Navigating Your 401(k) Audit

Navigating Your 401(k) AuditDanielle Gisondo, CPARebecca Ferris, CPA

March 21, 2017

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Dani Gisondo, CPAPartnerDani leads the firm’s Employee Benefit Plan Audit Group and has over 20 years of experience in public accounting. Dani works with clients in various industries including manufacturing, distribution, professional services, real estate and retail. Prior to joining Skoda Minotti, she was employed by one of the nation’s leading accounting firms.

PRESENTERS

Rebecca Ferris, CPARebecca is a senior manager in our accounting and auditing department, specializing in employee benefit plans. She has over eight years of experience performing audits of 401(k) plans.

Skoda Minotti is a member of the AICPA Employee Benefit Plan Audit Quality Center.

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• Who needs an audit?

• Audit process

• How to prepare for your first audit

• Wrap-up

AGENDA

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POLLING QUESTION

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Who needs to have a plan audit?

Generally, an employer that has over 100 eligible participants as of the beginning of the plan year needs to have an annual audit.

Exceptions for employers with between 80 and 120 eligible employees

Eligible is the KEY term

Employers are required to engage an IQPA

These plans are considered large plan filers

WHO NEEDS AN AUDIT?

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PLAN EXEMPTIONSPENSION BENEFIT

• Exemption from 5500 filing and audit requirement Plans that are unfunded or fully insured and provide benefits to a

select group of management or highly compensated EEs

• Exemption from audit requirement only Plans whose sole assets consist of insurance contracts fully

guaranteed by the insurance carrier

Plans funded by premiums paid out of the general assets of the employer, or a combination of general assets and employee contributions

Forward participant contributions within three months of receipt

and provide for return of refunds within three months of receipt

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PLAN EXEMPTIONSWELFARE BENEFIT

• Exemption from 5500 filing and audit requirement Plans that are unfunded or fully insured and provide benefits to a

select group of management or highly compensated EEs Plans under 100 eligible participants that meet

requirements below…• Exemption from audit requirement only

Plans whose sole assets consist of insurance contracts fully guaranteed by the insurance carrier

Plans funded by premiums paid out of the general assets of the employer, or a combination of general assets and employee contributions

Forward participant contributions within three months of receipt and provide for return of refunds within three months of receipt

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TYPES OF PLANSDefined Contributions Plans• Provide individual account for each participant

• Benefits based on amounts contributed by EE and ER and investment experience

• Examples are 401(k), profit sharing, money purchase, stock bonus, ESOP, 403(b), 457(b)

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TYPES OF PLANSDefined Benefit Plans• Do not have individual accounts for

each participant• Promise to pay a specific benefit determined by a

formula in the plan document based on age, years of service and compensation

• Examples are traditional pension plans and cash balance plans

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Health and Welfare Plans• Plans that provide medical, dental, vision, insurance,

post-employment/severance benefits, sick leave, dependent care, post-retirement, supplemental unemployment

• Can be either a DC or a DB plan or have attributes of both

• Generally if a trust exists, the plan has an audit requirement

TYPES OF PLANS

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POLLING QUESTION

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Audited financial statements must be included with the Form 5500 filing

• Original due date is seven months after the plan year end

• For calendar year-end plans, original due date is 7/31

• Can obtain an extension of 2 ½ months

• Extended due date is 10/15 for calendar year-end plans

AUDITED STATEMENTS

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• Planning for the audit usually begins in April/May

• Fieldwork in June, July and August

• Draft financials issued once fieldwork is complete and draft 5500 form is received

• Typically spend 2-3 days in the field performing the audit

AUDIT TIMING

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What do we test during a plan audit?

Financial Information and Compliance

Contributions

Participant accounts

Distributions

Loans

AUDIT PROCESS

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CONTRIBUTION TESTINGWhat are we testing?

Contributions must meet the following requirements:

Calculated in accordance with the plan document

Allocated appropriately to the respective participant accounts

Agreed to payroll records

Reduced properly by forfeitures

Adjusted to account for receivables

Remitted timely to the trust

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CONTRIBUTION TESTINGTimely Remittance of Employee Deferrals

• ERISA requires plan sponsors to remit employee deferrals to the plan at the earliest date that such amounts (contributions and loan repayments) are able to be reasonably segregated from the employer’sgeneral assets

• 15th business day—Not a safe harbor

• What is a “reasonable” time period?

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PARTICIPANT TESTINGFor a sample of participants, we audit:

• Eligibility and enrollment process

• Withholdings

• Investment allocations

• Employer contributions

• Compensation

• Account activity reasonableness

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PARTICIPANT TESTINGWhat are we testing?

• That participants are properly included and/or excluded in the plan (based on the plan’s provisions)

• That if the participant is eligible, the individual is allowed to enter the plan at the appropriate time, and that their elections are being followed

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• Plan document specifies eligibility requirements (who is in and who is out)

• May be more generous than ERISA minimum standards:

One year of service

Age 21

• If the plan document requirements are more generous than ERISA standards, then the plan document must be followed

ELIGIBILITY

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• Eligibility requirements may vary for different contribution types to the same plan (e.g., participant, ER match, ER profit sharing)

• A participant must be allowed to enter the plan within six months of satisfying the eligibility requirement(s)

ELIGIBILITY

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• Percentage of compensation or fixed amount per pay elected by participant matches payroll withholdings

• Consider the following: Hire date versus plan entry date

Changes in deferrals during the plan year

Leaves of absence

Hourly versus salary paid employees

IRS limitations

‒ $18,000 for 2017 and 2016 (EE deferrals)

‒ $6,000 for 2017 and 2016 (catch-up contributions)

WITHHOLDINGS

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• Deferrals are invested in correct investment options at correct allocation percentage

• Consider the following:

Changes in investment elections during the year

Current year contributions versus participant account balances

Frequency of investment elections; electronic options; availability of historical tracking

INVESTMENT ALLOCATIONS

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• Employer match recalculation

• Profit sharing contributions

• Consider the following:

Different eligibility requirements, timing

IRS limitations – lesser of

‒ 100% of participant’s compensation or

‒ $54,000 and $53,000 for 2017 and 2016 (includes deferrals, matching, non-elective contributions, allocations of forfeitures, etc.)

EMPLOYER CONTRIBUTIONS

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• Total compensation subject to income tax may not be the same as plan compensation

• Plan document will define compensation and any adjustments/exclusions such as:

Bonuses

Commissions

Holiday/vacation pay

Severance payments

Tips

COMPENSATION

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What are we testing?

• Verify salaries and pay rates to agreements, contracts and pay authorizations

• Examine time cards or attendance sheets for hourly employees

• Recalculate compensation

• Compare calculations of EE and ER contributions to payroll reports as well as trust statements

COMPENSATION

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For a sample of distributions, we audit: • Authorization

• Participant’s elections Taxes withheld, if applicable

Lump sum vs. annuity

Direct payment vs. rollover

• Eligibility

• Timeliness

• Distribution amount based on type and vesting

DISTRIBUTION TESTING

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LOAN TESTING• The plan document will state if participant loans are

allowed and describe any restrictions

• Loan accounting and compliance is typically performed by trustee/custodian or record-keeper

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LOAN TESTINGWhat are we testing?

Loans must meet the following requirements:

Made to plan participants with account balances

Properly recorded by the plan and allocated in the appropriate participant’s account

Repaid in the correct amount, and payments are remitted timely to the plan

Issued and repaid in amounts that do not exceed IRC or plan limits

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LOAN TESTINGRegulatory Limits

• Maximum loan is the lesser of $50,000 or half of the participant’s vested account balance at date of issuance

• Repayment term – no more than five years

Exception = purchase of participant’s primary residence

• Timely remittance consistent with employee contribution requirements

• Plan document must include loan provisions

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POLLING QUESTION

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FIRST AUDITPREPARING FOR YOUR

1. Read, understand and follow your plan document

2. Get all plan records in one place

Plan document

Adoption agreement

Amendments

Summary plan description

IRS/DOL communications

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3. Maintain detailed records for employees Include in employee files any Plan-related forms

‒ Enrollment form or opt-out

‒ Substantiation of date of birth, date of hire and salary

‒ Loan application, promissory note, amortization schedule, and copy of check or wire transfer

‒ Distribution request, copy of check or wire transfer

‒ Support for hardship distribution (e.g., medical bills, foreclosure notice)

Get employee requests in writing

‒ Change in deferral precentage

‒ Starting/stopping deferrals

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4. Make sure remittances are made timely Create a consistent routine for remittances

‒ Same day every pay period

Maintain records of contributions to the plan

‒ Print confirmations when submitting

‒ Keep payroll information and other worksheets

‒ Make notes of any adjustments made if amounts contributed are different from employee withholdings

‒ Maintain excel spreadsheet of contributions per payroll period to reconcile to the trust statement

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FIRST AUDITPLANNING YOUR

5. Memorialize important items

Keep minutes for meetings of trustees and/or fiduciaries

Document changes made to plan and how these changes support fiduciary responsibility

Document regular review of plan performance

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6. Take control of recordkeeping when you change service providers In year of change…

‒ Review information timely ‒ Keep all records in one place—our auditor will need to see records

from before and after the change If you are changing third-party administrators…

‒ Request documentation for all outstanding loans (promissory notes, checks, etc.)—this is a common area of deficiency

If you are changing payroll providers…‒ Be sure you maintain detail of payroll by employee for all pay periods

in the plan year

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7. Address issues early

Notify TPA and auditor as soon as you discover missed remittances and other errors

8. Engage an auditor early in the process and establish an open dialog

9. Do not wait until September to get started

Audit from start to finish is minimum of six weeks

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WILL THIS TAKE?HOW MUCH OF MY TIME

Average time for client personnel (initial year)• Prior to audit: 8-12 hours

Sending plan documents to auditors

Preparation of confirmation letters

Gathering requested documentation for fieldwork

• Audit fieldwork: 2-3 days Auditors at office; schedule on days when you are fully accessible

• After fieldwork: 2-8 hours Additional questions

Review of financial statement draft

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AUDIT PROCESSYour auditor will need what is known as the “Audit Package” from your service provider• Certification that records are complete and accurate• Overall plan balances and transaction information• Information regarding Fair Value of Investments• You will be responsible for getting audit package

Giving your auditor access to plan’s website saves everyone time.

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FAIR VALUE• Required disclosure of plan’s investments

• Separated by how easy it is to value the investment Level 1 – investments are identical to those traded in an active

market (registered investment companies, mutual funds)

Level 2 – investments are similar to those found in an active market (pooled separate accounts)

Level 3 – valuation methodology is unobservable (private company stock, guaranteed investment contracts)

• Audit package will include recommendations on how to value; plan sponsor needs to represent that they take responsibility for the disclosure

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INFORMATIONADDITIONAL FIRST-YEAR

• For your initial year only, your auditor will have to audit “beginning balances”

If you hit the audit requirement threshold in 2016, you will require an audit for the 12/31/16 year end. Your auditor will look at 12/31/15 information to gain comfort with 1/1/16 balances

It’s never too early to start maintaining good records

• Audit requires documentation of processes and internal controls

Consider documenting prior to the audit and keeping on file

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CLOSING PROCEDURESWRAP-UP

Financial Statement Issuance

Draft Financials

Read through and make sure consistent with plan

Verify accounting firm has agreed to Form 5500

Approve

Have access to electronic copy to attach to Form 5500

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Form 5500 Procedures

• TPA will send a questionnaire with various plan questions usually during Q1

• Draft 5500 usually available a few months after questions are submitted

• Once approved, either company or TPA is responsible for electronic filing

• Don’t wait until the last minute to get e-filing credentials

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Management Representation

• Accounting firm will ask for a management representation letter

• Should be signed by plan administrator or person performing the plan’s management functions

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Required Communications• Auditor has a responsibility to communicate with those

charged with governance; should be in writing• Requirement to communicate with the applicable parties

relating to specific matters (e.g., significant difficulties or disagreements with management)

• Communication should be to the person responsible for overseeing the strategic direction of the entity, including the financial reporting process

• Auditor should be communicating their responsibilities, overview of scope and timing, uncorrected misstatements and significant findings

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Significant Findings/Internal Control Recommendations

Auditor should communicate the following:

Misstatements noted

Significant findings

Internal control-related matters

Opportunities for improvement for the next year

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DOL AUDITSThe Department of Labor has significantly increased audit enforcement of all types of employee benefit plans, including:

Section 125 FSADental and vision plans

These plans do NOT generally require an annual audit by an independent auditor, but still need to operate in accordance with plan documents and may have an obligation to file Form 5500.

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DOL AUDITSMaintain records in case of DOL audit:• Original signed plan document and amendments, and IRS

determination letter

• Record of all disclosures and communications to participants (SPD, SAR, 5500s)

• Trust documents and financial reports

• Results of any nondiscrimination and/or coverage testing

• Notices of creditable/non-creditible coverage

• Payroll and census data used to determine eligibility and contributions

• Copies of Form 1099R for distributions

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Dani Gisondo, [email protected]

QUESTIONS?

Rebecca Ferris, CPASenior [email protected]

mailto:[email protected]

mailto:[email protected]

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Navigating Your 401(k) Audit