Auditing 401(k) Plans

Purpose of ERISA

Purpose of ERISA

The primary purpose of ERISA is to protect the interests of participants in the employee benefit plans and their beneficiaries.

 

 

 

 

 

 

 

 

 

 

 

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ERISA Requires Providing Information to Participants

ERISA Requires Providing Information to Participants

ERISA requires plans to provide participants with plan information including important information about plan features and funding.

 

 

 

 

 

 

 

 

 

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ERISA Requires Fiduciary Responsibilities

ERISA Requires Fiduciary Responsibilities

ERISA requires plans to provide fiduciary responsibilities for those who manage and control plan assets.

 

 

 

 

 

 

 

 

 

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  • You should know…

    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Quality audits for 401(k) plans are imperative, not only because they help ensure plan compliance for the benefit of the participants, but quality audits are important because the DOL can reject the annual Form 5500 filing when the DOL determines an audit failure has occurred.
    The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans.
    Common audit deficiency - testing of payroll data is insufficient.
    Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year.
    The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit.
    “Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
    Common audit deficiency - no audit work performed for related parties.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    Common audit deficiency - no audit work performed for contributions.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category (Schedule H or Schedule I) of form 5500 it filed the year before.
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    Common audit deficiency - no testing of investment income allocation to participants.
    The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.
    ”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.
    Common audit deficiency - inadequate or missing disclosures.
    Common audit deficiency - no audit documentation for testing participant data.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    Common audit deficiency - failure to test employee deferrals.
    Common audit deficiency - no audit work performed for benefit payments.
    A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.
    Common audit deficiency - failure to test timeliness of participant contributions

ERISA

The Employee Retirement Income Security Act of 1974

ERISA is the acronym for the Employee Retirement Income Security Act of 1974.  ERISA is a federal law that sets the standards for most voluntary established pension plans in private industry to provide protection for individuals participating in these plans.  ERISA requires plans to:

  • Provide participants with plan information including important information about plan features and funding.
  • Set minimum standards for participation, vesting, benefit accrual and funding.
  • Provide fiduciary responsibilities for those who manage and control plan assets.
  • Provide participants the right to sue for benefits and breaches of fiduciary duty.
  • Requires plans to establish a grievance and appeals process for participants to get benefits from their plans.

401(k) defined contribution plans are subject to ERISA.

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