| FYI
Auditing Employee Benefit Plans -
The Employee Retirement Income Security Act of 1974 (ERISA) applies to most employee benefit plans. ERISA is comprised of four sections: Title I deals with the Department of Labor (DOL) responsibilities, including reporting and disclosure (and auditing) requirements; Title II specifies the tax law requirements; Title III identifies specific enforcement-related matters; and Title IV addresses multiemployer plan issues, including plan termination procedures | Basic Issues Related to Employee Benefit Plans Under ERISA
There are two fundamental types of employee benefit plans under ERISA:
1. Welfare plans—These provide benefits such as healthcare, disability, death, unemployment, job training, and vacation.
2. Pension plans—These provide benefits involving retirement income or deferral of income beyond an employee's period of employment.
Eligibility Requirements—The plan must specify the eligibility requirements.
ERISA specifies minimum eligibility requirements for pension plans.
1. The minimum age to be eligible to enter the plan cannot be set above age 21, and the minimum employment to enter the plan is generally 12 months (2 years if the plan is fully vested); generally, an employee has to work at least 1000 hours for the year to count toward eligibility.
2. ERISA does not provide specific eligibility requirements for welfare plans. |
| FYI
Auditing Employee Benefit Plans -
Vesting Requirements—ERISA establishes specific minimum vesting standards for pension plans; pension plans may vest more quickly than these requirements, but they cannot vest less quickly. [Note: Benefits are “vested” when the employee has earned the rights to those benefits without any further performance requirements or conditions.] | Funding Requirements—“Qualified” pension plans (those having tax-exempt status) are subject to specific funding requirements; welfare plans are not required to be funded, although plan documents typically do address funding issues.
Exemptions from ERISA—ERISA provides certain specific exemptions from some or all of ERISA, but the auditor is not responsible for determining whether a plan is subject to ERISA requirements or whether the plan must be audited (although the auditor may, of course, assist in determining those matters); the plan sponsor's legal counsel should be involved in those determinations. |
| FYI
Auditing Employee Benefit Plans -
GAAP classifies employee benefit plans into either of two categories:
1. Defined benefit plans—The actual benefits are specified in the plan design; the plan's obligations are based on the determination of an actuary.
2. Defined contribution plans—The benefits are limited by the specified contributions to each participant's specific account.
ERISA requires that pension plans be funded whether they are viewed as defined benefit or defined contribution plans. | Welfare plans may be classified as defined benefit or defined contribution plans.
1. Defined benefit plans—These are common (e.g., a specific commitment to provide healthcare coverage) and usually do not create separate accounts for each participant.
2. Defined contribution plans—Individual accounts are maintained separately for each participant, and benefits are limited to the balance in the individual's account; an example that has grown in popularity is medical flexible spending accounts.
Unfunded versus Funded Plans
1. Unfunded plans—The benefits are either paid from the employer's assets or by insurance coverage (or a combination of those); ERISA exempts unfunded plans, which exempts most welfare plans. (The auditor is not responsible for determining whether the plan is “unfunded” or “funded”; the plan sponsor's legal counsel should be involved in determining that.)
2. Funded plans—If any portion of an ERISA benefit plan is deemed “funded,” then all of the plan's activities are subject to the ERISA audit requirements; in this case, the plan assets are required to be held in trust. |
| FYI
Auditing Employee Benefit Plans -
Defined Contribution Plans
1. 401(k) plans—These permit employees to defer a portion of their income to the pension plan; taxes are deferred until a distribution is made at a future date.
The employer may make a matching contribution, although employer contributions generally are not required.
2. Roth 401(k) contributions—Subject to specific tax requirements, contributions are made with after-tax dollars so that neither the original contribution nor the investment earnings will be subject to taxes when distributed.
3. 403(b) plans—Similar to 401(k) plans, these are associated with charitable organizations and public school entities; there are numerous technical requirements, including a “universal availability” requirement that nearly all employees are entitled to participate in the plan; also, plan assets may be held in a custodial account and need not be held in trust.
4. Employee stock ownership plans—ESOPs are stock incentive plans primarily invested in the employer's securities; these plans are subject to many complex technical issues that require auditors to study the underlying plan document in detail. | General Audit Considerations
ERISA Audit Requirements—ERISA requires an annual audit by an “independent qualified public accountant” of the financial statements of employee benefit plans (i.e., those that are not exempt from such a requirement).
1. Pension plans—An audit normally is required for a pension plan covered by ERISA having at least 100 participants at the start of the plan year (considered a “large” plan); the number of “participants” is based on those eligible to participate regardless of the number actually participating.
2. Welfare plans—An audit is normally required for a welfare plan covered by ERISA having the following characteristics: (a) it is a “large” plan having at least 100 participants at the start of the plan year (based on those who have actually elected to participate), and (b) the plan is “funded” (meaning that assets are held in trust or an account is established in the plan's name).
3. Additional exemptions—There is a general exemption for pension plans of any number of participants when (1) the benefits are provided by an insurance contract for each participant, and (2) those insurance contracts are funded by premiums paid from the employer's general assets (perhaps paid in part by participants’ contributions); there is a similar general exemption for welfare plans of any number of participants. |
| FYI
Auditing Employee Benefit Plans -
GAAS—Audits of employee benefit plans should be conducted according to generally accepted auditing standards; the audit takes into consideration relevant compliance issues, but the audit is not designed to ensure compliance with applicable laws (such compliance is the responsibility of the plan administrator, not the auditor). | The DOL requires plan financial statements to be filed on Form 5500, Annual Return/Report of Employee Benefit Plan; the financial statements may be based on GAAP, the cash basis, or the modified cash basis of accounting; the DOL also requires the auditor to express an opinion on whether the financial statements and supplemental schedules comply with applicable DOL requirements.
ERISA section 103(a)(3)(C) audits (formerly known as limited-scope audits)
1. DOL regulations permit the plan management to elect to omit certain investment information from the audit when such investments are held and certified by a qualified institution (e.g., an insurance company, a bank, or a trust company that is subject to periodic state or federal examination)
2. The qualified financial institution holding these plan assets must furnish a certification that the investments and related investment activity are “complete and accurate”; without an acceptable certification, an ERISA section 103(a)(3)(C) audit is not permitted |
| True or False
In an audit report for an ERISA section 103(a)(3)(C) audit, the auditor should disclaim an opinion on the fairness of the plan's financial statements taken as a whole and express an opinion as to whether the form and content of the information in the plan's financial statements and supplemental schedules that were audited comply with Department of Labor rules and regulations. | True |
