As the American financial landscape continues to evolve, Employee Benefits Plans (EBPs) have become increasingly complex and integral to organizations of all sizes. Not only are they essential components of the compensation package offered by employers to attract and retain talent, but businesses also have to ensure compliance with regulations like ERISA, IRS, DoL, and US GAAP. Non-compliance can lead to fines, penalties, and litigation.
CPA firms play a crucial role in this regard, offering EBP audit as a service for a comprehensive review of plan operations, financial statements, and compliance with regulatory bodies. These audits also help identify and correct errors, ensure plan assets are safeguarded, and provide assurance to plan participants and stakeholders.
Let’s explore the different types of plans, scopes of audits that CPA firms offer, tips for preparation, and challenges.
Types of Employee Benefit Plans
- Defined Contribution Plans: These plans involve fixed dollar amount or percentage contributions, such as in 401(k) plans. Audits focus on contributions, participant data, and compliance with plan provisions.
- Defined Benefit Plans: These plans compute benefits based on a formula considering factors like earnings history and length of employment. Audits assess actuarial assumptions, funding requirements, and compliance with ERISA regulations.
- Health & Welfare Plans: These plans provide benefits like health care, life insurance, and unemployment benefits. Audits verify eligibility criteria, claims processes, and compliance with plan rules and regulations.
Full-Scope Audit vs. Limited-Scope Audit
Based on a business entity and benefit plans offered to employees, CPA firms are required to perform a full-scope or a limited-scope audit. Here’s how they differ:
| Full-Scope Audit -
ERISA non-section 103(a)(3)(c) |
Limited-Scope Audit
ERISA section 103(a)(3)(c) |
|
|---|---|---|
| Extensiveness | Most comprehensive type of audit. | Less extensive compared to full-scope audit. |
| Requirement | Mandatory for all 11K SEC filings, ESOP plans, ESPS plans, etc. | Required when plan qualifies for it. |
| Plan Assets Certification | Plan assets are not certified by a qualified institution (plan trustee/custodian). | Plan assets are certified by a qualified institution (plan trustee/custodian). |
| Investment Testing | Additional testing of plan assets/investments, including employer stocks. | No audit testing of plan assets/investments; they are certified by a qualified institution. |
| Reporting Requirements | Dual reporting (DoL and PCAOB). | No dual reporting requirement. |
| Cost | More expensive due to additional testing and dual reporting. | Less expensive due to the exclusion of investment testing and no dual reporting requirement. |
| Commonality | Less common, as not all plan sponsors offer Employer Stocks/Shares. | More common, as not all plans have the complexities requiring full-scope audits. |
| Regulatory Compliance Testing | Required tests on various account balances and controls to ensure regulatory and US GAAP compliance, as well as comportment with ERISA requirements, IRS, and DoL regulations. | Limited testing, focused on areas not covered by the limited scope. |
| Audit Opinion | Comprehensive opinion on financial statements. | Comprehensive opinion on financial statements, with the auditor no longer issuing a report disclaiming an opinion on the financial statements and the supplemental schedules regarding scope limitation of testing investments (effective for audits ending on or after December 15, 2021). |
Tips for Preparing for an Employee Benefit Plan Audit
- Organize and familiarize yourself with required documents, including plan documents, IRS determination/opinion letters, and draft Form 5500.
- Understand fiduciary responsibilities and ensure operational compliance with plan provisions and regulatory requirements.
- Review internal controls related to financial reporting, participant data, and plan administration.
- Choose the right auditor with EBP expertise, ensuring they understand the complexities of your plan and regulatory environment.
alliantTALENT Advantage
At alliantTALENT, our highly skilled professionals are experienced in all types of employee benefit plan audits. We provide in-depth industry expertise and service specialization, as well as deliver superior audit quality as a vital member of your audit practice.
Our EBP professionals have a comprehensive understanding and knowledge of ERISA guidelines, IRS regulations, and DoL reporting requirements to assist CPA firms in performing employee benefit plan audits.
You can reach out to us to learn how we can help you as an extension of your EBP audit team.
