Auditing Employee Benefit Plans

Question 1

Employee benefit plans are subject to…..?

Answer 1

ERISA (most are subject to this)

Question 2

What are the two basic type of employee benefit plans that are tested?

Answer 2

1) Welfare plans- Healthcare, disability, vacation, life insurance, etc.
2) Pension Plans- Retirement income or deferral of income

Question 3

What are the pension plan eligibility requirements?

Answer 3

1) Minimum age cannot be set above 21
2) Minimum employment to enter is normally 12 months
3) At least 1000 hours of work to count towards eligibility

Question 4

What are some of the ERISA Requirements?

Answer 4

Nondiscrimination- requires broad participation across employees

Vesting- Establishes minimum vesting standards

Funding- “qualified” pension plans (tax exempt) have funding requirements; welfare plans do not

Exemptions- ERISA includes certain specific exemptions

Question 5

T/F: The auditor should determine whether ERISA applies or does not or whether it must be audited?

Answer 5

NOPE- it is the legal counsel who is responsible

Question 6

Define: Defined benefit

Answer 6

Usually do not have separate accounts for individual participants

Question 7

Define: Defined contribution

Answer 7

Have separate accounts for participants and benefits are limited to the balance in each account

Question 8

What are unfunded versus funded

Answer 8

unfunded- paid from employers assets or by insurance. ERISA exempts unfunded plans

funded- all of the plan are subject to ERISA audit requirements and the plans assets are required to be held in a trust

Question 9

What is a traditional plan under a defined benefit plans?

Answer 9

Benefits are based on the plans benefit formula

Question 10

What is a cash balance plan under a defined benefit plan?

Answer 10

Participant may choose a lump sum of cash distribution or an annuity

Question 11

What is a 401(K) plan under a defined contribution?

Answer 11

Permit employees to defer some income to the pension plan; taxes are deferred until the distribution occurs

Question 12

What is a Roth 401(K) plan?

Answer 12

Contribution are done at after-tax dollars without taxes on the future distribution

Question 13

What are 403(b) plans?

Answer 13

Similar to 401(K) for charities and public schools; they have to be made amiable to everyone. Can be held is a custodial account.

Question 14

What is ESOP?

Answer 14

Incentive plan in employers securities

Question 15

What is the Department of Labor (DOL) FORM 5500?

Answer 15

DOL requires plan financial statements to be filed on FORM 5500, “annual return” Report of employment benefit plan

Financial statements can be GAAP, cash basis, or modified cash basis

DOL requires auditor to report on whether those F/S comply with DOL requirements

Question 16

When conducting an audit what standards should be followed?

Answer 16

GAAS- consider relevant compliance issues (plan administrator and laws/reg)

Auditor should inquire if the plan qualifies with tax status (is it qualified or not?)

Obtain written representation from management

Question 17

What is a “Full-Scope Audit”?

Answer 17

1) Plan investments and investment income
2) Employee and employer contributions
3) Payment of benefits
4) Demographic and payroll
5) Loans to participants
6) Allocation of investment income to individual
7) Liabilities and plan obligations
8) Administrative expenses

Question 18

What is a limited scope audit? Certification requirements?

Answer 18

When specific plan assets are held by a “qualified regulated financial institution, the plan admin may elect a limited scope audit

Required certification- The qualified financial institution must provide a certification that the investments and investment activity are complete and accurate

Plan may direct the auditor not to perform any procedures on those investments and activities

The auditor should:

1) Read certification for appropriateness
2) Agree the certification with the plan F/S
3) Verify that the disclosures about certification comply

Question 19

What is included in a limited scope audit?

Answer 19

1) Employee and employer certifications
2) Payment of benefits
3) Participant demographic and payroll data
4) Loans to participants
5) Allocation of investment income to individual participants
6) Liabilities and plan obligations
7) Administrative expenses

Question 20

on a limited-scope audit report, the auditor would include a disclaimer of opinion?

Answer 20

TRUE (due to scope limitation on not auditing the assets)

They would also include an other matter paragraph commenting on supplemental schedules required by the DOL with a disclaimer of opinion on those