Avoiding Pitfalls in Audits of Employee Benefit Plans

1. Avoiding Pitfalls in Audits of Employee Benefit Plans Diane Walker, CPA Partner dwalker@jlco.com February 14, 2012

2. Overview • Audit of financial statements under ERISA • Common errors detected in plan audits • How to prevent them • How to detect them promptly when they do occur

3. Financial Statement Audit Generally required for large plans (more than 100 participants) subject to ERISA Auditor issues an opinion as to whether the financial statements are fairly stated, in all material respects, in accordance with stated accounting principles (typically US GAAP)

4. Financial Statement Audit • Includes some testing of: • Compliance with plan document and ERISA • Transactions and accounts at participant level • But, not a compliance audit • Limited Scope vs Full Scope audit • Limited scope – investments certified by trustee or custodian and excluded from audit procedures

5. Financial Statement Audit • Assign a “point person” to coordinate • Ensure auditors have access to online systems of all key service providers (auditor’s packages) • Self assess for common audit pitfalls • Understand the information required • Request auditor client assistance listing early • Allocate list to those responsible • HR, Accounting, Investments, Outsourced provider(s)

6. Common Audit Pitfalls Result in adjustments to financial statements, delays and increased audit costs Corrections need to be made (DOL\IRS) Additional contributions made to participant accounts, and/or distributions Problems can occur in small plans as well – more likely to go undetected

7. Common Audit Pitfalls Plan Document Updates Eligibility Contributions – Calculation Contributions – Remittance Monitoring of Service Providers Understanding of Plan Investments Other

8. Plan Document Updates • Frequent regulatory developments • Changes in operations of plan sponsor • Mergers & acquisitions • Changes in service providers • Understand who is responsible for • Individually designed plan vs prototype plan

9. Eligibility Certain employee groups could be excluded in operation, but not under the plan document Employees not provided timely notification when eligibility is reached Plan sponsor and TPA may not interpret plan provisions the same way (e.g., year of service)

10. Eligibility • Review plan document to ensure HR personnel and TPA understand the terms of eligibility and are properly applying • Require employees to complete enrollment form even if they do not want to contribute (opting out) • Provides documentation that employees were given the opportunity to enroll on a timely basis

11. Eligibility • Correction procedure when eligible employees improperly excluded: • Plan sponsor must make a contribution to the plan equal to 50% of average deferral rate (ADP test) times eligible compensation, plus associated employer match and lost earnings.

12. Contributions – Calculation • Incorrect definition of eligible compensation used in calculations • bonuses and vacation pay included or excluded? • Math errors or miscommunication with payroll vendor • Correct subtotals accumulated?

13. Contributions – Calculation Review the plan document’s definition and ensure it matches with the plan sponsor’s intent, and current practice for calculating compensation For prototype plans, ensure you have checked the correct box in selecting the definition Ensure payroll service provider has coded wages to match the plan’s provisions

14. Contributions - Remittance Regulation requires remittal to be “as soon as can be reasonably segregated from plan sponsor’s assets,” but no later than the 15th business day of the month following the month when contributions are received by the employer, or would be otherwise paid to the participant in cash Applies to participant contributions and loan repayments

15. Contributions - Remittance • Rule frequently misunderstood – 15th business day is not a safe harbor • DOL wants to see it done as soon as possible • January 2010 - DOL announced a “safe harbor” regulation for small plans • Fewer than 100 participants, deemed to have made a timely deposit if made within 7 business days • Offers no protection for large plans • One item of note - example for large plans changed from a scenario with 10 days to 3 days

16. Contributions - Remittance • Remittals deemed late = prohibited transactions • Lost earnings subject to 15% excise tax • Lost earnings for period from “administratively feasible” date through date actually remitted • Set a policy and follow it without fail • DOL is looking for consistency and timeliness • Money belongs to the participants as soon as pay day – delays in remitting to the plan are considered a loan to the plan sponsor from plan assets

17. Contributions - Remittance • DOL Voluntary Fiduciary Correction Program (VFCP) available if plan sponsor wants to receive a “no action” letter from the DOL • Close to 90% of the applications made under the VFCP since 2000 relate to delinquent participant contributions • Useful information, including FAQ, is available on the DOL website http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html

18. Monitoring of Service Providers Hiring and monitoring outsourced service providers is a fiduciary responsibility under ERISA Useful guidance on DOL website for considerations when hiring a service provider

19. Monitoring of Service Providers • Understand plan sponsor’s responsibilities for internal controls • Service providers generally provide a report on the design and operating effectiveness of their internal controls (SAS 70 or SOC 1) • Testing performed by an auditor hired by the service provider • Tool to assist plan auditors • Plan sponsor should review report for significant issues

20. Monitoring of Service Providers • “User controls” in SAS 70s\SOC 1s outline expectations for the plan sponsor to ensure no gaps in internal control • Typical responsibilities include: • Reviewing reports of service providers for completeness and accuracy • Comparing reports to plan sponsor’s own records • Contribution remittances, distributions, loans • Access to service provider systems (authorized users)

21. Monitoring of Service Providers • Actions to ensure they are performing the agreed-upon services (DOL website): • Reviewing the service providers’ performance; • Reading any reports they provide; • Checking actual fees charged; • Asking about policies and practices (such as trading, investment turnover, and proxy voting); and • Following up on participant complaints. • Plan sponsor cannot completely delegate fiduciary responsibility to service providers

22. Understanding Plan Investments • Increasingly complex investments in benefit plans – beyond mutual funds and standard pooled separate accounts • Separately managed accounts • Stable value products • Insurance contracts • More complex valuation and accounting considerations

23. Understanding Plan Investments Word “fund” can be misleading Involve internal and external resources to make sure all are clear on the nature of the investments, and the information required for Form 5500 and audit reporting

24. Other Pitfalls • Failure to use Forfeitures • Account needs to go to $0 once per year • Look for SSN 999-99-9999 on vendor reports • Use in accordance with plan document • Hardship Withdrawals • Participant loan (if available) must be taken first • Suspension of salary deferrals (usually 6 months) following the date of the hardship distribution

25. Other Pitfalls • Nondiscrimination tests (ACP/ADP) • Ensure complete and accurate population (employees + compensation amounts) provided to TPA if test outsourced • Perform as soon as possible after year end so any failures can be corrected timely

26. Concluding Thoughts Plan document terms rule – make sure it is current and used as a tool in administering the plan Perform self-assessments and testing early so any problems can be corrected promptly Use your resources – hire and work with competent service providers (and monitor their work)

27. Additional Resources • DOL– Employee Benefits Security Administration • http://www.dol.gov/ebsa/ • IRS • http://www.irs.gov/ep • Includes “fix it” guides for common problems • AICPA Employee Benefit Plan Audit Quality Center • http://www.aicpa.org/ebpaqc • Includes resources specifically designed for plan sponsors

28. Thank You Questions & Answers