The Department of Labor and IRS are ramping up efforts to improve compliance in corporate employee benefit plan administration. Frequent errors point to inadequate or improper administration by organizations, but also to auditors that lack the proper training and experience to conduct a technically appropriate employee benefit plan audit. Failure to make improvements can result in penalties and fines to companies and organizations — and even criminal charges in severe cases. That’s why it’s so important to choose an audit team with experience once your organization reaches 100 eligible participants.
The American Institute of Certified Public Accountants has made a concerted effort to cooperate with the Department of Labor and the IRS to inform companies and organizations about their fiduciary responsibilities regarding employee benefit plans. In 2014, the AICPA released an advisory report for plan sponsors, administrators and trustees on the basics of why employee benefit plans need an independent audit — and how to hire a qualified, independent public accountant.
This awareness is more important than ever. The DOL has noted an unacceptable level of errors in plan audits. Exploring further, they found that many plan administrators failed to properly administer and record plan information on behalf of qualified employees. An audit should catch administrative errors, but the auditors themselves are causing mistakes.
Auditors who perform only a handful of employee benefit plan audits a year may lack enough experience or credentials to identify areas of weakness in controls or plan operations. If companies and organizations aren’t aware of these weaknesses or don’t remedy them, they can face serious penalties. The DOL Employee Benefits Security Administration (EBSA) may reject plan filings and assess penalties on companies and organizations of up to $1,100 per day, without limit, for these deficient filings. Administrators and officers can even be held personally liable to restore losses incurred by the plan or other losses connected to employee payroll.
A 2015 report by the DOL found that nearly four in 10 Form 5500 filings had enough major deficiencies to merit rejection of the filing. This percentage encompasses $653 billion and 22.5 plan participants and beneficiaries at risk. The DOL report was based on Form 5500 filings from 2011, which sounded the alarm bells regarding the integrity of employee benefit plans for participants and their beneficiaries.
“There is a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed. CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate.” –U.S. Department of Labor
If CPA firms simply needed to perform more plan audits to improve audit quality, the accounting industry could encourage more intensive training and membership through the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). However, the nature of employee benefit plans and third-party administration continues to evolve and increase in complexity. Public accountants who have specialized for years in audits of employee benefit plan financial statements are at a clear advantage to deliver consistent quality to their clients into the future.
Any company or organization that has 100 or more eligible participants in an employee benefit plan is required to have a financial statement audit of the plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and DOL requirements. An independent, qualified public accountant must perform these audits to deliver a reliable report to participants, plan management, the DOL and other interested parties. The audit helps protect the financial integrity of the employee benefit plan so that the necessary funds will be available to pay retirement and other promised benefits.
The magic number of “eligible participants” may include more than just current employees. They could include former employees with funds still held in the benefit plan as well as retired employees receiving benefits. It also includes eligible but not participating employees. That’s why it’s so important to work with a qualified plan auditor to identify and assure compliance and accurate reporting.