Employer-sponsors must include a financial statement audit for certain types of plans, when filing the Form 5500 annual report for employee benefit plans that is required under the Employee Retirement Income Security Act (ERISA).
The audit, which must be made by an independent qualified public accountant, is aimed at ensuring that a plan's financial statements are presented fairly in all material respects and that they conform to U.S. generally accepted accounting principles (GAAP).
Pension and 401(k)-type plans typically fall under the audit requirement. While both large and small plans must file Form 5500 annually, typically only large plans need an audit. "Large" generally means plans with more than 100 eligible participants at the beginning of the plan year.
Because the focus is on eligible participants, former employees who remain in the plan with balances or benefits, and active employees who are eligible but choose not to participate, count toward the 100-participant threshold. This is an important distinction in 401(k) plans.
Plans that fluctuate in size between 80 and 120 participants may be able to use the "80-120 rule." This rule allows plans that have participants within the numerical range use the same small or large category they used the previous year when they file their annual reports. This can affect the audit requirement, so consult with your benefits professional to be sure the rule is being applied correctly.
A "limited-scope audit" is available in cases where a bank, trust company or insurance company, acting as a plan trustee or custodian, certifies that the investment information on the plan is complete and accurate. In these circumstances, the independent accountant doesn't have to audit the certified financial information.
However, this is not an exemption from the audit requirement. It is simply a reduction in the scope of the auditor's responsibilities, which can streamline the audit and cut costs. The accountant still must audit non-investment information, such as contributions and participant data, as well as assets that aren't held by a certifying institution.
Auditors must be licensed or certified as public accountants by the state regulatory authority and cannot have a financial interest in the plan or the sponsoring employer. The selection of the auditor is a fiduciary task for the plan sponsor, so care should be taken.
The Employee Benefit Plan Audit Quality Center, maintained by the American Institute of Certified Public Accountants (AICPA), provides information on audit importance and quality. It also provides detailed recommendations for crafting the Request for Proposal used to choose an auditor. These recommendations can be found on the AICPA website.
(Note: Welfare benefits plans -- medical, dental, disability and the like -- require an audit only if they are funded. If your company's plan pays those benefits through some other means, check with your benefits professional to determine whether the plan requires an audit.)
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