In 2015, the Department of Labor issued an audit quality study, “Assessing the Quality of Employee Benefit Plan Audits,” which concluded that 39% of audits inspected contained “major deficiencies” largely associated with employee benefit plan–specific audit areas. Three years later, the same issues remain.
Year in and year out, contributions are the main source of growth for an employee benefit plan. Testing how contributions are determined, remitted, and recorded is a critical part of the audit.
Year in and year out, contributions are the main source of growth for an employee benefit plan. Testing how contributions are determined, remitted, and recorded is a critical part of the audit. During the planning stage, an auditor should summarize the types of contributions after analyzing the plan document, making inquiries with management, and scanning the trust report. The brainstorming session should include how each type of contribution will be tested and reconciled with the plan sponsor and trust company’s records.
Key Audit Issues
Definition of plan compensation.
The plan document will have a very specific definition of compensation. Often, this definition is straight W-2 wages; however, many definitions exclude bonuses, overtime, vacation pay, and other payment codes. Issues often arise when the plan document was approved by an executive years ago and the current controller sets up a new payroll system without knowledge of what compensation should or should not be excluded for purposes of the plan. If the incorrect definition of compensation is used, then the base of both employee and employer contributions may be incorrect. This error could potentially span years and affect many participants, resulting in the plan sponsor having to make significant corrections to the plan.
When testing the contributions, auditors should inspect the sponsor’s payroll and have a specific test for the definition of plan compensation. Auditors should also recalculate how contributions are calculated and compare the base of compensation used in the payroll to the definition in the plan document. If there is an issue, auditors should inquire with the plan sponsor and understand the source of the discrepancy. The plan sponsor should attempt to quantify the amount of the error, and auditors should consider the issue and how it relates to the opinion in the auditor’s report, disclosure in the financial statements, and communication in both the governance and internal control letters.
Remittance of participant contributions.
The Department of Labor (DOL) has a strong focus on how quickly a sponsor remits participant contributions to the plan. 29 CFR 2510.3-102 states that a sponsor should remit participant contributions “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.” This has led to considerable confusion among both sponsors and auditors on how to determine what constitutes a late contribution.
AICPA Technical Question and Answer 6932.02 states that auditors need to determine late contributions on a plan-by-plan basis. Auditors should consider the complexity of the plan and the processes needed to remit contributions when determining how quickly the sponsor can reasonably segregate plan assets from general assets. The Employee Benefits Security Administration (EBSA) has also given guidance to consider both absolute and relative time frames, indicating that an auditor should consider a sponsor’s ability to remit federal income taxes when determining if participant contributions are delinquent. Auditors should also consider a sponsor’s remittance history when determining whether a contribution is delinquent. Notably, the DOL has indicated that there is no safe harbor allowed to remit participant contributions no later than the 15th business day of the next month. This is a very common misconception, as many sponsors rely on this to support the time-liness of their remittance.
Auditors should have the sponsor complete a remittance template that shows the sponsor’s payroll dates, date remitted, and the amounts and character of each contribution. First, an auditor should tie this report to the trial balance to ensure completeness. Next, an auditor should trace each payment to the trust report and calculate how long it took for each remittance to reach the trust company. After considering the factors described above, an auditor should determine which, if any, remittances are late. If any remittances are considered late, they should be disclosed in Schedule H, part IV(a), in the supplemental schedule, “Schedule of Delinquent Participant Contributions.” Disclosure in the financial statements should be considered as well.
Testing and reconciling contributions.
Contributions are made in different ways; participant and employer match contributions generally flow through the payroll, while employer discretionary contributions generally are made annually, after the year-end. The base for these calculations should be in both participant records and in the sponsor’s payroll, and the contributions should be recorded properly in the trust company reports and Schedule H of Form 5500.
After testing at the participant level, an auditor must compare the sponsor’s W-3 to the contributions received in the trust report. The W-3 will show the sponsor’s accrual contribution withheld, and the trust report generally shows the cash received. Auditors should use the W-3 to test for completeness of contributions and the remittance schedule, discussed above, to test the cutoff. After the results have been considered, the plan may need to book a receivable. Once completed, an auditor should compare the amounts in the financial statements to Schedule H, Part II(a) of Form 5500. If these amounts do not match, an auditor may need to include a reconciliation from the financial statements to Form 5500, with an explanation of the differences.
This column represents the first in a series of articles that will cover key issues and audit areas specific to employee benefit plans. The quality of audits in this practice area has come under scrutiny in the past several years, making a focus on best practices imperative for the profession. The author, Adam Lilling, is a partner at Lilling & Company LLP, and a former chair of the NYSSCPA’s Employee Benefits Committee.