Employer Benefit Plan Sponsors Face New Audit Requirements by Melissa Fleitas, CPA
The July 31 deadline for businesses to file annual employee benefit plan returns (or request a two and a half month filing extension) is right around the corner. While all employers offering defined contribution plans will find a few changes to the information reporting requirements found on IRS Form 5500, those with 100 or more eligible plan participants should be prepared for significant changes in their audits for plans with the year ended December 31, 2021.
Understanding Employee Benefit Plan Reporting Requirements
Employee benefit plans, such as 401(k)s and 403(b)s, are governed by the Employee Retirement Income Security Act (ERISA) of 1972, which establishes fiduciary standards employers must follow to protect plan assets, participants, retirees and their named beneficiaries. For example, a plan sponsor must annually file Form 5500 by July 31 (or October 15 with an extension) or face IRS penalties of $250 per day up to a total of $150,000 and DOL penalties of up to $2,529 per day with no maximum. In addition, plans with 100 or more participants at the beginning of a plan year historically have had an additional requirement to submit with Form 5500 an audit prepared by a qualified independent accountant. These audits are at the center of recent changes.
In 2019, the American Institute of Certified Public Accountants (AICPA) issued a statement of auditing standards (SAS 136) prescribing new requirements for employee-benefit plan financial audits. More specifically, for periods ending on or after Dec. 15, 2021, limited-scope audits for large plans with 100 or more eligible participants are being replaced with a new ERISA Section 103(a)(3)(C) audit, which places expanded responsibilities on plan sponsors.
Changes Under SAS 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA
SAS 136 aims to provide readers of financial statements with a better understanding of the scope of an employee benefit plan audit and clarify the responsibilities of both plan sponsors and auditors. The audit opinion of an ERISA section 103(a)(3)(C) audit will include information about the procedures performed on both certified and noncertified information. Consequently, employers will bear more responsibilities to document their ERISA plans’ financial statements and administrative expenses, participant eligibility, contributions and benefits received as well as the internal controls in place to govern and manage those plans. Plan sponsors should prepare for greater transparency and acknowledgement of their broader responsibilities this year. Some of the requirements they will need to meet include the following:
- Provide proof and written confirmation they qualify for an ERISA 103(a)(3)(C) audit;
- Acknowledge and explain management’s responsibilities to administer the plan, maintain records and ensure the accuracy of its financial statements and certified investment details;
- Obtain certification from qualified institutions that the plans’ investment information is complete and accurate;
- Maintain up-to-date documentation of all plan instruments, including plan amendments, records of plan participants and reporting of prohibited transactions;
- Consider whether prohibited transactions identified by management or as part of the audit have been appropriately reported in the applicable ERISA-required supplemental schedules;
- Evaluate whether there are conditions or events that could raise substantial doubts about the plan’s viability and its ability to continue as a going concern;
- Confirm performance of annual nondiscrimination compliance testing; and
- Provide auditors with a completed Form 5500, confirming data contained in financial statements and identifying potential data inconsistencies.
These new audit compliance standards place more responsibility and liability for risks on plan sponsors’ shoulders. Even in situations in which third-party service providers are hired to administer their plans, employers continue to bear the burden of ensuring the most accurate and proper accounting and reporting of plan performance. Under the new standards, plan sponsors have the benefit of increased transparency and communication during audits performed by qualified auditors who must adhere to professional standards. In instances in which auditors identify potential risks of non-compliance, they may communicate them to employers along with recommendations for how to improve plan compliance going forward.
About the Author: Melissa Fleitas, CPA, is an associate director of Assurance and Advisory Services with Berkowitz Pollack Brant, where she provides accounting, audit and consulting services to a wide range of companies in the healthcare, manufacturing and distribution sectors. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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