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Responsible for Your Employee Benefit Plan? There's More to it Than You Might Think!
By Christopher R. Alger, CPA, CFE
September 2015

Are you responsible for administering your company's 401(k), 403(b), or other type of employee benefit plan? If so, you are considered to be a plan fiduciary. A plan fiduciary is an individual or entity that exercises discretion or control over an employee benefit plan. Under the Employee Retirement Income Security Act (ERISA), plan fiduciaries are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These standards, which center around the duty to act prudently, extend to all actions and responsibilities carried out on behalf of the Plan. Plan fiduciaries that do not follow the basic standards of conduct may be held personally liable for their actions, making them responsible for restoring losses to the Plan or profits that resulted from improper use of the Plan's assets.

Plan Fiduciaries are responsible for hiring service providers for the Plan. This includes services such as Plan recordkeeping, investment management, and trustee services. If the Plan requires an audit, the Plan Fiduciary is also responsible for hiring an independent qualified public accountant (IQPA).

When Does a Plan Require an Audit?

Plans having less than 100 participants at the beginning of the plan year have the option to file as a "small plan," using Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Consistent with its title, the 5500-SF takes considerably less time to complete than the full length Form 5500, and it does not require audited financial statements to be attached. One-participant plans can file the even simpler, Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan.

Generally, Title I of ERISA requires employee benefit plans having at least 100 plan participants as of the beginning of the plan year to file as a large plan and attach audited financial statements to its Form 5500 filing. The plan's audit must be completed by an independent qualified public accountant (IPQA). Certain plans may qualify for a waiver under the U.S. Department of Labor's (DOL) "80 to 120 Participant Rule," meaning that a plan having between 80 and 120 participants at the beginning of the plan year, and having filed as a small plan in the previous year, can elect to continue filing as a small plan until its participant count exceeds 120 participants.

It is important to note that a plan's participant count is not limited only to active participants who made contributions to the Plan during the year, but also any eligible employees who elect not to participate in the Plan; as well as terminated or retired participants that still maintain an account balance in the Plan. This requires careful analysis of your plan document to ensure your participant count is complete and accurate; otherwise, you risk incurring penalties of up to $1,100 per day for incomplete or late filing of Form 5500.

Selecting an IQPA to Audit Your Plan

You've now established an accurate participant count and concluded that your employee benefit plan requires an audit. The next question is, "What makes an IQPA qualified to perform audits of ERISA plans?" The importance of this question is highlighted by a recent report issued by the U.S. Department of Labor's Employee Benefits Security Administration (EBSA). The May 2015 report, "Assessing the Quality of Employee Benefit Plan Audits," found that 39% of the 400 plans reviewed by EBSA contained major deficiencies that potentially put $653 billion in plan assets and 22.5 million participants at risk. Many Plan Fiduciaries make the mistake of assuming that any certified public accountant (CPA) is qualified to perform audits of employee benefit plans. As you will see, this is often not the case.

It can be easy for a plan administrator and independent auditor to underestimate the industry specific requirements that must be met in order to perform a plan audit in accordance with ERISA requirements. An ERISA plan auditor must possess an understanding of the additional reporting and disclosure requirements under ERISA and have the ability to design audit procedures that are unique to ERISA plan audits. Benefit plan audits are unlike audits of commercial and nonprofit organizations. Examples of such unique audit areas include: eligible compensation provisions, participant data, employee and employer contributions, benefit distributions, participant loans, administrative expenses, parties-in-interest, and prohibited transactions.

With regard to plan investments, an auditor must also know when a plan is eligible to apply the limited-scope audit exemption under ERISA. Depending on the type of institution serving as custodian or trustee of the Plan's assets, this exemption may allow for cost savings related to the audit. In addition to the unique testing involved in the audit, ERISA also requires a number of additional footnote disclosures and supplemental schedules to the financial statements which are unique to employee benefit plan audits. It is easy to see why it is important to ensure that the IQPA you choose to audit your plan has a thorough understanding of the rules and regulations governing employee benefit plans and specializes in ERISA plan audits. In addition to obtaining a quoted price for your Plan's audit services, there are also a number of qualitative factors that should be taken into consideration when selecting an appropriate IQPA to audit your plan. Plan fiduciaries should also obtain the following information from potential plan auditors:

  • Information about the accounting firm itself - specifically with regard to experience with retirement plans of similar size and complexity;
  • Information about the quality of the firms services:
    • The identity, experience, and qualifications of professionals who will be handling the Plans account;
    • Any recent litigation or enforcement action that has been taken against the firm; and
    • The results of the firm's most recent peer review report.

The EBSA's May 2015 report identified two significant commonalities among deficient audits. First, a direct link was identified between the number of employee benefit plan audits performed by an accounting firm and the quality of the work performed. The smaller the firm's employee benefit plan audit practice, the greater the incidence of audit deficiencies. Firms that performed five or fewer employee benefit plan audits accounted for nearly 59% of the 234 unacceptable audits with major deficiencies identified during the DOL review.

Next, the EBSA also noted that members of the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC) tend to have fewer audits containing multiple audit deficiencies. This is consistent with the fact that most firms who perform only 1-5 employee benefit plan audits are not EBPAQC members. When taking into account firms of all sizes during the DOL review, overall deficiency rate for EBPAQC members was 29.9%, compared to 82.3% for non EBPAQC members.

What if Your Form 5500 is Filed Late?

Regardless of whether or not your Plan is required to file as a small or large plan, it is imperative that you meet the applicable filing deadline in order to avoid the risk of incurring the aforementioned penalties for late filing of Form 5500. Plan sponsors must generally file the return on the last day of the seventh month after the plan year ends, with the option of requesting an extension for an additional 2 ½ months. For example, a plan that has a December 31st year-end must file by July 31st, with the option to extend the deadline to October 15th.

Fortunately, the DOL does provide relief for delinquent filers in the form of an opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements. Plan sponsors are eligible to participate in the DOL's Delinquent Filer Voluntary Compliance Program (DFVCP) so long as the filings under the DFVCP are made prior to receiving notification from the DOL of its failure to file a timely annual report.

In the case of a small plan with fewer than 100 (120 if the "80 to 120 Participant Rule" is applicable) participants at the beginning of the plan year, the penalty under the DFVCP is $10 per day the Form 5500 is filed after the initial due date (without regard to any extensions), up to a maximum of $750 for each individual return. If there is more than one delinquent return, the maximum penalty is $750 for each additional return, up to a maximum of $1,500.

With respect to large plans with over 100 participants at the beginning of the plan year and not eligible for the "80 to 120 Participant Rule," the penalty under the DFVCP is $10 per day the Form 5500 is filed after the initial due date (without regard to any extensions), up to a maximum of $2,000 for each individual return. If there is more than one delinquent return, the maximum penalty is $2,000 for each additional return, up to a maximum of $4,000.

What to Take Away

It is important to not only avoid potential filing penalties, but also to limit your potential liability as a plan fiduciary by demonstrating that you have properly carried out your responsibilities to the Plan. One of the most effective ways to do this is by exercising due diligence when contracting with an independent plan auditor. Make sure that in addition to the fee for service, you also take into account all relevant qualitative information from potential auditors to ensure that a quality audit is performed over the Plan and the Form 5500 is properly filed. The lowest priced bid is often not the best and most qualified choice for your Plan's auditor.

Christopher R. Alger, CPA, CFE is an Audit Manager at Grossman St. Amour CPAs PLLC. Chris practices in the areas of audit and attest engagements, financial statement preparation and internal control review. Chris' clients include employee benefit plans, local governments and municipalities, retail distribution, healthcare, and not-for-profit organizations. Chris is a member of the Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants.

For more information about employee benefit plans, contact Christopher R. Alger at 315.701.6508 or calger@gsacpas.com.

Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.  Tax articles in this site are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. 


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