Employee Benefit Plans Audit and Accounting Essentials

• Chapter 1 - Employee Benefit Basics
  • Learning Objectives
  • Introduction
  • Plan as Defined by ERISA
    • Welfare Plans
    • Pension Plans
  • Plans as Defined by GAAP
    • Defined Contribution and Defined Benefit
  • Popular Plan Types
    • Pension Plans
    • Welfare Benefit Plans
  • Tax Compliance Elements
    • Formation
    • Eligibility
    • Non-Discrimination
    • Funding
    • Vesting
    • Distributions
    • Plan Termination or Merger
    • Relief for Violation
  • Key Plan Operational Concepts
    • Fiduciary Conduct
    • Third Party, Claims, Contract Administrators, or Recordkeepers
    • Direct Filing Entities
    • Prohibited Transactions
    • Single, Multi-, and Multiple Employer Plans
    • Unrelated Business Income Tax
    • ERISA Exemptions
  • Understanding the Plan under Audit
    • Form and Substance of Employee Benefit Plan Definition
    • What Are You Auditing?
  • Questions
• Chapter 2 - Accounting and Reporting Standards
  • Learning Objectives
  • Introduction
  • Applicable Standards
    • FASB ASC 960 Plan Accounting – Defined Benefit Pension Plans
    • FASB ASC 962 Plan Accounting – Defined Contribution Pension Plans
    • FASB ASC 965 Plan Accounting – Health & Welfare Benefit Plans
    • FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans, as Amended
    • FASB Statement No. 110, Reporting by Defined Benefit Pension Plans of Investment Contracts.. 2-5 SOP 92-6, Accounting and Reporting by Health and Welfare Benefit Plans and Defined- Contribution Pension Plans, as Amended
    • SOP 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans, as Amended
    • FASB Staff Position (FSP) AAG INV-1 and SOP 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investments Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans
    • SOP 99-2, Accounting and Reporting of Postretirement Medical Benefit [401(h)] Features of the Defined Benefit Pension Plans
    • SOP 99-3, Accounting for and Reporting of Certain Defined Contribution Plan Investments and Other Disclosure Matters
    • SOP 01-2, Accounting and Reporting by Health and Welfare Benefit Plans
  • Financial Statements
  • Investment Valuation and Income Recognition
  • Accounting and Reporting for Contributions
  • Operating Assets
  • Accrued Liabilities
  • Plan Mergers
  • Terminating Plans
  • Recent Developments
    • EBSA Enforcement Initiative
    • EBSA Inspection Programs
    • AICPA Employee Benefit Plan Audit Quality Center
    • Medicare Prescription Drug, Improvement and Modernization Act of 2003
    • FASB Statement No. 157, Fair Value Measurement
    • FASB Statement No. 158, Employer's Accounting for Defined Benefit Plans and Other Postretirement Obligations
    • FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109
    • The Hierarchy of Generally Accepted Accounting Principles
  • Questions
• Chapter 3 - Reporting and Audit Requirements
  • Learning Objectives
  • Introduction
  • Audit Requirement
    • Plan versus Trust
    • Exemptions – Audit
  • Regulatory Reporting and Disclosure Requirements for Pension and Welfare Plans
    • Exemptions – Filing
  • Deadlines and Extensions
  • The Audit Guide
  • ERISA versus GAAP
  • Financial Reporting and Disclosure
  • Independence
  • Common Audit Concerns or Deficiencies
    • Issues Related to Participant Data
    • Issues Related to Limited Scope Audits
    • Issues Related to Investments
    • Issues Related to Supplemental Schedules
    • Miscellaneous Issues
  • Recent Developments
    • AU section 120 (SAS No. 102), Defining Professional Requirements in Statements on Auditing Standards
    • AU section 339 (SAS No. 103), Audit Documentation
    • New Auditing Standards Related to Risk Assessment
    • AU section 325 (SAS No. 112), Communicating Internal Control Matters Identified in an Audit
    • SAS No. 113, Omnibus 2006
    • AU section 380 (SAS No. 114), The Auditor's Communication with Those Charged with Governance
    • AU section 325 (SAS No. 115), Communicating Internal Control Related Matters Identified in an Audit
  • Questions
• Chapter 4 - Audit Planning
  • Learning Objectives
  • Introduction
  • Key Parties
  • Client Acceptance
    • Client and Engagement Team Evaluation
    • Engagement Letter
    • HIPAA Considerations
  • Scope and Timing
    • Nature and Scope
    • Timing
  • Gaining an Understanding of a Plan, Its Environment, and Its Internal Controls
    • Understanding a Plan (the Entity)
    • Understanding a Plan's Environment
    • Understanding a Plan's Internal Controls
  • Risk Assessment
    • Engagement Risk
    • Fraud Risk
    • Audit Risk
    • Identification of Significant Risks
    • Discussion among the Audit Team
    • Materiality
    • Design Further Audit Procedures in Response to Assessed Risks
  • Audit Documentation
  • Analytical Procedures
    • All Plans
    • Defined Benefit Pension Plans
    • Health and Welfare Plans
  • First Time Audit Procedures
  • Public Plans Considerations
  • Questions
• Chapter 5 - 401(k) and Other Defined Contribution Plans (Except ESOPs)
  • Learning Objectives
  • Introduction
  • Determination of Benefit Amount
  • Net Assets Available for Benefits
  • Changes in Net Assets Available for Benefits
  • Investments
    • Investment Types and Measurement/Valuation
    • Auditing Investments in a Defined Contribution Plan
    • Auditing of Unique Types of Investments
  • Contributions Receivable
    • Auditing Contributions Receivable
  • Other Operating Assets
  • Cash
  • Accrued Liabilities
  • Investment Income
  • Contribution Revenue
    • Auditing Contributions Received
  • Participant Data and Participant Equity
    • Auditing Participant Data and Participant Equity
  • Participant-directed vs. Self-directed
  • Benefit Payments
    • Auditing Benefit Payments
    • Present and Future Ability to Pay Benefits
  • Expenses
    • Auditing Plan Expenses
  • Financial Statement Presentation and Required Disclosures
  • Recent Developments
  • Questions
• Chapter 6 - Employee Stock Ownership Plans (ESOPs)
  • Learning Objectives
  • Introduction
  • Relationship to Employer, Plan, and Participants
  • Employer Securities
  • Acquiring Employer Stock
    • Leveraged Purchases of Stock
  • Unique Auditing Aspects of an ESOP
    • Readily Traded vs. Non-readily Traded Market Value
    • Definitions of Fair Value
    • Auditing Employer Securities
  • Other Defined Contribution Features
  • Contributions
    • Auditing Contributions
  • Changes in Fair Value of Investments
    • Auditing Change in Fair Value of Investments
  • Debt and Pledged Shares
    • Auditing Debt and Pledged Shares
  • Share Release in a Leveraged Plan
    • Auditing Share Release in a Leveraged Plan
  • Dividend Income from Employer
  • Participant Allocations
    • Auditing Participant Allocations and Participant Data
  • Distribution of Benefits
  • Diversification Requirements
  • Put Option
  • Presentation for Leveraged and Non-leveraged Plans
  • Tax Compliance
  • Required Disclosures
  • Questions
• Chapter 7 - Defined Benefit Pension Plans
  • Learning Objectives
  • Introduction
  • Determination of Benefit Amount
  • Financial Statements
    • Net Assets Available for Benefits
    • Changes in Net Assets Available for Benefits
    • Accumulated Plan Benefits
    • Changes in Accumulated Plan Benefits
  • Investments and Investment Income
  • 401(h) Accounts
  • Funding
  • Participant Data and Plan Obligations
  • Benefit Payments
  • Expenses
  • Financial Reporting and Disclosure
  • Mergers
  • Terminations
  • Questions
• Chapter 8 - Health and Welfare Plans
  • Learning Objectives
  • Introduction
  • Defined Contribution vs. Defined Benefit
  • Challenges in Auditing a Health and Welfare Plan
    • Plan vs. Trust
    • Plan Document
    • Claims Processor's Understanding of HIPAA
    • Lack of SAS 70 Reports for Claims Processor
  • Components of the Financial Statements of a Welfare Benefit Plan
    • Statement of Net Assets Available for Benefits
    • Statement of Changes in Net Assets Available for Benefits
    • Statement of Plan Benefit Obligations
    • Post-employment Benefit Obligations and Post-retirement Benefit Obligations
    • Statement of Changes in Plan Benefit Obligations
  • Unique Features of a Health and Welfare Benefit Plan
    • Rebates Receivable
    • Stop-loss Refunds Receivable
    • COBRA Contributions
    • Retiree Contributions
    • Premium Contributions
    • Claims Paid
    • Claims Payable
    • Accumulation of Eligibility Credits
    • Participant Data
    • Medicare Rebates
  • Disclosure Requirements
    • Description of the Plan
    • Accounting Policies
    • Investment Transactions
    • Other Disclosures
    • Medicare Subsidy Act
  • Reporting Requirements
  • Questions
• Chapter 9 - Other Auditing Considerations
  • Learning Objectives
  • Introduction
  • Party-in-Interest Transactions
    • Audit Procedures
    • Examples of Party-in-Interest Transactions – Both Exempt and Nonexempt
    • Financial Reporting
  • Prohibited Transactions
  • Untimely Deposits of Employee Deferrals
  • ERISA Supplemental Schedules
    • Effects of Information Omitted from ERISA Schedules
  • Certified Information in Limited Scope Audits
  • Investment Confirmations for Full Scope Audits
  • Self-Directed Investments
  • Tax Status
  • Auditing Corrective Actions
  • Going Concern
  • Form 5500 Information Consistency with Financial Statements
  • Questions
• Chapter 10 - Wrapping Up
  • Learning Objectives
  • Introduction
  • Commitments and Contingencies
  • Subsequent Events
  • Management Representation Letter
  • Communication of Internal Control Related Matters Identified in an Audit
    • AU section 325 (SAS No. 112), Communicating Internal Control Related Matters Identified in an Audit
    • Form of Communication
  • Management Advice Letter Considerations
  • Communication with Those Charged with Governance
    • Significant Findings from the Audit
  • Questions
• Chapter 11 - Latest Developments
• Appendix A – Illustrative Financial Statements and Disclosures for a Defined Contribution Plan
• Appendix B – Illustrative Financial Statements and Disclosures for a Defined Benefit Plan, Assuming End of the Year Benefit Information
• Appendix C – Illustrative Financial Statements and Disclosures for a Health and Welfare Plan
• Appendix D – Illustrative Supplemental Schedule of Assets
• Appendix E – Illustrative Supplemental Schedule of Reportable Transactions
• Appendix F – Illustrative Example of an Arrangement Letter for a Limited Scope Audit of a 401(k) Profit Sharing Plan
• Appendix G – SPPAW Decision Tree
• Appendix H – Report Modifications Chart
• Appendix I – Pension Plan Audit Decision Tree

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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). 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. Chapter 2 will address applicable accounting and auditing standards as well as recent developments in the employee benefit plan industry. Chapter 3 will discuss ERISA reporting requirements and standards of fiduciary conduct.

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 exemption to understand because they exist at many employers. Payroll practices are defined as various payments of compensation either

• In excess of normal pay for duties other than under ordinary circumstances, such as overtime pay, shift, holiday, and weekend premiums, or

• As normal compensation out of general assets for periods of time when the employee is physically or mentally unable to perform, or

• As normal compensation out of general assets for periods of time when the employee is physically or mentally able to perform, but on vacation, military or sabbatical leave, serving jury duty, or in training.

Other specific welfare plan exemptions include on-premise facilities, holiday gifts, sales to employees, hiring halls, remembrance funds, strike funds, industry advancement programs, and unfunded scholarship programs.

Gaining in popularity are certain group or group type insurance programs that are exempt from ERISA. Such arrangements are frequently included with a cafeteria plan package. These plans are exempt if

• No contributions are made by an employer or employee organization,

• Participation is completely voluntary, and

• The sole function of the employer or employee organization, without endorsement, is to permit the insurer to publicize the program, and to collect only administrative costs in connection with payroll deductions, services, or dues check offs.

The auditor needs to be familiar with these exemptions, but the auditor should not be making the determination of whether a plan is or is not subject to ERISA, nor whether the plan is subject to audit. That determination is a complicated decision with sometimes unexpected and undesirable consequences that extend far beyond simply whether or not a Form 5500 or audit is required.

1 Donovan v. Dillingham, (3 EBC 2122, 3 EBC 1073, 5 EBC 2092, 688 F2d 1367 (1983)).

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