Many companies sponsor employee benefit plans for their employees. Management may not be aware that certain plans require an audit to be completed by an independent auditor. The following is a summary of the audit and reporting guidelines and filing requirements for employee benefit plans.
Basic Filing Requirements
The Employee Retirement Income Security Act (“ERISA”) of 1974 was enacted to protect the interests of employee benefit plan participants and their beneficiaries. ERISA defines pension plans to include all defined benefit and defined contribution plans, including profit-sharing, stock bonus, and employee stock ownership plans. ERISA requires plan administrators to prepare and file various documents annually with the Department of Labor (“DOL”), the Internal Revenue Service (“IRS”), and the Pension Benefit Guaranty Corporation (“PBGC”). The IRS, DOL, and PBGC have consolidated their filing requirements into Form 5500.
Form 5500 filing requirements vary depending on a plan’s classification as a large plan or a small plan. The filing requirements and definition of each category are as follows.
- Large plan – Pension plans, including 401(k) and 403(b) plans, generally with 100 or more participants as of the beginning of the plan year. ERISA requires an annual audit to accompany Form 5500 filings for large plans
- Small plan – Plans with fewer than 100 participants. There are three approaches to filing the Form 5500 for a small plan:Form 5500 with all attachments, but replace Schedule H with Schedule I
- Form 5500-SF; limited to small plans with investments limited to those with a readily determinable market value, not holding any employer securities, or
- Form 5500-EZ; limited to plans covering owners only
The Department of Labor defines “participants” related to the audit requirement as the number of participants entered on line 5 of Form 5500. “Participants” include (1) any individuals who are eligible to participate in the plan at year end, regardless of whether or not they are participating, (2) retired or separated participants (or their beneficiaries) receiving benefits, and (3) other retired or separated participants (or their beneficiaries) entitled to future benefits from the plan.
Special Filing Requirement Provisions
Whether large or small, plans that have between 80 and 120 participants at the beginning of the plan year can complete the same form as filed in the previous year.
For example, if a plan had 105 participants at January 1, 20X2 (the assumed first day of the plan year), they could file as a “small plan” if they filed as a “small plan” in the previous year, thus not requiring an audit for 20X2 despite having over 100 plan participants on the first day of the plan year. In this example, the plan could continue to file as a small plan until they reach over 120 participants on the first day of the plan year. Likewise, if a plan has 95 participants at January 1, 20X2 (the assumed first day of the plan year), they could file as a “large plan” if they filed as a “large plan” in the previous year. Accordingly, the plan would need an audit for 20X2 despite having less than 100 participants on the first day of the plan year.
The “80-120” rule is helpful for plan sponsors that have employee levels that consistently fluctuate around 100 participants. Plan sponsors who drop below the 100 participant level but expect participant levels to rise in the near future often find it easier to continue obtaining audits for their plans due to the extensive opening balance testing that would be required for required subsequent year audits.
If the plan only provides benefits to a select group of people, such as managers or highly compensated employees, and it is underfunded and fully insured, companies may be exempt from filing a Form 5500 and obtaining an audit.
Also, plans, regardless of the number of participants at the beginning of the plan year, may be exempt from the audit requirement if the following stipulations are met:
- The plan benefits are provided exclusively through allocated insurance contracts
- The plan is solely funded by premiums paid directly from the general assets of the employer or the employee organization maintaining the plan, or partly from the general assets and partly from the contributions from employees
- Participant contributions are forwarded by the plan administrators within three months of receipt
- The plan provides for the return of refunds to contributing participants within three months of receipt by the employer or employee organization
ERISA and the Financial Accounting Standards Board (“FASB”) have specific financial reporting requirements that pertain to filing the Form 5500 and the audits of the financial statements of employee benefit plans.
According to the FASB, the primary objective of pension plan financial statements is to provide financial information that is useful in assessing the present and future ability for the plan to pay benefits when due. Below are specific reporting requirements established by ERISA and the FASB pertaining to the financial statements of a benefit plan.
Financial statements must include:
- A Statement of Assets and Liabilities – in comparative form
- A Statement of Changes in Net Assets – single year presentation
- Required supplemental information, consisting of schedules to Form 5500
- Required footnote disclosures, including a reconciliation of differences, if any, between amounts reported on the Form 5500 and in the financial statements
Financial statements must include:
- Presentation using the accrual method of accounting
- A statement of Net Assets Available for Benefits at the end of the plan year
- A statement of Changes in Net Assets Available for Benefits
- For defined benefit pension plans, the actuarial present value of accumulated benefits as of either the beginning or end of the plan year and information regarding any significant effects of certain factors affecting the year to year change in the actuarial present value of accumulated benefits
- Plan resources and descriptions of how the responsibility of the resources has been discharged
- The accumulated plan benefits of the plan participants
- The results of transactions and events that affect the information regarding the resources and plan benefits
- Any additional information that may assist the financial statement reader in understanding the information provided
When preparing for an initial or re-occurring employee benefit plan audit, practitioners should refer to the resources available at the DOL website: dol.gov/ebsa. In addition, make sure your independent plan auditors are members of the AICPA Employee Benefit Plan Audit Quality Center. That will ensure they obtain proper training and have access to the AICPA updated technical literature and resources.