Without any help, the process of preparing for and going through an audit of a retirement plan can be time consuming and painful. Between the volume of information needed and the technical terms used to describe the information, it may seem easier to understand Russian than go through the process of being audited. In the case of a foreign language, a translator goes a long way in helping navigate the unfamiliar. For example, the Russian proverb “Doveryai, no proveryai” to non-Russian speakers looks like nonsense. However, with the help of a translator the phrase can be clearly understood as “Trust, but verify”. Working with a good translator can take something that appears confusing and complicated, and turn it into something clear and concise. When working with a plan sponsor, a good auditor can do the same. As a result, audit process moves quickly and efficiently.
Often there is time spent translating between the information the auditor requests and finding the matching information in the plan sponsor’s records. In order to reduce the time spent lost in translation, below are some common areas that frequently need further explanation and the corresponding plain English explanation.
Employee Census
An employee census contains information about participants in the retirement plan and consists mainly of three items, which are listed below, and because all of these items change frequently, the census needs to be updated on an annual basis.
1. Personal information including:
- Name
- Date of birth
- Social security number
- Address
2. Employment information including:
- Date of hire
- Employee status (e.g. active, terminated, part-time, etc.)
- Eligibility date
- Current year compensation
3. Contribution information including:
- Participant deferral amounts
When updating the census, ensure that the census data is reconciled with the corresponding payroll information for the plan year to avoid any unintentional errors and because the auditor will ask for proof of the reconciliation to verify that census information represents a full population of employees.
Plan Documents and Records
The items listed below direct the auditor as far as what participant-related transactions and activity will be looked at during the audit. An auditor will look at participant eligibility, payroll information, deferral percentages, demographic information, and other plan provisions based on the information included in these documents. Without these items, an audit should not be started.
Basic plan document:
This document fully explains all of the possibilities that could be adopted by your plan within the range covered by the IRS determination letter. This includes essential information like elective deferral, eligibility requirements, employer contributions, profit sharing conditions, vesting and more.
Summary plan description:
This document describes in detail all the features of the Plan. ERISA requires plan administrators to deliver the summary plan description to plan beneficiaries.
Summary annual report:
This document summarizes the information on the Form 5500 for the benefit of plan participants. It must include the total plan assets, administrative expenses incurred by the plan, and benefits paid to participants. ERISA requires plan administrators to deliver the summary annual report to plan participants each year.
Adoption agreement:
This document identifies the specific features of the plan. It spells out the plan’s rules around eligibility, contributions, enrollment features and distribution features, among others. It is critical that these rules are followed in order to keep the plan compliant.
Plan amendments:
As the laws around retirement plans change over the years, amendments to the adoption agreement may be needed to keep the plan up-to-date. It is the plan sponsor’s responsibility to document these changes. These plan amendments should reflect the most up-to-date features of the plan.
IRS determination letter:
This letter from the IRS to the plan sponsor states the retirement plan was a qualified plan at the time the IRS reviewed the information. This means the plan met the legal requirements and complied with the tax code. Generally, if a plan has received a favorable determination letter and subsequently follows the plan documents, the plan will retain its qualified status.
ERISA fidelity bond:
ERISA requires everyone who will be handling plan funds to be insured (bonded). These bonds act as a safeguard and cover the retirement plan against losses due to dishonest or fraudulent activity. Generally, the maximum bond required is 10% of plan assets up to $500,000. A record of the current bond should be kept with the other plan documents.
Fee disclosures:
ERISA requires that plan sponsors must disclose the plan’s administrative, individual, or investment-related expenses and fees to the participants of the plan.
Trust and Recordkeeping Reports
These reports will be provided by the plan’s third party administrator (TPA), and summarize the activity that took place during the year. The reports provide information on activity that took place at the overall plan level as well as detail the activity that took place in each individual participant’s account. In many cases, the TPA will certify that the information contained in trust report is complete and accurate. This certification allows the auditor to reduce the procedures done in relation to the investments held by the plan. Audits performed with a certification in place are known as ERISA section 103(a)(3)(c) audits.
It should be noted that the plan administrator is responsible for determining that the investment certification is both complete and accurate and signed by an authorized person. As part of the audit procedures, the auditor will ask if the plan administrator has made this determination.
Conclusion
Remember that having an auditor working with you to help translate the information needed to complete the audit into approachable information will make the entire audit process move along quickly and efficiently.
