In the early 1970’s, there was no regulatory guidance for employee pension plans. Many employees worked for companies claiming to have retirement plans. Unfortunately, many times the plans were not properly funded or employees were terminated prior to becoming vested.
Due to the myriad of problems, the government created the Employee Retirement Income Security Act of 1974 (ERISA). ERISA was passed to provide minimum standards of vesting, funding and fiduciary behavior for pension and welfare benefit plans. ERISA gave the Department of Labor (DOL) and Internal Revenue Service (IRS) authority to issue specific requirements for pension plan record-keeping and required information returns to be filed annually. It also established guidelines requiring certain plans to be audited in accordance with generally accepted auditing standards (GAAS).
What types of audits can be done?
There are two types of pension plan audits, full-scope or DOL limited-scope. A full-scope audit is just like any other audit under GAAS. However, independent certified public accountants can be requested by plan administrators to use DOL guidelines to perform a DOL limited-scope audit. A DOL limited-scope audit is allowed when regulated and supervised assets held by banks or insurance companies are subject to periodic examination by state or federal agencies. Such an audit allows the auditor to rely on information related to plan investments and transactions that is prepared by the financial institutions and certified to be both complete and accurate. If your pension plan is subject to an audit, you should discuss the type of audit you may be required to obtain with an independent certified public accountant.
What is the general rule requiring an audit?
If you have over 100 participants at the beginning of the year, your plan is considered a “large plan” and an audit is required. If the plan has less than 100 participants, the plan is considered a “small plan” and is exempt. However, as with all government requirements, there is an exception. If the number of participants at the beginning of the plan year is between 80 and 120 but has not exceeded 120 participants in previous years, you can remain a “small plan” until you have over 120 participants. Once a plan has been considered a “large plan” with over 120 participants, an audit is required until the participant count falls below 100.
The DOL defines an active participant as follows: “active participants (all employees who are eligible to participate, whether or not they elect to participate), retired or separated participants (who are receiving or entitled to receive benefits from the plan), and deceased participants (whose beneficiaries are receiving or entitled to receive benefits from the plan)”.
For the plan years beginning after April 17, 2001 the DOL issued new requirements that small plans must meet to continue to be exempt from the audit requirement. The DOL regulations focused on three considerations in order to avoid an audit. The first relates to the location of the plan assets. The second involves increased disclosure to plan participants and beneficiaries. Third, the plan may be required to increase the bonding of the plan assets. You should verify your plan meets “small plan” requirements to avoid an audit.
Pension plan audit rules do not apply to 403(b) plans typically sponsored by not-for-profit or educational organizations. However, plans sponsored by churches and governmental entities may be subject to the above rules. Please consult your certified public accountant if you need any guidance.
There are other reasons to have a pension plan audited. Some employers want to give employees, management and fiduciaries comfort that the plan is being properly administered. As a pension plan auditor, I recommend that trustees of any pension plan periodically review third party administrators and management calculations of contributions and investment allocations to participant accounts. The responsibility of a plan trustee is to verify that third party administrators are administering the plan in accordance with the plan document and ERISA. Trustees may not understand the intricacies of accounting for a pension plan, and may want to contact an independent certified public accountant to assist them in fulfilling their fiduciary responsibility to the plan. This can be done through an audit or agreed upon procedures depending on the concerns of the trustee.