participant contributions must be
remitted to the plan as soon as they can reasonably be segregated from the employer’s
general assets and no later than the 15th business day of the month following the month of
withholding. I’ve seen instances where sponsors have been required to remit amounts in
the tens of thousands to restore lost earnings
to the plan as a result of failing to remit participant contributions in a timely manner.
Additional pitfalls range from problems
applying the definition of participant compensation, which impacts participant and
employer contributions to the plan, to a lack
of understanding surrounding the investment fees being charged to participants. I’ve
seen companies pay fines as high as $50,000
per year for failure to comply with a plan’s
operational requirements or for failing to
administer the plan properly. Misunderstanding the application of these and other
rules can become a costly oversight for a
company.
How can companies mitigate issues before a
benefit plan audit?
Companies should stay current and
engaged with their third-party administrative
service providers and plan auditor throughout the year to stay informed of problem
areas and ongoing regulatory developments,
such as the recently passed Pension
Protection Act.
Companies can arrange for an operational
review, which will take a look at the plan
from an operational perspective and provide
feedback covering items that need to be corrected. Companies can also utilize technical
resources, such as the Department of Labor
Web site and the Employee Benefit Plan
Audit Quality Center, which are good means
for staying current. Finally, plan sponsors
should be receiving periodic training on the
workings of these plans.
PAUL O’GRADY is partner-in-charge of the benefit practice
group at Armanino McKenna LLP in San Ramon. Contact Paul at
(925) 790-2766 or [email protected].