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What to Expect in a Plan Audit

What to Expect in a Plan Audit. Presented By: Amper, Politziner & Mattia, LLP. Kriste Naples-DeAngelo, CPA, MBA, Partner Brenda DeSaro, CPA, Manager, Pension Services Group Diane M. Wasser, CPA, Partner-in-Charge, Pension Services Group. Is your plan an ERISA Plan?. IF YOU ARE UNSURE,

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What to Expect in a Plan Audit

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  1. What to Expect in a Plan Audit Presented By: Amper, Politziner & Mattia, LLP Kriste Naples-DeAngelo, CPA, MBA, Partner Brenda DeSaro, CPA, Manager, Pension Services Group Diane M. Wasser, CPA, Partner-in-Charge, Pension Services Group

  2. Is your plan an ERISA Plan? IF YOU ARE UNSURE, SEEK LEGAL COUNSEL!!!!!!!!!!!!

  3. Form 5500 Requirements (Prior to 1/1/09) Current Form 5500 filing requirements (for those required): Limited Pension Plan Reporting for “403(b) Arrangements”—Required only to complete general information section (Lines 1 through 6 and Line 8) No Form 5500 schedules required to be completed No financial statement or any financial information required to be submitted No audit required Timing 5500 is due 7 months after the plan’s year end Extension available for 2½ months

  4. Form 5500 Filing Requirement(Beginning 1/1/09) Form 5500 filings will be required for all 403(b) Plans covered by Title I of ERISA (as under previous rules) They are now subject to the same 5500 annual return requirements Even Plans with less than 100 participants must file Form 5500 and providefinancial information, at the Plan level, never provided before No change on WHO should file Form 5500 Change only on WHAT should be filed with Form 5500

  5. Form 5500 Filing Requirement Starting with the 2009 Form 5500 (effective for plan year beginning January 1, 2009) 1/1/09 (December year end) 7/1/09 (June year end) Generally an excess of 100 eligible participants at the beginning of a plan year will require an audit Eligible—BE CAREFUL!—includes all employees under theUniversal Availability rule and all former participants with account balances 7,000 403(b) audits, 9,000 small plans with additional financial information to report

  6. Form 5500 Requirements 80-120 rule applies in the initial 403(b) audit year The Department of Labor advised in its Notice of Adoption of Final Forms Revision that 403(b) plans that were eligible to file as a small plan under DOL Reg. 29 CFR 2520.103-1(d) in the previous year and that have participant counts of fewer than 121 in the beginning of the 2009 plan year can file as small plans under the new filing rules Plans with over 120 participants at the beginning of the year (01/01/09 for calendar year plans) will be required to attach audited financial statements to their 2009 Form 5500 filing

  7. Financial Reporting RequirementWHAT IS THE OBJECTIVE OF THE AUDIT? To express an opinion on whether the plan’s financial statements are presented fairly, in all material respects, and in conformity with U.S. generally accepted accounting principles The auditor is responsible to plan and perform the audit to obtain reasonable assurance that material misstatements are detected Reasonable assurance is high, but not absolute The audit is conducted in accordance with auditing standards generally accepted in the U.S.

  8. Financial Reporting Requirement WHAT IS THE OBJECTIVE OF THE AUDIT? Generally accepted auditing standards among other things includes: gathering information to understand the Plan and its internal control environment understanding the design and implementation of internal control detailed testing of a Plan’s accounts and transactions gathering sufficient audit evidence documentation of findings The financial statements are the responsibility of Plan Management, the opinion is the auditors

  9. Financial Reporting RequirementWHAT IS AUDITED? Two Basic Buckets (Investments and Participant Accounts & Activity) Investments Participants Opening balance Eligibility Contributions Distributions Transfers in and out Earnings allocations Fund allocations Vesting Ending balance Timeliness of Contributions Prohibited transactions

  10. Financial Reporting RequirementWHAT IS AUDITED? Think in terms of the financial statement line items Statement of Net Assets Available for Benefits: Investments Participant loans Receivables (accrual basis) Participant contributions Employer contributions Income Liabilities (not for benefits) Accrued expenses

  11. Financial Reporting RequirementWHAT IS AUDITED? Statement of Changes in Net Assets Available for Benefits: Contributions (received and receivable) Timeliness of deferrals Rollovers Gains and losses/appreciation and depreciation on investments Investment income Interest and dividends Distributions Administrative expenses Transfers/plan mergers

  12. Financial Reporting RequirementWHAT IS AUDITED? The focus of the audit is on the material account balances and major transaction classes from which the statements are derived Participant activity is a major transaction class Opening balance, eligibility, demographics, contributions, vesting, distributions, transfers, rollovers, fund allocations, earnings allocations, ending balance Focus on investments is driven by the audit scope

  13. Financial Reporting RequirementWHAT IS AUDITED? Investments – Limited Scope or Full ScopeAudit LimitedScope—assets are held by a bank, insurance company or trust company, and are certified as to completeness and accuracy Custodians certify the information as contained in their ordinary books and records—If you have more than one custodian, you will need multiple certifications Custodians generally provide values based on best information available Watch “as of” dates for old information Watch fair value

  14. Limited Scope (continued) Auditor has no responsibility to test investments, investment activity and related transactions—(it is the Plan Sponsor’s responsibility to ensure that the investment values are proper) Must consider applicability of the limited scope audit, given the circumstances regarding the availability of the information on prior contracts—(will be discussed further in presentation)

  15. Financial Reporting RequirementWHAT IS AUDITED? Full scope—Audit investments, investment activity and related transactions Confirm existence and ownership, assure no liens, no pledges or other security interests Reasonably conclude investment transactions are recorded and investments are valued in conformity with GAAP (fair value) Disclosures are proper

  16. Financial Reporting RequirementsFIRST YEAR CONSIDERATIONS DOL requires comparative statements of net assets available for benefits Will need 12/31/08 or 6/30/09 statement of net assets available for benefits, at a minimum, compiled A compilation is less than an audit and a compilation report will be rendered Must determine that the accounting principles used by the Plan in the current and preceding year are consistent Must address the opening balances at the participant level

  17. Financial Reporting RequirementFIRST YEAR CONSIDERATIONS Address completeness and accuracy of participant data & records Address eligibility, types of benefits, participant account balances Opening balances at the participant level Essentially must address multiple prior years’ activity Contributions Distributions Other plan activity Going back in time presents a unique difficulty for 403(b) Plans given the possible recordkeeping shortfalls

  18. DOL Transition Relief FAB (Field Assistance Bulletin) 2009-02 provides transition relief for those that make a good faith effort…… whereby, they do not need to treat annuity contracts and custodial accounts as part of the employer’s Title I plan assets and for purposes of ERISA’s annual reporting requirements Must meet certain criteria Contract was issued to a current or former employee prior to 1/1/09 Employer ceased to make any contributions (including salary reduction contributions) to contract or account prior to 1/1/09 (including loan repayments made by employer) All rights and benefits under the contract are legally enforceable against the insurer to custodian by the individual owner without any involvement of the Employer, AND The individual owner of the contract is fully vested in the contract or account

  19. DOL Transition Relief Field Assistance Bulletin (“FAB”) 2009-02 Issued July 20, 2009 Provides guidance to DOL Field Offices Provides Enforcement Relief for 5500 filings Does not provide audit relief DOL/EBSA will NOT reject a 403(b) plan form 5500 filing solely because the auditor’s report is qualified, adverse or disclaims an opinion (other than allowed under 29 CFR 2520.203-8) due to the exclusion of pre 2009 annuity contracts and/or custodial accounts Regardless of the type of opinion issued, the auditor is still required to complete all other audit procedures (e.g. contributions, distributions, etc.)

  20. DOL Transition Relief You can use this relief to determine audit requirement – if by omitting these contracts puts the plan below the audit requirement threshold, then an audit will not have to be performed 80-120 rule also applies in determining audit requirement so look at number of participants at 1/1/08 The FAB allows but does not require that contracts/accounts be excluded The FAB also applies to years beyond 2009 ERISA and current regulations require the audit to be performed in accordance with (GAAS) The exclusion by the plan sponsor of contracts/accounts that meet the criteria of the FAB will likely prevent the auditor from being able to issue an unqualified opinion or limited scope opinion under 29 CFR 2520.103-8

  21. DOL Transition Relief Some sponsors may not find a qualified, adverse or disclaimer of opinion’s acceptable Some vendors will not be in a position to exclude contracts/account information that meets criteria DOL’s exception is for a “good faith” effort to comply with the ERISA annual reporting requirement DOL is working on additional guidance AICPA 403(b) task force is working on additional tools MORE GUIDANCE TO FOLLOW!

  22. Preparing for the Annual Audit Generally information is available within 2 months of year end A 401(k) audit from start to finish can take 1-2 months with fieldwork generally one week or less 403(b) timing and fieldwork could be double, given the initial time through Availability of SAS 70’s must be addressed (addressed in subsequent slide)

  23. What Does a SAS 70 Mean to a Plan Sponsor? It is important to keep in mind that auditors, under professional standards, cannot be a part of a plan’s internal control Controls of a benefit plan are comprised of controls at the plan sponsor as well as at service organizations SAS 70’s are reports on the design of internal controls (Type I) and operating effectiveness (Type II) at a service provider. Outlines what user controls are required Not only useful for the Auditor Review by Plan Management at least annually as part of the third party service provider monitoring effort, is good practice

  24. Preparing For The Annual Plan Audit Complete Collaboration Plan Sponsor Service Providers TPA’S Auditor

  25. How to Prepare for the Annual Plan Audit Take control of the process! Know your responsibilities—the financial statements are those of plan management—only the opinion is the auditor’s Hire a qualified independent auditor for your plan If not provided by the auditor, request a list of schedules and documents the auditor will require prior to the start of the process

  26. How to Prepare for the Annual Plan Audit Contact service providers early each year to assure they have the necessary information TO YOU on a timely basis. If you have not already contacted them for your 2009 plan audit, CONTACT THEM NOW! All individual participant contracts and account balances in your plan SAS 70 Reports (Is it a type I or Type II) Information needed for 2008 compiled financial statements and information needed for opening balances testing Have a point person. Establish responsibility for the Plan’s financially reporting function. (HR vs. Finance)

  27. How to Prepare for the Annual Plan Audit Review information before it is provided to the auditor to minimize the back and forth Make sure plan participant records are complete and accurate Get your books and records in shape Establish proper internal controls over the plan’s financial reporting process Ensure that the plan has an up to date written plan document and an investment policy statement Ensure that the plan is in compliance with the plan’s tax exemption

  28. How to Prepare for the Annual Plan Audit Expect great things! (Embrace the process) Communication throughout the process Innovative ideas Suggestions on enhancing procedures for efficiency and minimization of risk

  29. How to Prepare for the Annual Plan AuditWhat To Expect From the Auditor? List of schedules and documents required Inquiries Understanding of Internal Controls Risk Assessment Requests for documentation of participant level information Experience Knowledge of plan terminology Clear line of communication Helpful recommendations!

  30. How to Prepare for the Annual Plan AuditWhat The Auditor is Expecting of You? Time Documentation requested Full analysis of vendors Full analysis of participant population Coordination of communication with third party providers Financial statements

  31. How to Prepare for the Annual Plan AuditHow TPA’s Can Help and What Should They Provide? Share Auditor request listing with the TPA Organized audit package Detailed listing of participant balances 157 information (assistance with information) Draft Form 5500 and all related schedules Compliance and discrimination testing Universal availability ADP (Actual Deferral Percentage Test) and Top Heavy testing not required

  32. How to Prepare for the Annual Plan AuditHow TPA’s Can Help and What Should They Provide? Allocation of employer contributions Loan roll-forward report/delinquent loan reports Distribution report Transaction information SAS 70 report, if available Timely response to inquiries resulting from the annual audit

  33. Challenges / Suggestions Critical to employ fiduciary best practices, somewhat lacking in the 403(b) plan area Plan Committees Meet regularly Keep written minutes Document fiduciary due diligence Investment Policy Statements ERISA attorney relationships Monitor service providers Employ effective internal controls

  34. Challenges / Suggestions Gather complete and accurate information from all vendors, for all years Former employees and former vendors Orphan contracts and missing participants Effectuating information sharing agreements Careful documentation of data collection process is essential Beginning balances require certain audit procedures

  35. Helpful Websites & Tools Plan Sponsor Magazine Profit Sharing Council of America (IPS) Employee Benefit Plan Audit Quality Center Website: www.aicpa.org/ebpaqc Includes Plan Advisories for communication and research on plan responsibilities Includes tools for Plan Sponsors Your Third Party Provider www.dol.gov Employee Benefits Security AdministrationOffice of the Chief Accountant: 202.693.8360 EFAST Help Line: 1.866.463.3278

  36. New Reporting Requirements for Form 5500

  37. Department of Labor Update Electronic filing of form 5500 Effective years beginning on or after 1/1/09 EFAST 2 – secure web portal filing system Free DOL website based filing options—IFILE System TPA value added software—go onto DOL website for approved vendors EFAST 2 will help reduce errors and make information more accessible There will be no more 30 day letters. Will just get a 45 day letter and the next letter will be to assess penalties! Effective 1/1/10 EFAST (Old system) will only process 2008 form 5500 filings. All prior year filings will have to use EFAST2 (new system) After 10/15/10 no paper 5500 forms will be accepted NOTE: Filing under the new EFAST2 system may require additional time so this should be taken into consideration before the 10/15/10 extended deadline.

  38. 2009 Annual Reporting with EFAST2 Mandatory beginning 1/1/10 and includes: Plan Sponsor is required to maintain a hard copy Short plan year 2009 filings—If due date is before 1/1/10, given an automatic extension to electronically file a complete form 5500 on EFAST2 within 90 days after the 2009 filing system is available on the DOL website. Can file on paper using 2008 forms but it must be submitted prior to 1/1/10 2 ways to create and submit filings IFILE (free web-based filing application through DOL Website) Third Party Certified Software (make sure they are approved)

  39. 2009 Annual Reporting with EFAST2 Getting Started in EFAST 2 All filers must register for filing credentials whether using IFILE or third party software. Go to www.efast.dol.gov and click “register” Types of credentials Filing Author Filing signor Schedule Author Transmitter Third-Party Software Developer Credentials are assigned to individuals, not companies and will expire if not used for 3 years

  40. EFAST2 Credentials 1 - Filing Author —You can complete the 5500, attach schedules, submit the filing and check the filing status. (Many TPA’s will be fulfilling this role.) 2 - Filing Signer —This is for the individual(s) that would normally manually sign the 5500 (Plan Administrators, Employers/Plan Sponsors and Direct Filing Entities). Just like when it was manually signed, by electronically signing the Form 5500 you are indicating that to the best of your knowledge the Form and all it’s schedules and attachments are true, correct and complete. You are also legally responsible for making sure the filing is submitted timely. This mostly likely will be the credential most of you will need.

  41. EFAST2 Credentials 3 - Schedule Author —Complete 1 or more schedules that will go with the 5500 filing. This schedule must be exported. Once exported the filing author will import the schedule(s) to the correct filing. (If you use a TPA to prepare and file your 5500 this credential will not be necessary for you.) 4 - Transmitter —You will transmit the 5500 filing to the EFAST2 system. (If you use a TPA they will handle this area.) 5 - Third-Party Software Developer —Used to create test cases using their software to achieve certification for their software.

  42. EFAST2 Process Audited Financial Statements —Your auditor will need to send you the audited opinion to go with the financial statements on the auditor’s letterhead, signed and in PDF (portable document format) file. The PDF will then be attached to the 5500 filing. Be aware there could be some file size issues. Not filing the audited financial statement will more than likely trigger an error on the EFAST2 system and the error will need to be corrected quickly or the filing will be rejected.

  43. EFAST2 Process Extension – Complete the paper Form 5558 and submit it to the Internal Revenue Service. When you electronically file your Form 5500 on the EFAST2 system you do NOT need to attach a copy of the previously filed Form 5558. Submission – The Transmitter or Filing Signer should check the filing status either on-line or on the help line 1-866-463-3278. Filing Status – “Filing Received, Filing Stopped or Filing Error”. If the status is Filing Stopped or Filing Error action must be take to correct the Filing quickly. NO SOCIAL SECURITY NUMBERS

  44. Prepare for the New Schedule C Purpose/Objective Report plan related fees and expenses (New codes – use all that apply) Facilitates annual review of plan’s fees and expenses as part of a fiduciary’s on going obligation to monitor service provider arrangements Report terminated accounting firms and individual actuaries Schedule C has 3 Components: Identification of each person/service provider who received directly or indirectly $5,000 or more in total compensation in connection with services rendered to the plan or their position with the plan during the year. Identification of fiduciaries or service providers who failed or refused to provide information necessary to complete part I of Schedule C Terminated accounting firms s and individual actuaries

  45. Prepare for the New Schedule C Direct Compensation—“Payments made directly by the plan for services rendered to the plan or because of a person’s position with the plan are reportable as direct compensation. Direct payments by the plan would include, for example, direct payments by the plan out of a plan account, charges to plan forfeiture accounts and fee recapture accounts, charges to a plan’s trust account before allocations are made to individual participant accounts, and direct charges to plan participant individual accounts. Payments made by the plan sponsor, which are not reimbursed by the plan, are not subject to Schedule C reporting requirements even it the sponsor is paying for services rendered to the plan.” (5500 2009 instructions)

  46. Prepare for the New Schedule C Indirect Compensation —“Compensation received from sources other than directly from the plan or plan sponsor is reportable on Schedule C as indirect compensation from the plan if the compensation was received in connection with services rendered to the plan during the plan year or the person’s position with the plan. For this purpose, compensation is considered to have been received in connection with services rendered to the plan or the person’s position with the plan if the person’s eligibility for a payment or the amount of the payment is based, in whole or in part, on services that were rendered to the plan or on a transaction or series of transactions with the plan. Indirect compensation would not include compensation that would have been received had the service not been rendered or the transaction had not taken place and that cannot be reasonably allocated to the services performed or transaction(s) with the plan. Persons that provide investment management, recordkeeping, claims processing, participant communication, brokerage, and other services to the plan as part of an investment contract or transaction are considered to be providing services to the plan for purposes of Schedule C reporting and would be required to be identified in Part I if they received $ 5,000 or more in reportable compensation for providing those services.” (5500 2009 instructions)

  47. Prepare for the New Schedule C Common Service Providers Who May Receive Indirect Comp Investment Manager Broker Recordkeeper Transfer Agent Distributor Trustee/custodian Examples of Indirect Compensation Commissions (including soft dollars) SEC Rule 12b-1 distribution fees Float revenue (if making distributions and held in an interest bearing account that earns interest) Finders Fees

  48. Prepare for the New Schedule C Exceptions From Reporting Plan employee compensation < $25,000 Person’s whose only comp was reported on Schedule A Sponsor who was not reimbursed by Plan Other Important Changes Reportable comp includes brokerage fees and commissions, now regardless of whether broker has discretion For further help look at the “FAQ’s About the 2009 Form 5500 Schedule C” on www.dol.gov

  49. Prepare for the New Schedule C Reporting Gifts and Other Non-Monetary Compensation Must be reported Limited de minimus exception Instructions caution filers that gifts and gratuities of any amount paid to or received by plan fiduciaries may violate ERISA and give rise to civil and criminal liabilities Limited Exceptions for Reporting Gifts and Non-Monetary Comp Valued at less than $50 Aggregate value of gifts from one source less than $100 in calendar year Gifts with value less than $10 do not have to be counted towards $100 limit If $100 aggregate value is exceeded, the value of all gifts will be reportable

  50. Prepare for the New Schedule C Excludable Non-Monetary Compensation —“You may exclude non-monetary compensation of insubstantial value (such as gifts or meals of insubstantial value) that is tax deductible for federal income tax purposes by the person providing the gift or meal and would not be taxable income to the recipient. The gift or gratuity must be valued at less than $50, and the aggregate value of gifts from one source in a calendar year must be less than $100, but gifts with a value of less than $10 do not need to be counted toward the $100 limit. If the $100 aggregate value limit is exceeded, then the value of all the gifts over $10 will be reportable. Gifts received by one person from multiple employees of one entity must be treated as originating from a single source when calculating whether the $100 threshold applies.” (5500 2009 instructions)

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