Employee Benefit Plans Audit and Accounting Essentials

Chapter 1

Employee Benefit Basics

Learning Objectives

Upon completion of this chapter you should have an understanding of the following:

• How a benefit plan is defined under ERISA, GAAP, and the IRS.
• The design and functioning of today's popular benefit plans.
• The auditor’s responsibility regarding tax compliance matters.
• The roles of the various parties involved in the operation of a benefit plan.
• The need to distinguish between an employee benefit plan with a single or several benefits versus several employee benefit plans.

Introduction

The purpose of this course is to assist you in auditing employee benefit plans. Most employee benefit plan audits are required for compliance with the Employee Retirement Income Security Act of 1974 (ERISA). Chapter 2 will discuss what ERISA requires. A critical step in any audit process is to gain an understanding of the entity subject to audit. This chapter outlines the basic types of plans, the roles of the parties involved in running those plans and the tax rules, which define the limits of their operation.

ERISA is the starting point for plan definition. ERISA contains four titles. Title One includes the general Department of Labor responsibilities for plans. It includes reporting and disclosure (where the audit rules are located), funding, benefit accrual, fiduciary conduct, and enforcement. Title One also includes two parts covering health plans, but those provisions are beyond the scope of this discussion. Title Two is the tax law requirements for benefit plans. This includes nondiscrimination, funding, vesting, coverage, etc. Title Three deals with specific jurisdiction and enforcement procedures, which are beyond the scope of this course. Title Four deals with multi-employer plan matters - generally plan termination procedures. These are the subject of more advanced courses.

We are going to spend most of this chapter dealing with the operational framework of benefit plans. This is particularly necessary, as there has been a significant change in the kinds of employee benefit plans offered over the last decade. Through the early 1990s, fully insured noncontributory medical and life plans, and defined benefit plans were typical employer sponsored plans. However, economic instabilities, the spiraling cost of medical care, the shift to two income families with the resulting desire of employees to pick their personal benefit package from what is offered by both employers and, finally, the tendency of employees to change jobs frequently have all contributed to significant changes in benefit plans. Today, an employer is more likely to provide a contributory self-funded medical plan via a cafeteria plan, voluntary group life, and a defined contribution profit sharing plan with a 401(k) funding arrangement. Only the fully insured group life plan has remained relatively intact, primarily due to its low cost.

Plan as Defined by ERISA

A plan is not just a document. One plan may have several separate documents. Several plans may be found within a single legal document. For purposes of this program, an arrangement is considered a plan, if it has the following attributes:

• Benefits
• Beneficiaries/Participants
• Funding
• Administrative System¹

Under ERISA there are two broad categories of employee benefit plans: welfare and pension.

Welfare Plans

A plan of welfare benefits, by ERISA definition is comprised of any one or more of the following benefits:

• Medical, surgical, or hospital care
• Sickness, accident, disability, death, or unemployment
• Vacation
• Apprenticeship or other training programs
• Day care centers
• Scholarship funds
• Prepaid legal services
• Any benefit described in Section 302(c) of the Labor Management Relations Act, 1947 (except pension)

  ERISA provides for some other specific exemptions from ERISA. The broadest exemption is for church and governmental plans. Under welfare plans, payroll practices are an important